Is Regulation of Junk Fees Coming at Last?by Paul Ruden /
Many years in the making, the Federal Trade Commission has finally taken a formal, albeit tentative, step toward resolving what it calls “junk fees” -- known in the travel industry mainly as “resort fees.” 87 FR 67413 (2022)
The agency charged with general jurisdiction over unfair and deceptive practices in commerce has issued an Advance Notice of Proposed Rulemaking (ANPRM) to begin the formal process of dealing with this long-standing problem. Initial comments are due January 9, 2023. You can also see the ANPRM at Regulations.gov.
A couple of legal-ish points need to be made. First, this is just an ANPRM. This is a preliminary step that may, or may not, lead to a formal Notice of Proposed Rulemaking. An ANPRM does not lead to rules in force – it can lead only to proposals for specific rules and further comment rounds. We are, in the best of times, far from rules on junk fees. In the worst of times, this will go nowhere. Also, note that the ANPRM covers much more than hotel resort fees that are the aspect of most interest of travelers and travel advisors. My analysis will mainly cover those fees and leave the others to … others.
On the other hand, the FTC’s Background Information makes clear that it is considering a formal Trade Regulation Rule. Given the scope of the FTC’s legal powers, there are remarkably few such rules on the books. Historically, the FTC has proceeded through guidance and enforcement cases. A Trade Regulation Rule, if adopted, is an indication of intent to address endemic and serious violations of the unfair and deceptive practices law. Time will tell.
The FTC correctly notes that junk fees “frustrate consumers, erode trust, impair comparison shopping, and facilitate inflation.” It describes them as, “unfair or deceptive fees that are charged for goods or services that have little or no added value to the consumer, including goods or services that consumers would reasonably assume to be included within the overall advertised price.” And, perhaps with the history of hotel resort fees in mind, “not all junk fees are hidden fees.”
After first emerging in the late 1990s, hotel “resort fees” accounted for $2 billion, or one-sixth of total hotel revenue, by 2015. With rising prices, fees are becoming more prevalent, allowing some businesses to raise effective prices without appearing to do so.
Junk fees impose substantial economic harms on consumers and impede the dissemination of important market information. A Commission analysis of hotel “resort fees” that were mandatory and undisclosed in the posted room rates concluded such fees “artificially increas[e] the search costs and the cognitive costs” for consumers carrying out the transaction. Junk fees force consumers either to accept a higher actual price for a service or product after beginning the transaction or to spend more time searching for lower actual prices elsewhere. Consumers faced with such fees pay upward of twenty percent more than when the actual price was disclosed upfront. These fee practices can be found throughout the economy but appear to be particularly widespread in markets for travel such as hotels, room-sharing, car rentals, and cruises.
A rough short history of resort fees starts with their introduction as last-minute add-ons, often not disclosed until checkout. Unsuspecting travelers paid them but many who objected to them at checkout were able to avoid paying. Aggressive responses were rewarded but many were uncomfortable making a fuss at check-out and just acquiesced.
Eventually, hotels began to show the fees upfront at some point in the purchase process, but the purpose of the fees was often unclear. In any case they were not included in the listed prices for hotel rooms and thus skewed search results based on prices. The fees made room rates of hotels that charged the fees appear more competitive with rates of hotels that did not impose the fees.
Many hotels now display early in the reservation process the component services that their resort fees purport to cover. Nevertheless, some components are not used by all travelers who must pay the fees anyway. Your writer recently encountered a resort fee component that was simply the opportunity to purchase another hotel service for another additional fee!
The last FTC warning to hotels about the deceptive aspects of resort fees was sent in 2012. The warnings seem to have influenced disclosure but did not lead to inclusion of the fees in published rates, even though the fees are mandatory. The FTC ANPRM describes several studies that demonstrate the consumer harm from “drip pricing” in which mandatory fees are added later to the initially disclosed prices. Both the hotels and the platforms used to sell their rooms benefit from drip pricing at the expense of consumers.
While the case against drip pricing seems overwhelming, no one should assume this is going to be a simple or speedy process. The FTC process for creating trade regulation rules is subject to strict supervision by multiple Congressional committees, with all that implies. There is also substantial opposition within the FTC itself to taking aggressive action. More about that in a moment.
The ANPRM poses 21 questions to focus commenters’ inputs in ways that will be helpful to the FTC’s evaluation of the action to take. You can view the questions at 87 FR 67420. The questions posed are comprised of more than 1,000 words, suggesting that while the FTC is serious about this, the road to a final rule will be long indeed. The questions are designed to elicit information about a vast array of economic activity. Travel advisors should, of course, focus being fact-specific about resort fees, though you are free to comment on other similar experiences on which you have information.
Returning to the question of support and opposition within the FTC, one version of the ANPRM has been appended to its comments by members of the FTC. These comments do not appear in the printed Code of Federal Regulations, but they reveal important information about the process and what to expect.
On one side, there is a comment by the FTC Chair Lina Khan. Curiously, it refers to the “junk fees” as a “surprisingly recent phenomenon,” citing hotel resort fees as having first emerged in the late 1990s.” By any count, that is more than 20 years ago and is not “recent” by most standards. Chair Khan does note that, ‘By 2015, they accounted for one-sixth of total hotel revenue. That's $2 billion per year. In … hospitality, fees are increasing faster than … posted room rates.” Those are remarkable and disturbing numbers.
Also puzzling is the Chair’s contention that “in areas where there is no specific rule or sector-specific law, the Commission lacks authority to seek penalties against violators or readily get financial compensation for victims.” A forward-looking rule classifying certain junk fees as unfair or deceptive could give us that authority, allowing us to make wronged consumers whole and to seek penalties from lawbreakers. That, in turn, would help create a powerful deterrent against imposing junk fees.”
I would have thought that Section 5 of the Federal Trade Commission Act, which states, “unfair or deceptive acts or practices in or affecting commerce . . . are . . . declared unlawful” would be sufficient legal authority. See also here.
In any case, there is powerful resistance within the FTC itself to aggressive action against junk fees. A 1,707-word “Dissenting Statement” was issued in the ANPRM by Commissioner Christine S. Wilson. It appears in the Regulations.gov version of the ANPRM. You can read her imposing background here.
You can draw your own conclusions, but I was particularly struck by Commissioner Wilson’s complaint that she wasn’t given enough time to consider the issues prior to the release of the ANPRM. The issue of junk fees in multiple lines of commerce, including but hardly limited to hotel resort fees, has been around for decades and subject to multiple critical studies.
Moreover, the ANPRM is nothing but a set of questions. In Star Wars terms, we are light years from adoption of regulations. Every factual and economic question Commissioner Wilson thinks should be addressed will surely be addressed in the comments and resulting analysis that will lead only to a proposed set of rules that will then be subjected to further rounds of comments and analysis before anything with the force of law is adopted. Whatever dangers may lurk to the economy broadly or to specific industries will get a thorough airing before anything substantive happens some years from now.
In short, it’s time for the federal government to address the scourge of junk fees. The chosen process will be very slow and deliberate, but it should go forward. If travel advisors want to eliminate hotel resort fees to facilitate efficient price shopping, this is the long-awaited opportunity to be heard.