Turning up the Heat on Junk Fees and Drip Pricing: Federal and State Regulations Require Increased Transparency into Pricing and Contract Cancellation

Call it the summer of junk fees and drip pricing. In July, California’s new drip pricing law went into effect and in August the federal government announced further proposed rules into junk fees and subscription services. Regulators say these proposed price transparency laws and regulations are consumer protection tools that will save consumers money, help them avoid hidden fees and enable them to cancel recurring charges and subscriptions.

Here is what you need to know now:

 

• The laws/proposed regulations require all-in pricing and disclosure of that price. Assess what fees your company charges other than the listed product price. Determine how that fee is charged and where in the consumer shopping and checkout experience it is charged, and what information is provided to the customer about it.
• Transaction fees, mandatory tips, service fees are banned in California and may be banned nationwide in many direct-to-consumer industries. Do you need to re-calculate your prices to account for these “extras”?
• Most direct to consumer companies and services will be affected: banks, the hospitality, hotel and restaurant industries, airlines, e-commerce companies, cell phone and telecom companies and internet providers, gyms, event and ticketing companies.
• The proposed rules will require easier cancellation of subscriptions and other online products. Can consumers cancel your services easily (within just a few clicks)?
• New rules may crack down on chatbots and customer service. How hard is it for customers to get a real person on the phone? And what information is used to train any customer service chatbot?

What are Junk Fees and Drip Pricing?

Regulators and lawmakers refer to unexpected, hidden fees or undisclosed fees as junk fees. The FTC defines drip pricing as “a pricing technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process,” which, the FTC contends, causes the customer to believe that the price of a product is lower than it actually is.

The arguments against drip pricing and junk fees are varied, but all fall into the bucket of a purportedly deceptive consumer practice that deprives customers of choice and transparency. In California, lawmakers referred to junk fees as a bait and switch practice. Others claim that they are practices designed to artificially increase prices, or to deceive the customer into thinking he/she is getting a good deal and shop in the first instance.

Drier Days Ahead for Drip Pricing

Federal Developments. While European countries started cracking down on junk fees and drip pricing years ago, the U.S. federal government did not truly take on this issue until President Biden’s 2022 Executive Order on Competition, calling for the elimination of such pricing practices. Congress introduced the Junk Fee Prevention Act in 2023 to require merchants to disclose the total cost (including all fees) of an item prior to purchase, and in October 2023, the Biden Administration announced several actions to reduce drip pricing and junk fees. First, the FTC issued a proposed rule (“Rule on Unfair Deceptive Fees”) requiring merchants to prominently disclose the total price of a product or good before the consumer consents to pay, and forbidding merchants from misrepresenting the total costs of goods and services by omitting mandatory fees from advertised prices. At least 19 states’ AGs support the proposed rule, and the FTC is expected to issue that final rule soon.

The lodging, hospitality, restaurant, transportation, food delivery, and ticket event companies and providers are likely to feel the effect of this proposed rule the most acutely, as is any company or service that imposes a service or transaction fee, or any supplement above and beyond the base product. Businesses and companies would be prudent to consider how they can increase their disclosure or alter their advertising to ensure there is prominent display of pricing at the top of the shopping funnel, and whether they can convert their business model to all-in-pricing.

Second, the Consumer Financial Protection Bureau (CFPB) issued guidance and proposed rules to limit fees charged by banking institutions, including imposing caps on overdraft fees, bounced check fees and credit card late fees. Leaders at the nation’s largest retail bank, JP Morgan Chase, have commented that the rules may result in the bank levying higher monthly fees on accountholders, thus having the inverse effect of costing some accountholders more money.

California takes the lead. While over ten states have implemented or are considering bans on junk fees and drip pricing, California is the largest state thus far to do so and has implemented the most aggressive regulation. Amendments to California’s Consumer Legal Remedies Act (CLRA) went into effect on July 1, 2024 prohibiting businesses from adding automatic service charges onto consumer bills. The ban applies to the sale or lease of most consumer goods.

Like the proposed FTC rule, the CLRA now requires transparency in the advertised price. This means that businesses must disclose all costs and fees upfront and in their ads. While mandatory sales tax, shipping and voluntary tips are permissible, mandatory transaction fees or tips are not. It’s not enough to disclose all the fees at checkout--the total cost must be disclosed at the top of the funnel. Penalties are stiff: consumers can bring claims against businesses, with a max of $1,000 per violation, and consumers can recover attorneys’ fees.

The law applies to brick and mortar as well as online players. In a May 2024 FAQ, Attorney General Bonta specifically called out e-commerce players, including short-term rental and vacation home apps, food delivery apps and event ticket sellers as targets for enforcement. And while the AG was also clear that the advertised price must be the total price, his office has not provided guidance with respect to transaction-level fees, surge-pricing, dynamic pricing and the like. For example, if a ticket vendor typically charges $20 per transaction, regardless of the number of tickets purchased, how does that provider advertise prices or otherwise allocate that price on a per product or per unit basis? Similarly, query how dynamic or surge pricing can be disclosed up front if conditions and circumstances dictate price.

The CLRA has a limited restaurant exemption for certain surcharges so long as they are prominently displayed on menus for customers to see. However, also pending in California is SB1490 which would specifically require greater price transparency for food delivery apps.

Significantly, many practitioners anticipate that the FTC final rule may largely mimic or follow the California law.

Doom Loop No More

The Biden Administration has also long lamented subscription services and recurring charges, contending that many consumers who sign up for “free trials” later forget to cancel, or that its too difficult for customers to cancel online subscriptions or recurring charges. In Europe, many countries have implemented “two-click” cancellation policies for subscriptions offered by and recurring charges made by e-commerce and online companies, and it seems the federal government has taken note. On August 12, 2024, the Biden Administration announced new efforts, and reiterated old ones, to save consumers money on subscriptions and monthly service fees, and time, too.

First, the Administration announced that the CFPB will initiate a rulemaking process to break the service doom loop—what the government sees as the never-ending automated menu trees that never lead to a live human to assist. The rule would require financial service companies to let customers talk to a human by pressing a single button. Similarly, the FCC will launch an inquiry into considering similar requirements for phone, broadband, and cable companies.

Second, the CFPB also is considering rulemaking to crack down on ineffective, inaccurate, and time-wasting chatbots used by banks and other financial institutions in lieu of customer service agents. The CFPB will identify when the use of automated chatbots or automated artificial intelligence voice recordings is unlawful, including in situations in which customers believe they are speaking with a human being. While the rule is limited to just chatbots in the financial sector for now, this sort of rulemaking could certainly be applied to customer service chatbots in other direct-to-consumer industries, and e-commerce companies, airlines, hospitality companies should consider how and when they use chatbots and what AI their chatbots use.

Finally, the Administration referred to a 2023 FTC proposed rule to make it easier for customers to cancel subscriptions. The proposed rule, which is not yet final, would apply to all recurring payments and subscriptions in all media, set clear instructions and protocols for canceling, and require notice and disclosure about how consumers can cancel. Affected companies and industries are potentially endless—from gym memberships, to food delivery memberships, to monthly subscription boxes, free shipping memberships, streaming services, and auto-fill or auto-renewal for goods and services. The FCC also announced on August 12, 2024 that it will look into similar rulemaking in to cancel cell phone and internet service subscriptions.