FTC's Proposed Rule to Ban Hidden Fees Sparks Debate in the Restaurant Industry

In a significant move to protect consumers from hidden and deceptive fees, the Federal Trade Commission (FTC) has proposed a new rule aimed at banning junk fees that can cost Americans tens of billions of dollars annually. According to FTC Chair Lina M. Khan, these fees not only burden consumers with unexpected costs but also hinder fair competition in the market. However, amidst the widespread support for the proposed rule, the restaurant industry has voiced concerns about potential ramifications and is advocating for an exclusion.

The proposed rule seeks to eliminate the practice of businesses imposing hidden and bogus fees on consumers, ensuring transparency in pricing. It requires businesses to include all mandatory fees when disclosing prices, enabling consumers to make informed decisions and encouraging companies to compete based on offering the lowest price. The rule also addresses issues such as bait-and-switch pricing tactics, where mandatory fees are concealed, and misrepresentation of fees, which often leaves consumers confused about the purpose or nature of the charges.

The FTC received over 12,000 comments from the public, highlighting the frustration consumers face with hidden fees across various sectors, including hotel bookings, concert ticket purchases, apartment rentals, and utility bills. Many consumers expressed dissatisfaction with sellers who fail to disclose fees until the transaction is well underway, leaving them questioning the value of the services or products for which they are being charged.

The National Restaurant Association and the Restaurant Law Center have submitted comments urging the FTC to exclude the restaurant industry from the proposed rule. They argue that restaurant operators utilize value-added and well-defined fees that should not be altered. The restaurant industry, consisting of over 1 million outlets and a workforce of 15.5 million employees, is a crucial part of the American economy.

Independent table service restaurants are particularly vulnerable to the proposed changes, facing challenges in customer reactions to menu adjustments and bearing the projected $3.5 billion cost of compliance. With thin profit margins (3-5% pre-tax), rising food and labor costs, and increased non-controllable expenses, restaurants struggle to absorb or pass on cost increases to consumers.

The use of fees and surcharges, including delivery fees, credit card surcharges, and service fees, has been a longstanding practice in the industry. According to a 2024 report, only 16% of restaurants are currently adding surcharges. However, the proposed rule by the FTC aims to regulate these fees, impacting businesses across the economy.

The argument against the proposed rule revolves around the FTC's legal authority. Critics argue that the FTC lacks clear congressional authorization for an economy-wide rule on "unfair and deceptive fees," and that the proposed rule invokes the major questions doctrine, which provides that federal agencies “must point to clear congressional authorization” before enacting regulations that pertain to questions of major economic or political significance. Additionally, critics argue that the rule fails to meet Magnuson-Moss rulemaking requirements, which is more exacting than traditional rulemaking under the Administrative Procedures Act, because the rule lacks evidence of widespread prevalence and specificity.

Concerns have been raised about the absence of a comprehensive cost-benefit analysis for the restaurant industry. For instance, the estimated compliance costs, particularly for menu redesign, has been challenged, considering the industry's variability in menu offerings and the need for multiple menus (small/large parties, takeout, delivery, credit cards). The industry contends that the rule could impose significant financial burdens without clear benefits, urging the FTC to rescind the proposed rule.

As the FTC reviews the 60,776 comments received, it faces the challenge of balancing consumer protection with industry concerns. While the proposed rule aims to create a fair and transparent marketplace, the restaurant industry's plea for exclusion raises questions about the potential impact on their unique business models. The final decision will likely involve a careful examination of each industry's practices to strike a balance that safeguards consumer interests while allowing businesses to thrive.

For more information on how the FTC’s proposed rule could impact your business, contact the qualified attorneys at Rock, Fusco & Connelly, LLC.