17 May 2024
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Note: If you are a consumer with a Junk Fee issue, please do NOT contact us! We do not represent consumers. We represent owners, developers, lenders, and management of hotels, restaurants, and other hospitality-related properties. We advise them on litigation, labor, regulatory compliance, contracts, transactions, financing, development, and strategies.
Consumers hate drip pricing and junk fees
Consumers and politicians have complained about drip pricing and junk fees for more than 20 years. There’s a close connection between the two, but they are not exactly the same thing.
- Junk fees: These are generally any unexpected, often mandatory fees added to the advertised price of a good or service. They can be hidden or poorly explained, making it difficult for consumers to anticipate the true cost. Examples include service fees on concert tickets, credit card processing fees, or resort fees at hotels.
- Drip pricing: This is a specific tactic used to introduce junk fees. It involves advertising a lower headline price initially and then revealing additional mandatory fees later in the purchasing process, often in small print or during checkout. This creates a misleading impression of the actual cost and makes it harder for consumers to compare prices accurately.
So, all drip pricing involves junk fees, but not all junk fees involve drip pricing. For instance, a credit card with an “electronic service fee” added – even if clearly advertised — would not be considered drip pricing, even though it is a type of a junk fee.
Here’s an analogy: Drip pricing is like revealing all the ingredients in a recipe one by one, after having already taken a bite. Junk fees are like the unexpected or ill-defined ingredients that might not have been listed at all.
The first reports of hotels charging resort fees (or similar charges) can be traced back to the year 2000. We are not sure if hotels invented the practice or were just amongst the early innovators. But in any event, the various mandatory fees with various labels soon became widespread throughout the hospitality industry and other industries including hotels, restaurants, food delivery services, live-event ticket sales, transportation such as car rentals and airlines, and many others.
FTC concern about drip pricing, junk fees, and deceptive practices
On November 9, 2023, the Federal Trade Commission (FTC) issued notice of a proposed rule on “Unfair or Deceptive Fees.” This development is discussed in the Blog below by my partner, Mark S. Adams.
FTC Cracks Down on Hidden Fees:
Upfront Pricing Is Coming
by
Mark S. Adams
Hotel Dispute Lawyer, Partner & Senior Member
JMBM’s Global Hospitality Group
Federal Trade Commission (FTC) is proposing a new weapon in the fight against hidden fees, surprise charges that inflate the cost of everything from hotel rooms and restaurant charges to concert tickets and college tuition. This proposed rule addresses prevalent fee practices that are unlawful under Section 5 of the FTC Act, 15 U.S.C. 45, and declares them to be unfair or deceptive to consumers. This “junk fee” crackdown would impact a wide range of industries, aiming to bring transparency to how businesses disclose their true costs. Generally, the proposed rule makes two changes: Upfront Pricing and Deceptive Fees.
Upfront Pricing:
The FTC considers pricing structures deceptive if they do not disclose the full cost upfront – upon the initial contact — even if the total price is revealed later. Disclosing additional costs is stages is called drip pricing. This practice misleads consumers and leads them to spend more. Studies show people spend more when bombarded with partial prices.
Consumers incur search costs when comparing products when the full price is not readily available. For instance, on websites, one might need to go through multiple pages to see the final price including taxes and fees. The FTC recognizes such search costs as harm caused by unfair practices.
Even when mandatory fees are listed separately, it can be deceptive. This practice, called partitioned pricing, makes it difficult for consumers to accurately estimate the total cost and compare products effectively. Psychological factors also come into play. People tend to underestimate the total cost when presented with a lower initial price first (anchoring theory). Additionally, they might feel a sense of loss if they abandon the purchase process after already investing time (endowment theory and sunk cost fallacy).
The prevalence of hidden fees also makes it difficult for honest businesses to compete on price, ultimately hurting consumers and hindering the market’s ability to drive prices down. For example, after StubHub unilaterally adopted an all-in pricing model in 2014, it soon reverted back to its original model after it lost significant market share when customers incorrectly perceived StubHub’s prices to be higher. This price obfuscation, in turn, undermines the ability of businesses to compete on price and inhibits the market from driving down prices overall.
Deceptive Fees:
The FTC’s proposed rule also addresses deceptive fees. The rule aims to increase transparency in pricing by prohibiting businesses from hiding mandatory fees within advertised prices. For example, a concert ticket advertised online might display a base price, but then add processing fees, service charges, or even facility usage fees during the purchase process. By requiring upfront disclosure of all mandatory fees, consumers can gain a clearer understanding of the total cost before committing to a purchase.
The proposed rule goes beyond simply showing the total price. It also mandates that businesses explain the nature and purpose of each fee. This would allow consumers to comprehend what they are paying for and potentially avoid unnecessary charges. Instead of a vague “processing fee,” a fee for expedited shipping would be clearly explained.
Overall, the FTC’s proposal seeks to empower consumers through improved information. By eliminating deceptive fees and requiring clear explanations of all charges, consumers can make informed decisions and shop around for the best deals. This increased transparency could also incentivize businesses to compete on price by offering lower or fewer fees.
Industry and Consumer Concerns:
The proposed rule is not without critics. The hospitality industry argues that eliminating itemized fees in hotels could make it harder for consumers to compare amenities offered by different properties. For example, two hotels may have the same guest room rate, but one offers a continental breakfast, and the other does not. Similar concerns exist in other sectors, like live event ticketing, where the industry worries about the impact on competition if all-in pricing becomes mandatory.
The FTC received over 12,000 comments on the proposed rule, reflecting the diverse perspectives from both consumers and businesses. If implemented, this new rule could mean a significant shift towards clearer pricing, making it easier to compare costs and avoid hidden fees across a wide range of industries. Below is a summary of 9 industries highlighted by the FTC and some examples of the 12,000 comments regarding upfront pricing and deceptive fees.
| Industry | Examples of Concerns and Comments | Impact of FTC Rule |
| Hotels & Rentals | Industry is concerned that pricing is difficult because, among other things, hotels and rental are not fungible because, among other things, locations are different, services are different, amenities are different, and so on Consumers are concerned about being charged for “resort fees”, “hotel service charges”, local taxes, etc., and for rentals “cleaning fees” for vacation home rentals after mandatory cleaning by the renter. | Increased transparency regarding and upfront disclosure of pricing and amenities. |
| Live Events | Industry is concerned about losing the ability to offer discounts on base ticket prices. Consumers are concerned that ticket prices always end up costing much more, through a “contrived: surcharge, or simply an outright undisclosed and wholly newly made up miscellaneous charge, such as a “delivery fee” for an electronic ticket. | Clearer pricing for tickets, and a more even playing field. |
| Restaurants & Delivery Apps | Industry is concerned about the difficulties in advertising the specific service offerings. Consumers are concerned about being charged for “delivery guarantees” or “priority service options”; or an added “hospitality fee” or a “kitchen fee” or an “equity fee” or “economic impact fee” or “temporary inflation fee” or a “service charge” in addition to a tip, on a food bill). | Clearer breakdown of fees. |
| Transportation (Airlines, Rental Cars) | Airlines are concerned about losing revenue from a-la-carte fees. Consumers are concerned about learning the true cost of a service either after the service is performed, or late into the purchasing phase of the product or service. Fixed-Base Operators (‘‘FBOs’’), which are provide commercial aeronautical services, are criticized for pricing their services only after an aircraft has arrived or, even more troubling, after rendering the services. In other cases, an advertised “free” flight still charged for government fees, airport fees, and a “plane usage fee”. Rental car businesses often add a “tourism commission fee”, “county bus license fee”, “customer facility charge”, “airport tram fee”, vehicle license recovery fee”, and/or a “concession recovery fee”. | Upfront all-in pricing. |
| Telecommunications (Phone, Internet) | Industry is concerned about the difficulty in offering flexible service plans upfront and how best to explain them. Consumers are concerned about confusing data plan pricing, and tiered plans; and undisclosed “activation fees”, “installation fees”, “equipment fees”, “network enhancement fees”, “internet infrastructure fees”, “deregulated administration fees”, “technology service fees”, and “early termination fees”. | Clearer breakdown of fees. |
| Rental Housing | Industry is concerned about the potential impact on already existing landlord-tenant agreements, and also that they have factored in these fees into their business models. Consumers are concerned about fees not being disclosed up-front, such as: “rental application fees”, sometimes charged even if landlords know applications will never be approved; excessive late fees; utilities-related fees; processing or administrative fees; convenience fees; insurance fees; notice fees; trash fees; pest control fees; technology fees; common area and amenity-related fees; inspection fees; and mail sorting fees.). | Clearer, required disclosure of fees on first contact. |
| Education | Industry is concerned about implementation, given that fees may vary by program. Consumers are concerned about not having upfront disclosure of fees, such as mandatory student activity fees. | Upfront pricing. |
| Financial Services | Industry is concerned about reducing its flexibility in offering financial products. Consumers’ concerns include: the limited options for low-balance accounts still being charged monthly fees; remittance fees that are hidden in artificially inflated money exchange rates; banks charging overdraft fees (even with a linked credit card to cover the overdraft, plus an additional credit card fee for using the credit card); “convenience fees” charged for paying bills online; and unposted ATM usage fees; ). | Clearer explanation and disclosure of fees. |
| Correctional Services | Industry is concerned about covering the costs of the services. Consumers are concerned about hidden fees impacting the ability of families’ of incarcerated persons to stay connected with their incarcerated loved ones). | Disclosure of all fees prior to being incurred. |
Conclusion:
The FTC’s proposed rule to combat hidden fees has the potential to significantly impact pricing and transparency across a wide range of industries. The rule would require upfront disclosure – at first contact — of all mandatory fees together with clear explanations of their nature. This would effectively end drip pricing and partitioned pricing. The rule would also incentivize businesses to compete on a level playing field.
The overwhelming response from the public comment period highlights the desire for clearer pricing structures. While some industries raise concerns about the impact on their ability to differentiate services or compete through flexible pricing models, overall the potential benefits for consumers are undeniable. Finding a balance between transparency and flexibility will be key in finalizing the rule.
Click here for November 9, 2023 FTC Release — Notice of proposed rulemaking; request for public comment.
Mark S. Adams, Hotel Dispute Lawyer, is an experienced trial lawyer and a senior member of JMBM’s Global Hospitality Group®. A primary focus of Mark’s practice is devoted to representing clients on hundreds of matters involving Hospitality Litigation, Arbitration & Dispute Resolution – from avoiding litigation to conducting complex, multi-state litigation, arbitration, and mediation.
Mark’s expertise is in business litigation involving contracts, corporate and partnership disputes, and hospitality disputes and litigation. On behalf of hotel and resort owners, Mark has successfully litigated the termination of long-term, no-cut, hotel management agreements, franchise agreements, fiduciary duty issues, investor-owner disputes, TOT assessments, and more. He has wide-ranging trial experience in various commercial disputes, including complex multi-party litigation and class actions. He has tried numerous cases in state courts, federal courts, and domestic and international arbitrations and is a frequent author and speaker on trial practice. Forbes, Reuters, and other publications have covered Mark’s trial wins. He obtained two of California’s 50 largest jury verdicts in the same year.
Mark has taken or defended nearly 1,000 depositions throughout North America, Europe, and the Middle East. The Wall Street Journal has quoted him as an expert on noncompete agreements. For more information, contact Mark at 949.623.7230 or markadams@jmbm.com.
For more recent articles written by Mark S. Adams, please see the following links:
Junk Fee Law: Exception for California restaurants moves forward
New Federal Junk Fee Law – The No Hidden FEES Act of 2023 (HR 6543)
Disclosing Mandatory Resort Fees – What Hoteliers Need to Know
The better way to resolve hotel contract disputes: Judicial Reference or Arbitration?
Should New York law govern your hospitality contract? How about Texas, California or Florida law?
Meet Mark S. Adams, Hotel Dispute Lawyer – Hospitality Litigation, Arbitration & Dispute Resolution
How Pennsylvania Resort Fees Settlements Could Play Out for US Hotel Industry
Force Majeure – Contract provisions and governing law are important
History & origins of Force Majeure as a contract defense
JMBM’s Global Hospitality Group® announces 5th edition of The HMA & Franchise Agreement Handbook
Hotel Lawyer on HMAs: “The shrinking terms of hotel management agreements”
This is Jim Butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators, and investors. This advice covers critical hotel issues such as hotel purchase, sale, development, financing, franchise, management, ADA, and IP matters. We also have compelling experience in hotel litigation, union avoidance and union negotiations, and cybersecurity & data privacy.
JMBM’s Global Hospitality Group® has been involved in more than $125 billion of hotel transactions and more than 4,700 hotel properties located around the globe. Contact me at +1-310-201-3526 or jbutler@jmbm.com to discuss how we can help.
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