Fed. Trade Comm'n, Compendium of Recent FTC Policy Statements, Advisory Opinions, and Final Rules (Jan. 17, 2025)
2 FTC, Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (Aug. 13, 2015) [hereinafter “2015 Statement”], https://www.ftc.gov/system/files/documents/public_statements/735201/150813section5enforcement.pdf. 3 Address by Chairwoman Edith Ramirez, Competition Law Center, George Washington University Law School, 3 (Aug. 13, 2015), https://www.ftc.gov/system/files/documents/public_statements/735411/150813section5speech.pdf (“Our aim in adopting this policy statement is to reaffirm the principles that guide our enforcement decisions, leaving for future generations the flexibility to do the same.”). 4 2015 Statement, supra note 2. Chairwoman Ramirez and Commissioners Julie Brill, Terrell McSweeny, and Joshua Wright voted in favor of the statement. Commissioner Maureen Ohlhausen dissented. FTC Press Release, FTC Issues Statement of Principles Regarding Enforcement of FTC Act as a Competition Statute (Aug. 13, 2015), https://www.ftc.gov/news-events/press-releases/2015/08/ftc-issues-statement- principles-regarding-enforcement-ftc-act.
standalone Section 5 claim “if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm.”5 In a statement accompanying the issuance of these principles, the Commission explained that its enforcement of Section 5 would be “aligned with” the Sherman and Clayton Acts and thus subject to “the ‘rule of reason’ framework developed under the antitrust laws[.]”6 In a speech announcing the statement, Chairwoman Ramirez noted that she favored a “common-law approach” to Section 5 rather than “a prescriptive codification of precisely what conduct is prohibited.”7 She also acknowledged that the Commission’s policy statement was codifying an interpretation of Section 5 that is more restrictive than the Commission’s historic approach and more constraining than the prevailing case law.8 She added, “[W]e now exercise our standalone Section 5 authority in a far narrower class of cases than we did throughout most of the twentieth century.”9 With the exception of certain administrative complaints involving invitations to collude, the agency has pled a standalone Section 5 violation just once in the more than five years since it published the statement.10 II. The Text, Structure, and History of Section 5 Reflect a Clear Legislative Mandate Broader than the Sherman and Clayton Acts By tethering Section 5 to the Sherman and Clayton Acts, the 2015 Statement negates the Commission’s core legislative mandate, as reflected in the statutory text, the structure of the law, and the legislative history, and undermines the Commission’s institutional strengths. In 1914, Congress enacted the Federal Trade Commission Act to reach beyond the Sherman Act and to provide an alternative institutional framework for enforcing the antitrust 5 2015 Statement, supra note 2.
6 FTC, Statement on the Issuance of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, at 2 (Aug. 13, 2015), https://www.ftc.gov/system/files/documents/public_statements/735381/150813commissionstatementsecti on5.pdf; see also Chairwoman Ramirez, supra note 3, at 10 (“Today’s policy statement reaffirms that this same framework governs standalone Section 5 claims no less than claims arising under the Sherman and Clayton Acts.”).
7 Address by Chairwoman Ramirez, supra note 3, at 2.
8 Id. at 4-5.
9 Id. at 2.
10 See Federal Trade Commission’s Complaint for Equitable Relief, FTC v. Qualcomm Inc., No. 5:17-cv- 00220 (N.D. Cal. Jan. 17, 2017), [hereinafter “Qualcomm Complaint”], https://www.ftc.gov/system/files/documents/cases/170117qualcomm_redacted_complaint.pdf. Even in Qualcomm, the Commission primarily relied on arguments under the Sherman Act; the standalone theory was not a core focus of the litigation.
laws.11 After the Supreme Court announced in Standard Oil that it would subject restraints of trade to an open-ended “standard of reason” under the Sherman Act, lawmakers were concerned that this approach to antitrust delayed resolution of cases, delivered inconsistent and unpredictable results, and yielded outsized and unchecked interpretive authority to the courts.12 For instance, Senator Newlands complained that Standard Oil left antitrust regulation “to the varying judgments of different courts upon the facts and the law”; he thus sought to create an “administrative tribunal … with powers of recommendation, with powers of condemnation, [and] with powers of correction.”13 Likewise, a 1913 Senate committee report lamented that the rule of reason had made it “impossible to predict” whether courts would condemn many “practices that seriously interfere with competition, and are plainly opposed to the public welfare,” and thus called for legislation “establishing a commission for the better administration of the law and to aid in its enforcement.”14 These concerns spurred the passage of the FTC Act, which created an administrative body that could police unlawful business practices with greater expertise and democratic accountability than courts provided.15 At the heart of the statute was Section 5, which declares “unfair methods of competition” unlawful.16 By proscribing conduct using this new term, rather than codifying either the text or judicial interpretations of the Sherman Act, the plain language of the statute makes clear that Congress intended for Section 5 to reach beyond existing antitrust law. The structure of Section 5 also supports a reading that is not limited to an extension of the Sherman Act. Notably, the FTC Act’s remedial scheme differs significantly from the remedial structure of the other antitrust statutes. The Commission cannot pursue criminal penalties for violations of “unfair methods of competition,” and Section 5 provides no private right of action, shielding violators from private lawsuits and treble damages. In this way, the institutional design laid out in the FTC Act reflects a basic tradeoff: Section 5 grants the Commission extensive authority to shape doctrine and reach conduct not otherwise prohibited by the Sherman Act, but provides a more limited set of remedies.17 The legislative debate around the FTC Act makes clear that the text and structure of the statute were intentional. Lawmakers chose to leave it to the Commission to determine which practices fell into the category of “unfair methods of competition” rather than attempt to define through statute the various unlawful practices, given that “there were too many unfair practices 11 See Neil Averitt, The Meaning of ‘Unfair Methods of Competition’ in Section 5 of the FTC Act, 21 B.C.
12 Id. at 232-237. See Standard Oil Co. v. United States, 221 U.S. 1, 60 (1911). 13 See 47 CONG. REC. 1225 (1911) (statement of Sen. Newlands). 14 S. REP. NO. 1326, 62d Cong., 3d Sess., at xiv (1913). 15 See Averitt, supra note 11, at 232-37.
16 15 U.S.C. § 45(a).
17 William E. Kovacic & Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 ANTITRUST L.J. 929, 932 (2010). to define, and after writing 20 of them into the law it would be quite possible to invent others.”18 Lawmakers were clear that Section 5 was designed to extend beyond the reach of the antitrust laws.19 For example, Senator Cummins, one of the main sponsors of the FTC Act, stated that the purpose of Section 5 was “to make some things punishable, to prevent some things, that cannot be punished or prevented under the antitrust law.”20 The Supreme Court has repeatedly affirmed this view of the agency’s Section 5 authority, holding that the statute, by its plain text, does not limit unfair methods of competition to practices that violate other antitrust laws.21 The Court, recognizing the Commission’s expertise in competition matters, has given “deference”22 and “great weight”23 to the Commission’s determination that a practice is unfair and should be condemned. Although the Commission suffered a few notable defeats under Section 5 in the early 1980s, those decisions in no way support the 2015 Statement’s decision to tether Section 5 to the Sherman and Clayton Acts. For example, in Boise Cascade, the Ninth Circuit ruled that the evidence did not support the Commission’s factual finding that the defendants’ conduct had an adverse effect on prices.24 In Ethyl, the Second Circuit explicitly held that the FTC’s Section 5 authority is broader than the Sherman or Clayton Acts, but it required the Commission to show that the challenged conduct is “collusive, coercive, predatory, or exclusionary,” or has an “anticompetitive purpose,” or “cannot be supported by an independent legitimate reason.”25 In short, these decisions confirm that Section 5 empowers the Commission to prohibit conduct that does not violate other antitrust laws, so long as it clearly explains why the practice is illegitimate and bases that ruling on substantial evidence.
18 S. REP. NO. 597, 63d Cong., 2d Sess., 13 (1914) (“The committee gave careful consideration to the question as to whether it would attempt to define the many and variable unfair practices which prevail in commerce and to forbid [them] or whether it would, by a general declaration condemning unfair practices, leave it to the commission to determine what practices were unfair. It concluded that the latter course would be the better, for the reason . . . that there were too many unfair practices to define, and after writing 20 of them into the law it would be quite possible to invent others.”). 19 See Averitt, supra note 11, at 251-252.
20 51 CONG. REC. 11, 236 (1914) (statement of Sen. Cummins). 21 See FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986); FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972); FTC v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel & Bros., Inc., 291 U.S. 304, 309-310 (1934). 22 Ind. Fed’n of Dentists, 476 U.S. at 454.
23 Atl. Ref. Co. v. FTC, 381 U.S. 357, 368 (1965) (quoting FTC v. Cement Inst., 333 U.S. 683, 720 (1948)).
24 Boise Cascade Corp. v. FTC, 637 F.2d 573, 577-82 (9th Cir. 1980). 25 E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 136-40 (2d Cir. 1984). See also Official Airline Guides, Inc. v. FTC, 630 F.2d 920, 927-28 (2d Cir. 1980) (holding that while courts must give “great weight” to the Commission’s judgment that a practice is unfair, the Commission could not condemn a monopolist’s refusal to deal where it “has no purpose to restrain competition or expand [its] monopoly, and does not act coercively”).
Moreover, by subjecting Section 5 to a framework similar to the rule of reason, the Commission hamstrings its enforcement mission with an approach that poses significant administrability concerns. The current iteration of the rule of reason invites courts to assess whether particular business conduct is “unreasonable,” including through determining whether the “procompetitive” effects of the conduct outweigh any “anticompetitive” effects.30 Famously unwieldy, the standard leads to soaring enforcement costs, risks inconsistent outcomes, and has been decried by judges as unadministrable or exceedingly difficult to meet.31 26 See, e.g., Professor Daniel A. Crane, Comments at FTC Workshop on Section 5 of the FTC Act as a Competition Statute, 73-74 (Oct. 17, 2008), https://www.ftc.gov/sites/default/files/documents/public_events/section-5-ftc-act-competition- statute/transcript.pdf, (“What I want to suggest is that, in many ways, by marrying the meaning of Section 5 to the Sherman Act, the FTC is losing many, many of its institutional advantages, as both a norm creator and an enforcer of antitrust law.”).
27 See id. at 76 (“[B]y coupling the Sherman Act to the FTC Act, the FTC gets saddled with a rule that was created in a completely different institutional context with different considerations.”); id. at 77 (“I think this is a huge mistake in terms of the institutional context. You’re taking baggage you don’t have to take and you shouldn’t take and it leads to weakened liability norms in the FTC.”). 28 See, e.g., Oregon Lithoprint, Inc.; Analysis to Aid Public Comment, 83 Fed. Reg. 11529, 11531 (Mar. 15, 2018) (“The Commission has long held that an invitation to collude violates Section 5 of the FTC Act even where there is no proof that the competitor accepted the invitation.”). 29 See Qualcomm Complaint, supra note 10.
30 See, e.g., Ohio v. Am. Express Co., 138 S. Ct. 2274, 2283-84 (2018). 31 See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 916 (2007) (Breyer, J., dissenting) (“How easily can courts identify instances in which the benefits are likely to outweigh potential harms? My own answer is, not very easily.”); Richard A. Posner, The Rule of Reason and the In practice, courts have also used the weaknesses of the rule of reason as a basis for restricting private antitrust plaintiffs.32 As the Supreme Court recently pointed out, scholars have found that the defendant prevailed in “nearly all rule of reason cases in the last 45 years on the ground that the plaintiff failed to show a substantial anticompetitive effect.”33 Indeed, lawmakers’ concerns about the infirmities of the rule of reason standard were partly why Congress enacted Section 5 in the first place.34 Tying Section 5 back to this framework offends the plain text, structure, and legislative history of Section 5 and needlessly constrains the Commission from taking action to safeguard the public from unfair methods of competition. The 2015 Statement is also rife with internal contradictions that may effectively read the Commission’s standalone Section 5 authority out of the statute altogether. First, although the Statement recognizes that Section 5 prohibits conduct that would violate the Sherman or Clayton Acts “if allowed to mature or complete,” it then requires the Commission to prove “likely” anticompetitive effects under the rule of reason.35 Importing the rule of reason’s likelihood requirement would abrogate the Commission’s statutory mandate to combat incipient wrongdoing before it becomes likely to harm consumers or competition. As the Supreme Court has held, Section 5 “was designed to supplement and bolster the Sherman Act and Clayton Act— to stop in their incipiency acts and practices which, when full blown, would violate those Acts.”36 Second, although the 2015 Statement declares that the Commission will apply a “framework similar to the rule of reason,” it then suggests that the Commission will typically refrain from bringing a standalone Section 5 case where the Sherman or Clayton Acts already apply. But it is hard to imagine what, if any, cases could ever meet both of these criteria: With the exception of invitations to collude, almost every practice that is unlawful under the rule of reason will already be subject to the Sherman or Clayton Acts and thus (according to the 2015 Statement) be improper targets for standalone Section 5 enforcement. The 2015 Statement may have hinted at a broader reading of Section 5 by embracing an undefined “framework similar to” the rule of reason, but if that was the Commission’s intent, the reference was far too vague to provide any meaningful guidance. By both wedding Section 5 to the Sherman Act’s legal Economic Approach: Reflections on the Sylvania Decision, 45 U. CHI. L. REV. 1, 14 (1977) (“The content of the Rule of Reason is largely unknown; in practice, it is little more than a euphemism for nonliability.”).
32 Maurice E. Stucke, Does the Rule of Reason Violate the Rule of Law?, 42 U.C. DAVIS L. REV. 1375, 1383, 1423, 1471 (2009).
33 NCAA v. Alston, No. 20-512, slip op. at 25 (June 21, 2021) (citing Brief for 65 Professors of Law, Business, Economics, and Sports Management as Amici Curiae 21, n. 9); see also Michael A. Carrier, The Rule of Reason: An Empirical Update for the 21st Century, 16 GEO. MASON L. REV. 827 (2009). 34 See supra pp. 2-3.
35 2015 Statement, supra note 2.
36 FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95 (1953) (citing FTC v. Beech-Nut Packing Co., 257 U.S. 441, 453 (1922); Fashion Originators' Guild of Am. v. FTC, 312 U.S. 457, 463, 466 (1941)); see also FTC v. Brown Shoe Co., 384 U.S. 316, 321-22 (1966). standard and signaling that Section 5 won’t be pursued if the Sherman Act already applies, the 2015 Statement effectively turns standalone Section 5 into a dead letter. More generally, the 2015 Statement assumes a case-by-case approach to “unfair methods of competition,” despite widespread recognition that this adjudication-only approach often fails to deliver clear guidance.37 Without explanation, the Statement fails to address the possibility of the Commission adopting rules to clarify the legal limits that apply to market participants. The Commission’s inability, after a century of commanding this statutory authority, to deliver clear Section 5 principles suggests that the time is right for the Commission to rethink its approach and to recommit to its mandate to police unfair methods of competition even if they are outside the ambit of the Sherman or Clayton Acts. The task will require careful and serious work, but it is one that our enabling statute expected and required.
The Commission’s report on repair restrictions explores and discusses a number of these issues and describes the hardships repair restrictions create for families and businesses. The Commission is concerned that this burden is borne more heavily by underserved communities, including communities of color and lower-income Americans.2 The pandemic exacerbated these effects as consumers relied more heavily on technology than ever before.3 1 Federal Trade Commission. Nixing the Fix: An FTC Report to Congress on Repair Restrictions. (May 2021) https://www.ftc.gov/system/files/documents/reports/nixing-fix-ftc-report-congress-repair- restrictions/nixing_the_fix_report_final_5521_630pm-508_002.pdf. 2 See id. at 3-4.
3 Id. at 4-5.
While unlawful repair restrictions have generally not been an enforcement priority for the Commission for a number of years,4 the Commission has determined that it will devote more enforcement resources to combat these practices.5 Accordingly, the Commission will now prioritize investigations into unlawful repair restrictions under relevant statutes such as the Magnuson-Moss Warranty Act6 and Section 5 of the Federal Trade Commission Act.7 First, the Commission urges the public to submit complaints and provide other information to aid in greater enforcement of the Magnuson-Moss Warranty Act and its implementing regulations. While current law does not provide for civil penalties or redress, the Commission will consider filing suit against violators of the Magnuson-Moss Warranty Act to seek appropriate injunctive relief. The Commission will also closely monitor private litigation to determine whether the Commission may wish to investigate a pattern of unfair or deceptive acts or practices or file an amicus brief. Further, the Commission will explore rulemaking, as appropriate. Second, the Commission will scrutinize repair restrictions for violations of the antitrust laws. For example, certain repair restrictions may constitute tying arrangements or monopolistic practices—such as refusals to deal, exclusive dealing, or exclusionary design—that violate the Sherman Act.8 Violations of the Sherman Act also violate the prohibition on unfair methods of competition codified in Section 5 of the Federal Trade Commission Act. Third, the Commission will assess whether repair restrictions constitute unfair acts or practices, which are also prohibited by Section 5 of the Federal Trade Commission Act. In addition, the Commission will analyze any material claims made to purchasers and users to ascertain whether there are any prohibited deceptive acts or practices, in violation of Section 5 of the Federal Trade Commission Act.
Finally, the Commission will bring an interdisciplinary approach to this issue, using resources and expertise from throughout the agency to combat unlawful repair restrictions. The FTC will also closely coordinate with state law enforcement and policymakers to ensure compliance and to update existing law and regulation to advance the goal of open repair markets. 4 The Commission has brought only one case alleging a violation of the Magnuson-Moss Warranty Act in the past decade. In the Matter of BMW of North America, LLC, No. 132-3150 (October 2015). During this period, the Commission’s efforts have included issuing several warning letters to companies that appeared to be engaged in warranty tying in violation of the Magnuson-Moss Warranty Act. See FTC Staff Warns Companies that It Is Illegal to Condition Warranty Coverage on the Use of Specified Parts or Services, https://www.ftc.gov/news-events/press- releases/2018/04/ftc-staff-warns-companies-it-illegal-condition-warranty-coverage. 5 In conjunction with the Nixing the Fix Workshop, the Commission sought public comments and submissions of empirical research concerning repair restrictions. The full docket of public comments and empirical research submissions is available at https://www.regulations.gov/docket/FTC-2019-0013/document and https://www.regulations.gov/document/FTC-2019-0013-0001/comment. 6 15 U.S.C. § 2301 et. seq. The Magnuson-Moss Warranty Act prohibits, among other things, tying arrangements that condition a consumer product’s warranty on the use of a third-party service provider or on the use of a particular product, unless the warrantor provides the services or products for free or obtains a waiver from the FTC. 15 U.S.C. § 2302(c).
7 15 U.S.C. § 45. Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive actors or practices, as well as unfair methods of competition, in or affecting commerce. Section 5 also encompasses violations of the Sherman Act, which prohibits certain exclusionary and other anticompetitive conduct. 8 See, e.g., Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992); United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001).
UNITED STATES OF AMERICA Federal Trade Commission WASHINGTON, D.C. 20580 Office of the Chair STATEMENT OF THE COMMISSION On Breaches by Health Apps and Other Connected Devices September 15, 2021 In recognition of the proliferation of apps and connected devices that capture sensitive health data, the Federal Trade Commission is providing this Policy Statement to offer guidance on the scope of the FTC’s Health Breach Notification Rule, 16 C.F.R. Part 318 (“the Rule”).1 The FTC’s Health Breach Notification Rule helps to ensure that entities who are not covered by the Health Insurance Portability and Accountability Act (“HIPAA”) nevertheless face accountability when consumers’ sensitive health information is compromised. Under the Rule’s requirements, vendors of personal health records (“PHR”) and PHR-related entities must notify U.S. consumers and the FTC, and, in some cases, the media, if there has been a breach of unsecured identifiable health information, or face civil penalties for violations. The Rule also covers service providers to these entities. In practical terms, this means that entities covered by the Rule who have experienced breaches cannot conceal this fact from those who have entrusted them with sensitive health information.
The Rule was issued more than a decade ago, but the explosion in health apps and connected devices makes its requirements with respect to them more important than ever. The FTC has advised mobile health apps to examine their obligations under the Rule,2 including through the use of an interactive tool.3 Yet the FTC has never enforced the Rule, and many appear to misunderstand its requirements. This Policy Statement serves to clarify the scope of the Rule, and place entities on notice of their ongoing obligation to come clean about breaches. The Rule covers vendors of personal health records that contain individually identifiable health information created or received by health care providers. The Rule is triggered when such entities experience a “breach of security.”4 Under the definitions cross-referenced by the Rule, the developer of a health app or connected device is a “health care provider” because it “furnish[es] health care services or supplies.”5 When a health app, for example, discloses 1 The Rule implements the requirements of the American Recovery & Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115, codified at 42 U.S.C. § 17937.
2 Mobile Health App Developers: FTC Best Practices, FED. TRADE COMM’N, https://www.ftc.gov/tips- advice/business-center/guidance/mobile-health-app-developers-ftc-best-practices (last visited on Sept. 15, 2021). 3 Mobile Health Apps Interactive Tool, FED. TRADE COMM’N, https://www.ftc.gov/tips-advice/business- center/guidance/mobile-health-apps-interactive-tool (last visited on Sept. 15, 2021). 4 See 16 C.F.R. § 318.2(a)
5 See id. § 318.2; 42 U.S.C. § 1320d(6), d(3).
sensitive health information without users’ authorization, this is a “breach of security” under the Rule.6 The statute directing the FTC to promulgate the Rule requires that a “personal health record” be an electronic record that can be drawn from multiple sources. The Commission considers apps covered by the Rule if they are capable of drawing information from multiple sources, such as through a combination of consumer inputs and application programming interfaces (“APIs”). For example, an app is covered if it collects information directly from consumers and has the technical capacity to draw information through an API that enables syncing with a consumer’s fitness tracker. Similarly, an app that draws information from multiple sources is covered, even if the health information comes from only one source. For example, if a blood sugar monitoring app draws health information only from one source (e.g., a consumer’s inputted blood sugar levels), but also takes non-health information from another source (e.g., dates from your phone’s calendar), it is covered under the Rule. In addition, the Commission reminds entities offering services covered by the Rule that a “breach” is not limited to cybersecurity intrusions or nefarious behavior. Incidents of unauthorized access, including sharing of covered information without an individual’s authorization, triggers notification obligations under the Rule. As many Americans turn to apps and other technologies to track diseases, diagnoses, treatment, medications, fitness, fertility, sleep, mental health, diet, and other vital areas, this Rule is more important than ever. Firms offering these services should take appropriate care to secure and protect consumer data. The Commission intends to bring actions to enforce the Rule consistent with this Policy Statement. Violations of the Rule face civil penalties of $43,792 per violation per day.
6 Id. § 318.2(a) (defining “breach of security” as “acquisition of [PHR identifiable health information] without the authorization of the individual.”).
Enforcement Policy Statement Regarding Negative Option Marketing I. Introduction and Background The Federal Trade Commission (“FTC” or “Commission”) issues this Policy Statement to provide guidance regarding its enforcement of various statutes and FTC regulations addressing negative option marketing and operating.1 This Statement is intended to assist the business community and practitioners by providing specific guidance on the Commission’s interpretation of existing law as it applies to negative option practices. This Statement may also assist the courts in developing an appropriate framework for interpreting and applying the various statutes and regulations addressing negative option marketing discussed herein. Negative option offers come in a variety of forms, but all share a central feature: each contains a term or condition under which the seller may interpret a consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement as acceptance or continuing acceptance of the offer.2 Typically, negative option arrangements include, but are not limited to, automatic renewals, continuity plans, free-to-pay or fee-to-pay conversions, and prenotification plans. Automatic renewals allow sellers (e.g., a magazine publisher) to 1 This Policy Statement elaborates on principles annunciated by the Commission in individual cases and rules issued over the course of many years. This Policy Statement does not confer any rights on any person and does not operate to bind the FTC or the public. In any enforcement action, the Commission must prove the challenged act or practice violates one or more existing statutory or regulatory requirements. In addition, this Policy Statement does not preempt federal, state, or local laws. Compliance with those laws, however, will not necessarily preclude Commission law enforcement action under the FTC Act or other statutes. Pursuant to the Congressional Review Act (5 U.S.C. § 801 et seq.), the Office of Information and Regulatory Affairs designated this Policy Statement as not a “major rule,” as defined by 5 U.S.C. § 804(2). 2 The Commission’s Telemarking Sales Rule (16 C.F.R. Part 310) defines a negative option feature as a provision in an offer or agreement to sell or provide any goods or services “under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.” 16 C.F.R. § 310.2(w).
unilaterally renew consumers’ subscriptions when they expire, unless consumers affirmatively cancel their subscriptions by a certain date. Continuity plans allow consumers to agree in advance to receive periodic shipments of goods or provision of services (e.g., bottled water delivery), which they continue to receive until they cancel the agreement. Free trial marketing (e.g., free-to-pay conversions) provides consumers the opportunity to receive goods or services for free (or at a nominal fee) for a trial period. After the trial period, sellers can automatically begin charging a fee (or higher fee) unless consumers affirmatively cancel or return the goods or services. Finally, under prenotification plans3 (e.g., book-of-the-month clubs), sellers provide periodic notices offering goods to participating consumers and then send—and charge for—those goods only if the consumers take no action to decline the offer. The periodic announcements and shipments can continue indefinitely.4 Negative option programs are widespread in the marketplace and can provide substantial benefits for sellers and consumers. At the same time, consumers suffer costs when marketers fail to make adequate disclosures, bill consumers without their consent, or make cancellation difficult or impossible. Over the years, unfair or deceptive negative option practices have remained a persistent source of consumer harm, often saddling shoppers with recurring payments for products and services they did not intend to purchase or did not want to continue to purchase.5 To address this problem, the Commission and states regularly bring cases 3 The Commission’s Rule on the “Use of Prenotification Negative Option Plans” (16 C.F.R. Part 425) only covers this type of negative option marketing. 4 In addition, some negative option offers include upsell or bundled offers, where sellers use consumers’ billing data to sell additional products from the same seller or pass consumers’ billing data to a third party for their sales. An upsell occurs when a consumer completes a first transaction and then receives a second solicitation for an additional product or service. A bundled offer occurs when a seller packages two or more products or services together so that they cannot be purchased separately.
5 See, e.g., n. 6 infra.
challenging a variety of harmful negative option practices. These matters involve a range of deceptive or unfair practices, including inadequate disclosures of hidden charges in ostensibly “free” offers and other products or services, enrollment without consumer consent, and inadequate or overly burdensome cancellation and refund procedures.6 In addition, the Commission receives thousands of complaints each year related to negative option marketing. The number of ongoing cases and high volume of complaints demonstrate there is prevalent, unabated consumer harm in the marketplace.
The FTC’s enforcement actions primarily rely on Section 5 of the FTC Act (15 U.S.C. § 45(a)), the Restore Online Shoppers’ Confidence Act (“ROSCA”) (15 U.S.C. §§ 8401-8405), and the Telemarketing Sales Rule (16 C.F.R. Part 310). However, the Rule on the Use of Prenotification Negative Option Plans (16 C.F.R. Part 425), the Electronic Fund Transfer Act (“EFTA”) (15 U.S.C. §§ 1693-1693r), and the Postal Reorganization Act (i.e., the Unordered Merchandise Statute) (39 U.S.C. § 3009) also address various aspects of negative option marketing.
6 Recent examples of these matters include: FTC v. JDI Dating, Ltd., No. 1:14-cv-08400 (N.D.
8 See Negative Options: A Report By the Staff of the FTC’s Division of Enforcement, 26-29 (Jan. 2009), https://www.ftc.gov/sites/default/files/documents/reports/negative-options-federal-trade- commission-workshop-analyzing-negative-option-marketing-report- staff/p064202negativeoptionreport.pdf. In discussing the principal Section 5 requirements related to negative options, the report cites to the following pre-ROSCA cases, FTC v. JAB Ventures, No. CV08-04648 (C.D. Cal. 2008); FTC v. Complete Weightloss Center, No. 1:08cv00053 (D.N.D. 2008); FTC v. Berkeley Premium Nutraceuticals, No. 1:06cv00051 (S.D. Ohio 2006); FTC v. Think All Publ’g, No. 4:07cv11 (E.D. Tex. 2006); FTC v. Hispanexo, No. 1:06cv424 (E.D. Va. 2006); FTC v. Consumerinfo.com, No. SACV05-801 (C.D. Cal. 2005); FTC v. Conversion Mktg., No. SACV04-1264 (C.D. Cal. 2004); FTC v. Mantra Films, No. CV03-9184 (C.D. Cal. 2003); FTC v. Preferred Alliance, No. 103-CV0405 (N.D. Ga. 2003); United States v. Prochnow, No. 1:02-CV-0917 (N.D. Ga. 2002); FTC v. Ultralife Fitness, Inc., No. 2:08-cv-07655-DSF-PJW (C.D. Cal. 2008); In the Matter of American Isuzu Motors, No. C- 3712 (FTC 1997); FTC v. Universal Premium Services, No. CV06-0849 (C.D. Cal. 2006); FTC v. Remote Response, No. 06-20168 (S.D. Fla. 2006); and FTC’s Dot Com Disclosures guidance. 9 See, e.g., FTC v. JAB Ventures; FTC v. Complete Weightloss Center; FTC v. NutraClick, LLC I. 10 See, e.g., FTC v. JAB Ventures; Complete Weightloss Center; FTC v. Berkeley Premium Nutraceutical; FTC v. Think All Publ’g. Disclosures earlier in the transaction may be necessary to avoid deception. See e.g., FTC’s Dot Com Disclosures guidance. consent to such offers.11 Finally, marketers must not erect unreasonable barriers to cancellation or impede the effective operation of promised cancellation procedures, and must honor cancellation requests that comply with such procedures.12 Although these basic guidelines are useful, the legality of a particular negative option depends on an individualized assessment of the advertisement’s net impression and the marketer’s business practices.13 ROSCA: Enacted by Congress in 2010 to address ongoing problems with online negative option marketing, ROSCA prohibits charging or attempting to charge consumers for goods or services sold on the Internet through any negative option feature14 unless the marketer: (1) clearly and conspicuously discloses all material terms of the transaction15 before obtaining the consumer’s billing information; (2) obtains a consumer’s express informed consent before 11 E.g., FTC. v. Neovi, Inc., 604 F.3d 1150, 1157-59 (9th Cir. 2010), amended by 2010 WL 2365956 (9th Cir. June 15, 2010); FTC v. Amazon.com, Inc., No. C14-1038-JCC, 2016 WL 10654030, at *8 (W.D. Wash. Apr. 26, 2016); FTC v. Ideal Fin. Sols., Inc., No. 2:13-CV-00143- JAD, 2015 WL 4032103, at *8 (D. Nev. June 29, 2015); FTC v. BunZai Media Group, Inc. 12 See, e.g., FTC v. Universal Premium Services; FTC v. Remote Response; FTC v. Berkeley Premium Nutraceuticals; FTC v. Hispanexo; FTC v. Age of Learning, Inc. 13 See, e.g., Negative Options: A Report By the Staff of the FTC’s Division of Enforcement, 28. 14 15 U.S.C. § 8403. ROSCA incorporates the definition of “negative option feature” from the Commission’s Telemarketing Sales Rule, 16 C.F.R. § 310.2(w). ROSCA also contains a finding that “Third party sellers used a free trial period to enroll members, after which they periodically charged consumers until consumers affirmatively canceled the memberships. This use of “free- to-pay conversion” and “negative option” sales took advantage of consumers’ expectations that they would have an opportunity to accept or reject the membership club offer at the end of the trial period.” 15 U.S.C. § 8401(8). Finally, in addition to addressing negative option marketing, ROSCA contains provisions related to third party “post transaction” offers. See, e.g., 15 U.S.C. § 8402.
15 The Commission has brought several cases alleging a failure to disclose adequately the terms of the negative option feature. See, e.g., FTC v. NutraClick II; FTC v. Triangle Media Corporation; FTC v. AAFE Products Corp. The Commission recently alleged that failure to disclose a material term of the underlying service that was necessary to prevent deception violated this provision of ROSCA. In re: MoviePass, Inc., No. C-4751 (October 5, 2021). charging the consumer’s account; 16 and (3) provides simple mechanisms for the consumer to stop recurring charges.17 ROSCA also addresses offers made by, or on behalf of, third-party sellers during, or immediately following, a transaction with an initial merchant. Specifically, ROSCA prohibits post-transaction, third-party sellers18 from charging or attempting to charge consumers unless the seller: (1) before obtaining billing information, clearly and conspicuously discloses the offer’s material terms; and (2) receives the consumer’s express informed consent by obtaining the consumer’s name, address, contact information, as well as the full account number to be charged, and requiring the consumer to perform an additional affirmative action indicating consent.19 ROSCA also prohibits initial merchants from disclosing billing information to any post- transaction third-party seller for use in any Internet-based sale of goods or services.20 Furthermore, ROSCA provides that a violation of that Act is a violation of a Commission trade regulation rule under Section 18 of the FTC Act.21 Thus, the Commission may seek a variety of remedies for violations of ROSCA, including civil penalties under Section 5(m)(1)(A) of the FTC Act;22 injunctive relief under Section 13(b) of the FTC Act;23 and consumer redress, 16 See, e.g., FTC v. BunZai Media Group, Inc.; FTC v. Health Formulas, LLC; and FTC v. JDI Dating, Ltd.
17 See, e.g., FTC v. Age of Learning, Inc.; FTC v. AdoreMe, Inc.; and FTC, State of Illinois, and State of Ohio v. One Technologies.
18 ROSCA defines “post-transaction third-party seller” as a person other than the initial merchant who sells any good or service on the Internet and solicits the purchase on the Internet through an initial merchant after the consumer has initiated a transaction with the initial merchant. 15 U.S.C. § 8402(d)(2).
19 15 U.S.C. § 8402(a).
20 15 U.S.C. § 8402(b).
21 15 U.S.C. § 8404. Section 18 of the FTC Act is 15 U.S.C. § 57a. 22 15 U.S.C. § 45(m)(1)(A).
23 15 U.S.C. § 53(b).
such as damages, and other relief under Section 19 of the FTC Act.24 Although Congress charged the Commission with enforcing ROSCA, it did not direct the FTC to promulgate implementing regulations.25 Telemarketing Sales Rule: The TSR prohibits deceptive telemarketing acts or practices, including those involving negative option offers, and certain types of payment methods common in deceptive negative option marketing. Specifically, the TSR requires telemarketers to disclose all material terms and conditions of the negative option feature, including the need for affirmative consumer action to avoid the charges, the date (or dates) the charges will be submitted for payment, and the specific steps the customer must take to avoid the charges. It also prohibits telemarketers from misrepresenting such information and contains specific requirements related to payment authorization.26 Finally, the TSR prohibits the use of payment methods often used in deceptive marketing, including negative options, such as remotely created checks.27 The Rule, however, only applies to negative option offers made over the telephone. Prenotification Plan Rule: The Commission promulgated the “Use of Prenotification Negative Option Plans” Rule (“Prenotification Plan Rule”) (16 C.F.R. Part 425).28 The Prenotification Plan Rule requires sellers of such plans to clearly and conspicuously disclose 24 15 U.S.C. § 57b(a)(1) and (b).
25 ROSCA states that a violation “of this chapter or any regulation prescribed under this chapter shall be treated as a violation of a rule under section 18 of the Federal Trade Commission Act (15 U.S.C. 57a) regarding unfair or deceptive acts or practices.” 15 U.S.C. § 8404(a). 26 16 C.F.R. Part 310.3(a).
27 80 Fed. Reg. 77520 (Dec. 14, 2015). The TSR Notice of Proposed Rulemaking (78 Fed. Reg. 41200 (July 9, 2013)) noted negative option cases where the defendants used unauthorized remotely created checks. E.g., FTC v. FTN Promotions, Inc., Civ. No. 8:07-1279 (M.D. Fla.
28 The Commission issued the Rule after finding some negative option marketers committed unfair and deceptive practices that violated Section 5 of the Act, 15 U.S.C. § 45. their plan’s material terms before consumers subscribe. It enumerates seven material terms sellers must disclose: (1) how subscribers must notify the seller if they do not wish to purchase the selection; (2) any minimum purchase obligations; (3) the subscribers’ right to cancel; (4) whether billing charges include postage and handling; (5) that subscribers have at least ten days to reject a selection; (6) that, if any subscriber is not given ten days to reject a selection, the seller will credit the return of the selection and postage to return the selection, along with shipping and handling; and (7) the frequency with which announcements and forms will be sent.29 In addition, sellers must provide particular periods during which they will send introductory merchandise, give consumers a specified period to respond to announcements, provide instructions for rejecting merchandise in announcements, and promptly honor written cancellation requests.30 The Prenotification Plan Rule applies only to plans like book-of-the-month clubs in which sellers provide periodic notices offering goods to participating consumers and then send— and charge for—those goods only if the consumers take no action to decline the offer. These types of plans, however, account for only a small fraction of current negative option marketing. Therefore, the Rule does not reach most modern negative option marketing.31 29 16 C.F.R. § 425.1(a)(1)(i)-(vii).
30 16 C.F.R. §§ 425.1(a)(2) and (3); § 425.1(b).
31 The Prenotification Plan Rule defines “negative option plan” narrowly to apply only to prenotification plans. 16 C.F.R. § 425.1(c)(1). In 1998, the Commission clarified the Rule’s application to such plans in all media, stating that it “covers all promotional materials that contain a means for consumers to subscribe to prenotification negative option plans, including those that are disseminated through newer technologies . . . .” 63 Fed. Reg. 44555, 44561 (Aug. 20, 1998). In 2017, the Commission estimated that fewer than 100 sellers (“clubs”) were subject to the current Rule’s requirements. 82 Fed. Reg. 38907, 38908 (Aug. 16, 2017). Other Relevant Requirements: EFTA32 and the Unordered Merchandise Statute33 also contain provisions relevant to negative option marketing. EFTA prohibits sellers from imposing recurring charges on a consumer’s debit cards or bank accounts without written authorization. The Unordered Merchandise Statute provides that mailing unordered merchandise, or a bill for such merchandise, constitutes an unfair method of competition and an unfair trade practice in violation of Section 5 of the FTC Act.
33 39 U.S.C. § 3009.
34 In an October 2, 2019 Notice (84 Fed. Reg. 52393), the Commission sought comment on the need for amendments to the “Rule Concerning the Use of Prenotification Negative Option Plans” (i.e., “Negative Option Rule” (16 CFR Part 425)) to help consumers avoid recurring payments for products and services they did not intend to order and to allow them to cancel such payments without unwarranted obstacles. The Commission will continue to closely monitor compliance with the rules and laws applicable to negative option marketing, and is still considering various options in the rule review proceeding for the Negative Option Rule. 35 Any reference to ROSCA in these principles applies only to Internet transactions, consistent with that statute’s coverage.
36 Of course, sellers fail to disclose adequately material terms if the disclosed terms are not truthful and substantiated.
deliberately implied claim is presumed to be material.37 Moreover, the FTC’s cases for failure to disclose under Section 5 of the FTC Act are generally consistent with ROSCA.38 Those terms at minimum should include:
• Any material terms related to the underlying product or service that are necessary to prevent deception, regardless of whether that term directly relates to the terms of the negative option offer;39 • That consumers will be charged40 for the good or service, or that those charges will increase after any applicable trial period ends, and, if applicable, that the charges will be on a recurring basis, unless the consumer timely takes steps to prevent or stop such charges;
• Each deadline (by date or frequency) by which the consumer must act in order to stop the charges;
• The amount (or range of costs) the consumer will be charged or billed and, if applicable, the frequency of such charges a consumer will incur unless the consumer takes timely steps to prevent or stop those charges; 37 See, e.g., FTC Statement on Deception, 103 F.T.C. 174, 182 (1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)); Thompson Medical Co., 104 F.T.C. 648, 816 (1984). 38 The Commission has consistently brought cases for deceptive and pure omissions of material fact. See, e.g., FTC v. Roca Labs, Inc., 345 F. Supp. 3d 1375, 1390 (M.D. Fla. 2018); FTC v. NPB Advert., Inc., 218 F. Supp. 3d 1352, 1361 (M.D. Fla. 2016); FTC v. Am. Standard Credit Sys., Inc., 874 F. Supp. 1080, 1088 (C.D. Cal. 1994); FTC v. BlueHippo Funding, LLC, 762 F.3d 238, 241 (2d Cir. 2014). But see, In re International Harvester, 104 F.T.C. 949, 1059 (1984) (Not all omissions are deceptive or unfair. “The number of facts that may be material to consumers-and on which they may have prior misconceptions-is literally infinite.”) 39 The Commission recently alleged that a negative option seller’s failure to disclose that it was impeding access to its movie subscription service violates ROSCA. MoviePass, Inc. 40 “Charge,” “Charged,” or “Charging,” for the purposes of this Policy Statement, means any attempt to collect money or other consideration from a consumer, including but not limited to causing Billing Information to be submitted for payment, including against the consumer’s credit card, debit card, bank account, telephone bill, or other account. • The date (or dates) each charge will be submitted for payment; and • All information necessary to cancel the contract.
These disclosures must be clear and conspicuous.41 To meet this standard, offers should be difficult to miss (i.e., easily noticeable) or unavoidable and easily understandable by ordinary consumers, including:
• In any communication that is solely visual or solely audible, the disclosure should be made through the same means through which the communication is presented. In any communication made through both visual and audible means, such as a television advertisement, the disclosure should be presented simultaneously in both the visual and audible portions of the communication even if the representation requiring the disclosure is made in only one means. • A visual disclosure, by its size, contrast, location, the length of time it appears, and other characteristics, should stand out from any accompanying text or other visual elements so that it is easily noticed, read, and understood. • An audible disclosure, including by telephone or streaming video, should be delivered in a volume, speed, and cadence sufficient for ordinary consumers to easily hear and understand it.
• In any communication using an interactive electronic medium, such as the Internet or software, the disclosure should be unavoidable. A disclosure is not clear and conspicuous if a consumer needs to take any action, such as clicking on a hyperlink or hovering over an icon, to see it.
41 Supra at nn. 9 and 15.
• The disclosure should use diction and syntax understandable to ordinary consumers and should appear in each language in which the representation that requires the disclosure appears.
• The disclosure should comply with these requirements in each medium through which it is received, including all electronic devices and face-to face communications.
• The disclosure should not be contradicted or mitigated by, or inconsistent with, anything else in the communication.42 • When the representation or sales practice targets a specific audience, such as children, the elderly, or the terminally ill, “ordinary consumers” includes reasonable members of that group.
Additionally, if the disclosures are in writing (including on the Internet), they should: • if related to the negative option feature, appear immediately adjacent to the means of recording the consumer’s consent for the negative option feature; • if not related to the negative option feature, appear before consumers make a decision to buy (e.g., before they “add to shopping cart”); and • not contain any other information that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to read and understand the 42 An example of an inadequate disclosure is one where the consumer sees an offer upfront, in an electronic or written advertisement or on the landing page of a website, which is materially different from the terms of the offer presented in later stages, such as later web pages, of the ordering process. See, e.g., FTC v. E.M.A. Nationwide, Inc., 767 F.3d 611, 633 (6th Cir. 2014); FTC v. Fed. Loan Modification Law Ctr., LLP, No. SA-CV-09-401-CJC (MLGx) (C.D. Cal. 2010); FTC v. Grant Connect, LLC, 827 F. Supp. 2d 1199, 1214 (D. Nev. 2011). disclosures, including any information not directly related to the material terms and conditions of any negative option feature.
For all telephone and other oral offers, the disclosures should not contain any other information that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to understand the disclosures, including any information not directly related to the material terms and conditions of any negative option feature. Consent:43 ROSCA, judicial decisions applying Section 5, and cases brought by the Commission under those laws make clear marketers should obtain the consumer’s express informed consent before charging the consumer.44 To attain express informed consent, the negative option seller should:
• obtain the consumer’s acceptance of the negative option feature offer separately from any other portion of the entire transaction;
• not include any information that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to provide their express informed consent to the negative option feature;45 • obtain the consumer’s unambiguously affirmative consent to the negative option feature;46 43 Negative option sellers covered by the Telemarketing Sales Rule should also ensure that they are complying with the consent requirements in 16 C.F.R. § 310.4 specifically applicable to transactions involving a free-to-pay conversion and preacquired account information. 44 Supra at nn. 11 and 16.
45 Such information could appear on the product page itself (e.g., extraneous language that interferes with the consumer’s ability to provide consent) or in another location (e.g., a separate webpage containing information materially contradicting the information on the consent page). 46 A “pre-checked box” does not constitute affirmative consent. In addition, the seller should clearly disclose the name of the billing entity authorized by the consumer’s consent. • obtain the consumer’s unambiguously affirmative consent to the entire transaction; and • be able to verify the consumer’s consent.
Cancellation: ROSCA requires negative option sellers to provide a simple, reasonable means for consumers to cancel their contracts.47 To meet this standard, negative option sellers should provide cancellation mechanisms that are at least as easy to use as the method the consumer used to initiate the negative option feature. For example, to ensure compliance with this simple cancellation mechanism requirement, negative option sellers should not subject consumers to new offers or similar attempts to save the negative option arrangement that impose unreasonable delays on consumers’ cancellation efforts.48 In addition, negative option sellers should provide their cancellation mechanisms at least through the same medium (such as website or mobile application) the consumer used to consent to the negative option feature. The negative option seller should provide, at a minimum, the simple mechanism over the same website or web-based application the consumer used to purchase the negative option feature. If the seller also provides for telephone cancellation, it should provide, at a minimum, a telephone number, and answer all calls to this number during normal business hours, within a short time frame, and ensure the calls are not lengthier or otherwise more burdensome than the telephone call the consumer used to consent to the negative option feature. Finally, to comply with Section 5, a seller’s cancellation procedures for negative option features should be effective. Sellers should not impede the effective operation of promised 47 Supra at 17.
48 While a request to consider an offer or discount would not amount to an unreasonable delay, multiple requests for a consumer to listen to additional offers, lengthy pitches, or ignoring a consumer’s request to decline further offers could amount to an unreasonable delay. cancellation procedures, and should honor cancellation requests that comply with such procedures. In implementing effective cancellation procedures, marketers should not, among other things: hang up on consumers who call to cancel; place them on hold for an unreasonably long time; provide false information about how to cancel; or misrepresent the reasons for delays in processing consumers’ cancellation requests.49 If ROSCA applies, sellers must comply with both that statute and Section 5 of the FTC Act.
49 See, e.g., FTC v. Universal Premium Services; FTC v. Remote Response; FTC v. Hispanexo; FTC v. Berkeley Premium Nutraceuticals.
Policy Statement of the Federal Trade Commission on Education Technology and the Children’s Online Privacy Protection Act The Federal Trade Commission (“Commission”) is committed to ensuring that education technology (“ed tech”) tools and their attendant benefits do not become an excuse to ignore critical privacy protections for children. When Congress enacted the Children’s Online Privacy Protection Act1 (“COPPA”), it empowered the Commission with tools beyond administering compliance with notice and consent regimes. The Commission’s COPPA authority demands enforcement of meaningful substantive limitations on operators’ ability to collect, use, and retain children’s data, and requirements to keep that data secure. The Commission intends to fully enforce these requirements—including in school and learning settings where parents may feel they lack alternatives.
Protecting children’s privacy online has been a priority for the Commission since 1998, when the Commission recommended “that Congress develop legislation placing parents in control of the online collection and use of personal information from their children.”2 Thereafter, Congress enacted COPPA and charged the Commission with enforcing the law, entrusting the FTC to take the lead in protecting children’s privacy just as the country was entering the Internet age. To implement COPPA, the Commission issued the COPPA Rule, which became effective in
2000.3
In the decades since COPPA’s enactment, there has been a steady proliferation of technologies that allow, and business models that depend on, the online collection and monetization of consumers’ personal information. The development of ever more sophisticated targeting practices, in some cases based on comprehensive collection of users’ activities across the Internet, has raised concerns that businesses might engage in harmful conduct and led to calls for strengthening children’s privacy protections. Partly in response to these concerns, the Commission revised the COPPA Rule4 in 2013, including to hold third parties such as advertising networks liable for collection of children’s personal information from child-directed sites in violation of the Rule5 and to expand the definition of personal information to include 1 15 U.S.C. §§ 6501–6505.
2 FED. TRADE COMM’N, PRIVACY ONLINE: A REPORT TO CONGRESS, at 42 (June 1998). See also Complaint, In re Liberty Fin. Cos., Inc., FTC File No. 982-3522 (Aug. 12, 1999)(alleging that website operator falsely represented that personal information collected from children in a survey would be maintained anonymously and that participants would be sent an e-mail newsletter and prizes); Complaint, In re GeoCities, FTC File No. 982-3015 (Feb. 5, 1999) (alleging that website operator misrepresented which entity collected and maintained personal identifying information collected from children).
3 16 C.F.R. Part 312. As discussed below, the Commission strengthened the COPPA Rule through amendments that became effective in 2013. See Children’s Online Privacy Protection Rule, 78 Fed. Reg. 3,972 (Jan. 17, 2013) (Final Rule amendments codified at 16 C.F.R. Part 312).
4 See id.
5 See id. at 4,010. See also Complaint, United States v. OpenX Techs., Inc., Case No. 2:21-cv-09693 (C.D. Cal. Dec. 15, 2021) (alleging that online advertising platform collected and transmitted location information and persistent identifiers from users of child-directed apps without complying with COPPA); Complaint, FTC and the State of New York v. Google LLC and YouTube, LLC, Case No. 1:19-cv-2642 (D.D.C. Sept. 4, 2019) (alleging that YouTube persistent identifiers used to target advertising to children.6 Since that time, companies’ information collection practices have continued to become more extensive, and concerns remain that children’s information may be used to target them. Concerns about data collection are particularly acute in the school context, where children and parents often have to engage with ed tech tools in order to participate in a variety of school-related activities. School-issued personal computing devices and online learning services have provided substantial benefits to students, particularly as the COVID-19 pandemic closed schools and forced families to switch from in-person to remote learning for their children. At the same time, parents may have reasonable questions and concerns about the personal information that ed tech providers collect and how they use and potentially share that information with third parties, including for marketing purposes. And parent groups, among others, have expressed concern that children are a captive audience in the school setting and should not be targeted with advertising as they pursue their educations.7 School-issued devices and applications also enter families’ homes, potentially allowing for even more private information to be collected and shared. Commission staff has provided extensive guidance8 on COPPA’s application to ed tech providers to address these concerns.
In investigating potential violations of COPPA by providers of ed tech and other covered online services, the Commission intends to scrutinize compliance with the full breadth of the substantive prohibitions and requirements of the COPPA Rule and statutory language. In particular, the Commission will focus on:
• Prohibition Against Mandatory Collection: COPPA-covered companies, including ed tech providers, must not condition participation in any activity on a child disclosing more information than is reasonably necessary for the child to participate in that activity.9 These businesses cannot stop students from engaging in an ed tech activity if they do not provide information beyond what is reasonably needed to administer the students’ collected persistent identifiers used for targeted advertising from users of child-directed channels without complying with COPPA); Complaint, United States v. InMobi Pte Ltd., Case No. 3:16-cv-3474 (N.D. Cal. June 22, 2016) (alleging that mobile advertising network collected geolocation information from users of apps directed to children under the age of 13 without complying with COPPA).
6 78 Fed. Reg. 3,972, 4,009. See also Complaint, United States v. HyperBeard, Inc., Case No. 3:20-cv-3683 (N.D.
9 16 C.F.R. § 312.7. See also Complaint, United States v. Looksmart Ltd., Civ. Action No. 01-606-A (E.D. Va. Apr. 19, 2001); Complaint, United States v. BigMailbox.com, Inc., Civ. Action No. 01-605-A (E.D. Va. Apr. 19, 2001). participation in the activity.10 For example, if an ed tech provider does not reasonably need to be able to email students, it cannot condition the student’s access to schoolwork on students providing their email addresses.11 Students must not be required to submit to unnecessary data collection in order to do their schoolwork. • Use Prohibitions: COPPA-covered companies, including ed tech providers, are strictly limited in how they can use the personal information they collect from children. For example, operators of ed tech that collect personal information pursuant to school authorization12 may use such information only to provide the requested online education service. In this context, ed tech companies are prohibited from using such information for any commercial purpose, including marketing, advertising, or other commercial purposes unrelated to the provision of the school-requested online service.13 • Retention Prohibitions: COPPA-covered companies, including ed tech providers, must not retain personal information collected from a child longer than reasonably necessary to fulfill the purpose for which it was collected.14 It is unreasonable, for example, for an ed tech provider to retain children’s data for speculative future potential uses. • Security Requirements: COPPA-covered companies, including ed tech providers, must have procedures to maintain the confidentiality, security, and integrity of children’s personal information.15 For example, even absent a breach, COPPA-covered ed tech providers violate COPPA if they lack reasonable security.16 Such limitations on collection, use, and retention, along with security requirements, place significant responsibility on COPPA-covered businesses to implement strong privacy protections, in addition to the notice and consent requirements of the COPPA Rule. The responsibility for COPPA compliance is on businesses, not schools or parents—and agreements must reflect that.
10 The text of the COPPA Rule addressing prohibitions against conditioning access (16 C.F.R. § 312.7), which is described here, restates nearly verbatim the text of the statutory language (15 U.S.C. § 6502(b)(1)(C)). As part of its ongoing rule review, the Commission is carefully analyzing this provision to ensure that operators are aware of their obligations. See Request for Public Comment on the Federal Trade Commission’s Implementation of the Children’s Online Privacy Protection Rule, 64 Fed. Reg. 35,842, 35,846 (July 25, 2019). 11 See Children’s Online Privacy Protection Rule, 64 Fed. Reg. 22,750, 22,758 (proposed Apr. 27, 1999) (codified at 16 C.F.R. § 312) (discussing email address example).
12 Children’s Online Privacy Protection Rule, 64 Fed. Reg. 59,888, 59,903 (Final Rule released Nov. 3, 1999) (codified at 16 C.F.R. § 312).
13 Complying with COPPA: Frequently Asked Questions, FED. TRADE COMM’N § N, https://www.ftc.gov/business- guidance/resources/complying-coppa-frequently-asked-questions#N.%20COPPA%20AND%20SCHOOLS (last visited May 18, 2022).
14 16 C.F.R. § 312.10. See also Complaint, United States v. Kurbo, Inc. and WW Int’l, Inc., No. 3:22-cv-00946 (N.D.
Children should not have to needlessly hand over their data and forfeit their privacy in order to do their schoolwork or participate in remote learning, especially given the wide and increasing adoption of ed tech tools. Going forward, the Commission will closely scrutinize the providers of these services and will not hesitate to act where providers fail to meet their legal obligations with respect to children’s privacy.
Policy Statement of the Federal Trade Commission on Rebates and Fees in Exchange for Excluding Lower-Cost Drug Products American families and businesses should never pay higher prices for medicine due to unlawful business practices. For this reason, challenging healthcare industry conduct that may raise prices and stifle innovation is a top priority for the Federal Trade Commission (“FTC” or “Commission”), and the Commission will use its full authority under the FTC Act to do so. The FTC has long pursued a comprehensive agenda to address unlawful conduct in the healthcare and pharmaceutical industries.1 For many years, the Commission has received complaints about rebates and fees paid by drug manufacturers to pharmacy benefit managers (PBMs) and other intermediaries to favor high-cost drugs that generate large rebates and fees that are not always shared with patients.2 These rebates and fees may shift costs and misalign incentives in a way that ultimately increases patients’ costs and stifles competition from lower-cost drugs, especially when generics and biosimilars are excluded or disfavored on formularies.
1 For an overview of FTC healthcare actions generally, see MARKUS H. MEIER ET AL., OVERVIEW OF FTC ACTIONS, FED. TRADE COMM’N (Apr. 2022).
2 See H. Rep. 16-456, 116th Cong., (2021), www.congress.gov/116/crpt, (that accompanied H.R. 7668, Fin. Serv’s and General Gov’t Appropriations Bill, (2021)). The Report states: “The Committee urges the FTC to prioritize investigations into manufacturers that erect rebate walls to block competition from new branded therapies, biosimilars, generics, and other innovative products.” Id at 67; see also FED. TRADE COMM’N, REP. ON REBATE WALLS, at 1 n. 3. Previous discussions of the potential for pharmaceutical rebate agreements to foreclose competition were discussed at an FDA/FTC Workshop on a Competitive Marketplace for Biosimilars and an FTC workshop on prescription drug markets. See Public Workshop: FDA/FTC Workshop on a Competitive Marketplace for Biosimilars, U.S. FOOD AND DRUG ADMIN. (Mar. 9, 2020), https://www.fda.gov/drugs/news-events-human- drugs/public-workshop-fdaftc-workshop-competitive-marketplace-biosimilars-03092020-03092020#event- materials; Understanding Competition in Prescription Drug Markets: Entry and Supply Chain Dynamics, FED. TRADE COMM’N (Nov. 8, 2017), https://www.ftc.gov/news-events/events/2017/11/understanding-competition- prescription-drug-markets-entry-supply-chain-dynamics. The FTC has been aware of the issues surrounding drug rebate practices since at least 1999. See ROY LEVY, THE PHARMACEUTICAL INDUSTRY: A DISCUSSION OF COMPETITIVE AND ANTITRUST ISSUES IN AN ENVIRONMENT OF CHANGE, BUREAU OF ECON. STAFF REP., FED. TRADE COMM’N (Mar. 1999).
The Commission is issuing this Policy Statement to explain its enforcement policy with respect to these practices.3 We do so by highlighting insulin, which many have cited as one prominent example of a prescription drug impacted by high rebates and fees to PBMs and other intermediaries.4 Insulin is a life-sustaining treatment for roughly 8 million Americans who rely on it to control diabetes.5 Research indicates that the wholesale price of insulin nearly tripled between 2009 and 2017,6 increasing out-of-pocket costs for both insured7 and uninsured patients.8 The list price for a year’s supply of insulin has risen to nearly $6,000, with out-of- pocket costs for insulin alone averaging $1,288 for uninsured patients and $613 for insured patients as of 2017.9 3 This Policy Statement does not confer any rights on any person and does not operate to bind the FTC or the public. In any enforcement action, the Commission must prove the challenged act or practice violates one or more existing statutory or regulatory requirements. In addition, this Policy Statement does not preempt federal, state, or local laws. Compliance with those laws, however, will not necessarily preclude Commission law enforcement action under the FTC Act or other statutes. Pursuant to the Congressional Review Act (5 U.S.C. § 801 et seq.), the Office of Information and Regulatory Affairs designated this Policy Statement as not a “major rule,” as defined by 5 U.S.C. § 804(2).
4 U.S. SEN. FINANCE COMM., STAFF REP., INSULIN: EXAMINING THE FACTORS DRIVING THE RISING COST OF A CENTURY OLD DRUG, at 71 (Jan. 2021) (“certain contracting and business practices may create incentives for PBMs to favor drugs with high rebates and, in turn, discourage manufacturers from competing to lower WAC prices.”). See also Karen Von Nuys et al., Estimation of the Share of Net Expenditures on Insulin Captured by US Manufacturers, Wholesalers, PBMs, Pharmacies, and Health Plans from 2014 to 2018, 2 J. AM. MED. ASSOC. H. FORUM 1, 3 (2021) (suggesting business practices of intermediaries may influence rising list prices for insulin). 5 See CARDINAL H., 2022 BIOSIMILARS REPORT: THE U.S. JOURNEY AND PATH AHEAD, at 18 (“over eight million people use insulin daily to effectively manage their diabetes”); William T. Cefalu et al., Insulin Access and Affordability Working Group: Conclusions and Recommendations, 41 DIABETES CARE 1299 (2018). 6 See Brian Sable-Smith, How Much Difference Will Eli Lilly’s Half Price Insulin Make, KAISER FAMILY FOUNDATION (Mar. 12, 2019), https://khn.org/news/how-much-difference-will-eli-lillys-half-price-insulin-make/ (“Between 2009 and 2017 the wholesale price of a single vial of Humalog . . . nearly tripled — rising from $92.70 to $274.70.”).
7 Cefalu et al., supra note 5, at 1302; Samantha Willner et al., "Life or death": Experiences of insulin insecurity among adults with type 1 diabetes in the United States, 11 SSM POPULATION H. 1, 3 (2020). 8 See Cefalu et al., supra note 5, at 1308 (explaining uninsured patients pay the full list price without financial assistance).
9 See Sherry Glied & Benjamin Zhu, Not so sweet: Insulin Affordability over Time, THE COMMONWEALTH FUND (Sept. 25, 2020), https://www.commonwealthfund.org/publications/issue-briefs/2020/sep/not-so-sweet-insulin- affordability-over-time; Chien-Wen Tseng et al, Impact of Higher Insulin Prices on Out-of-Pocket Costs in Medicare Part D, 43 J. DIABETES CARE 50 (2020) (“From 2014 to 2019, the average annual insulin price rose 55% from $3,819 to $5,917… the projected yearly out-of-pocket cost for insulin increased 11% from $1,199 to $1,329.”). These studies note significant heterogeneity in patient out-of-pocket costs depending on several factors including which insulin product(s) is used, the amount of insulin needed, and whether the patient has commercial insurance, Medicare, Medicaid or is uninsured.
Patients with diabetes have described how rising insulin costs have rendered this essential product unaffordable and harmed them in different ways.10 The increased cost of insulin has caused many patients to ration it,11 causing suffering, severe illness, and death.12 During the Commission’s Open Meeting in October 2021, one commenter discussed the death of her son who was forced to ration insulin due to high costs.13 Others have described how insulin costs and the fear of losing health insurance have dissuaded them from leaving their current jobs and limited their ability to pursue other opportunities14 For example, one small business owner expressed the fear of expanding his business because of insulin costs.15 High insulin costs also have an outsized impact on those least able to absorb or avoid these additional costs, including patients from historically underserved communities.16 In addition to other factors, some have suggested that high rebates and fees to PBMs and other intermediaries may incentivize higher list prices for insulin and discourage coverage of the 10 Willner et al., supra, note 7; Fed. Trade Comm’n, Tr. of Open Comm’n Meeting, at 14-15, 19-20 (Oct. 21, 2021), www.ftc.gov/openmeetingtranscript.pdf.
11 See Darby Herkert et al., Cost-Related lnsulin Underuse Among Patients With Diabetes, 179 J. AM. MED. ASSOC. INTERN MED. 112-114 (2019) (finding one of every four patients rations insulin due to cost within one sample); INSULIN SENATE REP., supra note 4, at 14.
12 See FTC Open Meeting Tr., supra note 10, at 14 -15, 18-19 (public commenters Matthew Dinger, Anna Squires, and Nicole Smith Holt); see also S. Vincent Rajkumar, The High Cost of Insulin in the U.S.: An Urgent Call to Action, 95 MAYO CLINIC PROC. 22 (Jan. 2020) (“Alec Smith was 23 when he was diagnosed with type 1 diabetes.… At age 26, he could no longer stay on his mother’s health care insurance plan and needed to find his own coverage. …The insurance available to him came with a $7600 deductible and a monthly premium of approximately $440. Because he could not afford this, Alec decided to temporarily forego insurance coverage and purchase insulin with cash. Unfortunately for him, the cash price of insulin was far beyond his means. He decided to try and ration the amount of insulin he took till he had enough savings to purchase insurance. Sadly, on June 27, 2017, he was found dead in his apartment of diabetic ketoacidosis.”).
13 FTC Open Meeting Tr., supra note 10, at 18-19 (public commenter Nicole Smith Holt describes the death of her son, Alec Smith, and others from rationing insulin).
14 See Willner et al., supra note 7, at 6 (“the only reason that I'm working my job currently … is because I'm afraid to get off of it because there goes my insurance, there goes my method to get any kind of insulin or supplies for anything); see also FTC Open Meeting Tr., supra note 10, at 14-15; see also COLORADO ATT’Y GEN., PRESCRIPTION INSULIN DRUG PRICING REP., at 53 (2020) (“Many survey respondents reported they feel hostage to jobs they would like to leave but need to keep for the insurance because they could not afford insulin and supplies without it.”). 15 See, e.g., COLORADO ATT’Y GEN. INSULIN REP., supra, note 14, at 53 (“One survey respondent expressed the fear of expanding his small business because of high insulin costs and overall expensive insurance costs.”). 16 See Herkert, et al., supra note 11 (“Patients with lower incomes were more likely to report cost-related underuse…”).
lowest-cost insulin products.17 As the Commission’s previous Report on Rebate Walls explained, most consumers have insurance that covers a portion of their prescription costs.18 Health plans, usually through PBMs, use formularies to define which drugs are covered. Drug manufacturers commonly pay PBMs and other intermediaries rebates and fees to have their drugs included on formularies or placed on preferred formulary tiers.19 Some rebates and fees are conditioned on the sales volume of specific drugs or the exclusion of competing drug products from the same formulary tier.20 These rebate and fee agreements may incentivize PBMs and other intermediaries to steer patients to higher-cost drugs over less expensive alternatives.21 This practice could lead to increased costs for both patients and payers, including increased out-of-pocket costs at the point of sale. It may also insulate more expensive drugs from competing with less expensive alternatives. Nothing prevents drug manufacturers, PBMs, and health plans from negotiating good-faith rebates and fees for legitimate services that increase value to payers and patients. However, when dominant drug manufacturers or intermediaries stifle or foreclose competition from significantly less expensive generic and biosimilar alternatives, the Commission has the 17 Cefalu et al., supra note 5, at 1309 (“The current pricing and rebate system encourages high list prices. . . PBMs negotiate rebates from manufacturers using formulary placement as leverage. PBMs often exclude from formularies the insulins made by the manufacturer who offers the lowest rebate. . . People with diabetes are financially harmed by high list price and high out of pocket costs.”); INSULIN SENATE REP., supra note 4, at 71 (“Information collected for this investigation suggests that certain contracting and business practices may create incentives for PBMs to favor drugs with high rebates and, in turn, discourage manufacturers from competing to lower WAC prices.”). 18 See FTC REBATE WALL REP., supra note 2, at 2.
19 Id. at 2; INSULIN SENATE REP., supra note 4, at 67 (“manufacturers offer substantial rebates to PBMs and their clients for the purposes of securing preferred formulary placement for their products”). 20 See id., at 68 (“Manufacturers have increased their rebates in order to win preferred formulary placement and block competitors.”).
21 See e.g., Stacie Dusetzina et al., Patient and Payer Incentives to Use Patented Brand-Name Drugs vs Authorized Generic Drugs in Medicare Part D, 181 J. AM. MED. ASSOC. INTERN. MED. 1605, 1611 (2021) (describing Part D plans’ use of high-list price brand insulins, including insulin lispro (Humalog), and insulin as part (Novolog) over 50% lower-list price authorized generic versions).
legal authority to investigate these practices and take enforcement action against unlawful conduct.22 The Commission has several legal authorities that may apply to these practices, including Section 5 of the FTC Act, Section 3 of the Clayton Act, Section 2 of the Robinson-Patman Act, and the Sherman Act.23 Exclusionary rebates that foreclose competition from less expensive alternatives may constitute unreasonable agreements in restraint of trade under Section 1 of the Sherman Act; unlawful monopolization under Section 2 of the Sherman Act; or exclusive dealing under Section 3 of the Clayton Act.24 Moreover, inducing PBMs or other intermediaries to place higher-cost drugs on formularies instead of less expensive alternatives in a manner that shifts costs to payers and patients may violate the prohibition against unfair methods of competition or unfair acts or practices under Section 5 of the FTC Act. Finally, paying or accepting rebates or fees in exchange for excluding lower-cost drugs may violate Section 2(c) of the Robinson-Patman Act, which prohibits payments to agents, representatives, and intermediaries who represent another party’s interests in connection with the purchase or sale of goods.25 At least one court has held that this provision may reach rebates paid 22 At the request of Congress, the FTC has previously investigated certain PBM business practices. See FED. TRADE COMM’N, PHARMACY BENEFIT MANAGERS: OWNERSHIP OF MAIL-ORDER PHARMACIES (Aug. 2005). 23 The Commission’s authority to address unfair methods of competition under Section 5 of the FTC Act include, but are not limited to, conduct that would violate the Sherman Act. See, e.g., Oregon Lithoprint, Inc., Analysis to Aid Public Comment, 83 Fed. Reg. 11529, 11531 (Mar. 15, 2018) (“The Commission has long held that an invitation to collude violates Section 5 of the FTC Act even where there is no proof that the competitor accepted the invitation.”).
24 See Fed. Trade Comm’n Act, 15 U.S.C. § 45; Sherman Act §§ 1 and 2; Clayton Act, 15 U.S.C. § 14. 25 15 U.S.C. § 13(c) (“It shall be unlawful for any person engaged in commerce, in the course of such commerce, to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods, wares, or merchandise, either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf, or is subject to the direct or indirect control, of any party to such transaction other than the person by whom such compensation is so granted or paid.”). by drug manufacturers to PBMs.26 The Commission has a long history of addressing commercial bribery and will continue to do so.27 The FTC intends to closely scrutinize the impact of rebates and fees on patients and payers to determine whether any of these provisions have been violated. In addition, the Commission will monitor private litigation and file amicus briefs where it can aid courts in analyzing unlawful conduct that may raise drug prices. The Commission will also continue to study this issue to understand the full range of practices and implications. The Commission recognizes the life-and-death stakes of this work and is committed to acting expeditiously. As it has done throughout its history, the FTC will bring an interdisciplinary approach, using resources and expertise from throughout the agency to combat unlawful practices in the prescription drug industry.
See also PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ⁋ 2362i (4th & 5th ed. 2015-2021) (collecting and discussing cases involving commercial bribery under Section 2(c)); JOSEPH BAUER ET AL., KINTNER'S FEDERAL ANTITRUST LAW § 26.12 (2021). 26 In re Warfarin Sodium Antitrust Litig., Civ. No. 97-659 (D. Del.)1998 WL 883469, at *16 (D. Del. Dec. 7, 1998), rev'd on other grounds, 214 F.3d 395 (3d Cir. 2000).
27 See Hon. Garland S. Ferguson, Jr., Chairman of FTC, Commercial Bribery: An Address to the Conf. on Com. Bribery to the Comm. Standards Council and the Better Bus. Bureau of N.Y .City (Oct. 17, 1930), www.ftc.gov/systemstatementsferguson_commercial_bribery (explaining the Commission’s focus on commercial bribery as an unfair method of competition even before it gained authority under the Robinson-Patman Act); see also Donald S. Clark, Sec’y of FTC, Remarks Regarding The Robinson-Patman Act: Annual Update, Before the Robinson Patman Act Comm., Section of Antitrust Law, 46th Annual Spring Meeting (Apr. 2, 1998), www.ftc.gov/public-statements/1998/04/robinson-patman-act-annual-update (recognizing the Robinson-Patman’s prohibition on commercial bribery).
FTC Policy Statement on Enforcement Related to Gig Work American workers deserve fair, honest, and competitive labor markets. Over the past decade, internet-enabled “gig” companies have grown exponentially, and gig work now composes a significant part of the United States economy.1 One study suggests the gig economy will generate $455 billion in annual sales by 2023.2 The rapid growth of the gig economy is made possible by the contributions of drivers, shoppers, cleaners, care workers, designers, freelancers, and other workers. Protecting these workers from unfair, deceptive, and anticompetitive practices is a priority, and the Federal Trade Commission (“FTC” or “Commission”) will use its full authority to do so.3 As the Commission’s past work and current initiatives illustrate, the agency’s broad-based jurisdiction and interdisciplinary approach to market harms make it well positioned to confront the challenges this model can pose to workers.4 1 See, e.g., Ben Zipperer et al., Econ. Pol’y Inst., National Survey of Gig Workers Paints a Picture of Poor Working Conditions, Low Pay, at 1 (June 1, 2022) (“While the concept of nontraditional, short-term, and contract work has been around since well before the digital age, it wasn’t until the 2010s that digital platform companies like Uber, DoorDash, Instacart, and TaskRabbit began to rise to prominence and shape the way we define gig work today.”). 2 Mastercard & Kaiser Assocs., Mastercard Gig Economy Industry Outlook and Needs Assessment, at 2 (May 2019). 3 While this Statement focuses on potential harms to gig workers and how the Commission might address them, misconduct against any consumer—customers who use services offered through the platform, workers who supply labor, and businesses on or off the platform—is prohibited. See, e.g., Decision & Order, In re Uber Techs., Inc., Dkt.
11 Fed. Trade Comm’n, Serving Communities of Color: A Staff Report on the Federal Trade Commission’s Efforts to Address Fraud and Consumer Issues Affecting Communities of Color, at 19 & n.70 (Oct. 2021). 12 Anderson et al., The State of Gig Work in 2021, at 5; see DoorDash, 2021 DoorDash ESG Report: Growing and Empowering Local Economies, at 41 (Apr. 19, 2022) (nearly 40% of DoorDash gig workers identify as people of color, 58% are women, and 15% are veterans); Uber, 2021 ESG Report, at 28 (July 2021) (about half of Uber’s U.S. delivery personnel identify as people of color).
13 See Zipperer et al., National Survey of Gig Workers, at 1 (“[A] survey of gig workers reveals that these workers often are paid low wages, in some instances less than the minimum wage [and] they face economic insecurity at high rates . . . .”); see also Anderson et al., The State of Gig Work in 2021, at 4–5, 7, 23; Gallup, Gallup’s Perspective on the Gig Economy and Alternative Work Arrangements, at 8. 14 See Anderson et al., The State of Gig Work in 2021, at 31 (reporting that 58% of current or recent gig workers said that money earned via gig jobs has been “essential or important for meeting their basic needs”). 15 See, e.g., DoorDash, What Is Fast Pay? (2020); Grubhub for Drivers, What Is Instant Cashout? (2020); Uber Techs., Inc., Your Money When You Need It (2022).
16 See Chris Benner, UC Santa Cruz, On-Demand and On-the-Edge: Ride-Hailing and Delivery Workers in San Francisco, at 28 (May 5, 2020) (“Delivery workers are particularly dependent on tips, which account for 30% of their estimated earnings.”).
17 See Cong. Rsch. Serv., R44365, What Does the Gig Economy Mean for Workers?, at 3 (Apr. 28, 2017); see also Aaron Gordon & Dhruv Mehrotra, Uber and Lyft Take a Lot More from Drivers Than They Say, Jalopnik (Aug. 26, 2019, 12:04 PM).
3 of 17 II. The Market for Gig Workers As with any evolving sector of the economy, the Commission is attuned to gig work’s promises and pitfalls. This Statement focuses on three market features that implicate the Commission’s consumer protection and competition missions: Control Without Responsibility. Companies frequently promote gig work as a flexible opportunity for people to set their own hours and work on their own terms.18 These companies often categorize their workers as independent contractors. Yet in practice these firms may tightly prescribe and control their workers’ tasks in ways that run counter to the promise of independence and an alternative to traditional jobs. This tension has contributed to litigation across the country over allegations that gig workers are being misclassified as independent contractors rather than employees.19 When misclassification occurs, workers are often deprived of critical rights to which they are entitled under law (such as the right to organize, overtime pay, and health and safety protections), and saddled with inordinate risks (such as unclear and unstable pay, or responsibility for a vehicle, equipment, or supplies) and business expenses that employers commonly bear (such as insurance, gas, maintenance, and taxes).20 At the same time, 18 See, e.g., Cong. Rsch. Serv., What Does the Gig Economy Mean for Workers?, at i (“The apparent availability of gig jobs and the flexibility they seem to provide workers are frequently touted features of the gig economy.”). 19 See, e.g., Lawson v. Grubhub, Inc., 13 F.4th 908 (9th Cir. 2021); Waithaka v. Amazon.com, Inc., 966 F.3d 10 (1st Cir. 2020); Razak v. Uber Techs., Inc.¸ 951 F.3d 137 (3d Cir. 2020); Hood v. Uber Techs., Inc., Case No. 1:16-CV-998, 2019 WL 93546 (M.D.N.C. Jan. 3, 2019). 20 See, e.g., National Labor Relations Act, 29 U.S.C. §§ 151 et seq. (protecting, among other rights, employees’ rights to act together to address working conditions); U.S. Dep’t of the Treasury, The State of Labor Market Competition, at 12 (“Classifying workers as independent contractors can especially reduce costs by shifting non- wage costs typically paid by employers (e.g. healthcare benefits) onto the employee. These costs are non-trivial— approximately 30 percent of per-hour employer costs come from costs other than wages and salaries.”); see also Ken Jacobs & Michael Reich, Inst. for Rsch. on Labor & Emp., Massachusetts Uber/Lyft Ballot Proposition Would Create Subminimum Wage, at 2, Univ. Cal. Berkeley. (Sept. 2021) (estimating the financial impact of undisclosed terms of work for rideshare drivers); James A. Parrott & Michael Reich, An Earnings Standard for New York City’s App-Based Drivers: Economic Analysis and Policy Assessment, at 49 (July 2018) (noting the large amount of unpaid “idle” time for rideshare drivers). Moreover, high inflation and other economic shocks may cause certain worker- borne costs to rise without any corresponding increase in pay. See Gerrit De Vynck et al., Inflation Is Helping Gig Companies Like Uber—and Hurting Their Workers, Wash. Post (Aug. 7, 2022, 6:00 AM EDT). 4 of 17 gig companies may use nontransparent algorithms to capture more revenue from customer payments for workers’ services than customers or workers understand.21 This dynamic calls for scrutiny of promises gig platforms make, or information they fail to disclose, about the financial proposition of gig work.
Diminished Bargaining Power. Gig workers often do not have the information they need to know when work will be available, where they will have to perform it, or how they will be evaluated.22 Behind the scenes, ever-changing algorithms may dictate core aspects of workers’ relationship with a given company’s platform, leaving them with an invisible, inscrutable boss.23 Workers have little leverage to demand transparency from gig companies: A decentralized work environment, the potential lack of legal protections to organize, and a high turnover rate driven by companies’ treatment of workers as replaceable all contribute to workers’ diminished bargaining power.24 Mandatory arbitration and class-action waivers are also increasingly common among gig workers, meaning that most efforts to vindicate worker rights occur in nonpublic, isolated proceedings.25 This power imbalance may leave gig workers more 21 See, e.g., Compl. ¶¶ 30–34, In re Amazon.com, Inc., Dkt. No. C-4746 (alleging that Amazon adopted a “variable base pay” model for Amazon Flex so it could capture drivers’ tips); Dan Calacci, MIT Media Lab, Bargaining with the Algorithm: Pooling Worker Data to Estimate Gig Economy Worker Pay (Oct. 15, 2020). 22 See, e.g., Compl. ¶¶ 35–47, Amazon.com, Dkt. No. C4746 (alleging that Amazon concealed changes to an algorithm by falsely telling workers that no change had actually occurred). 23 See, e.g., Hatim A. Rahman, The Invisible Cage: Workers’ Reactivity to Opaque Algorithmic Evaluations, 66 Admin. Sci. Q. 945, 976 (2021); Spencer Soper, Fired by Bot at Amazon: “It’s You Against the Machine”, Bloomberg (June 28, 2021, 5:00 AM); see also Noam Scheiber, How Uber Uses Psychological Tricks to Push Its Drivers’ Buttons, N.Y. Times (Apr. 2, 2017).
24 See U.S. Dep’t of the Treasury, The State of Labor Market Competition, at 11 (“By removing the immediate nexus between workers and the firm for which they provide services, workers are prevented from bargaining directly with the entity that has the economic power.”); Christopher Mims, In a Tight Labor Market, Gig Workers Get Harder to Please, Wall St. J. (May 4, 2019) (noting “[t]he unusually high rate of turnover [of workers] in the gig economy”); see also Zipperer et al., National Survey of Gig Workers, at 7. 25 See, e.g., Elizabeth C. Tippett & Bridget Schaaf, How Concepcion and Italian Colors Affected Terms of Service in the Gig Economy, 70 Rutgers U. L. Rev. 459, 461 (2018) (analyzing the high prevalence of mandatory arbitration and class-action waivers in the gig economy even before Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018)). 5 of 17 exposed to harms from unfair, deceptive, and anticompetitive practices and is likely to amplify such harms when they occur.
Concentrated Markets. Markets populated by businesses that run online platforms are often concentrated, resulting in reduced choice for workers, customers, and businesses. As a platform grows by attracting more users (e.g., riders), it can become more valuable to users on the other side of the platform (e.g., drivers) by generating so-called “network effects.” Because network effects can lock in a dominant player’s market position, these businesses can be incentivized to pursue tactics designed to quickly capture a large share of the market, leading the market to “tip” and raising significant barriers to entry. Gig companies in concentrated markets may be more likely to have and exert market power over gig workers or engage in anticompetitive unilateral or coordinated conduct. Such conduct may eliminate or further weaken competition among existing gig companies for workers’ services or prevent new gig companies from getting off the ground or being able to enter the market. The resulting loss in competition may enable gig companies to suppress wages below competitive rates, reduce job quality, or impose onerous terms on gig workers.26 In the absence of robust competition among gig companies, unfair and deceptive practices by one platform can proliferate across the labor market, creating a race to the bottom that participants in the gig economy, and especially gig workers, have little ability to avoid.
While online gig platforms may seem novel, traditional legal principles of consumer protection and competition apply.27 And the manifold protections enforced by the Commission do not turn on how gig companies choose to classify working consumers.28 The Commission will use the full portfolio of laws it enforces to prevent unfair, deceptive, anticompetitive, and otherwise unlawful practices affecting gig workers.
7 of 17 unfair or deceptive manner. The Commission also recognizes that misleading claims about the costs and benefits of gig work can impair fair competition among companies in the gig economy and elsewhere.
Deceptive or Unfair Pay Practices. False, misleading, or unsubstantiated claims about earnings may violate Section 5 of the FTC Act,32 the Franchise Rule, or the Business Opportunity Rule,33 and can trigger civil penalties.34 Likewise, withholding money owed to workers without consent can violate Section 5’s prohibition against unfairness.35 Gig companies often advertise hourly pay to prospective workers or promise a specific amount or range of pay to existing workers for completing a gig.36 Yet fewer than half of gig workers understand how their pay is determined, and misleading or unsupported claims about their earnings can leave workers in a financial bind.37 Deceptive earnings claims and opaque compensation criteria can also impede competition by preventing workers from accurately comparing opportunities presented by gig companies.
32 15 U.S.C. § 45. Unfortunately, the Commission’s ability to refund consumers for violations of Section 5 is hampered following the U.S. Supreme Court’s decision in AMG Capital Management, LLC v. FTC, 141 S. Ct. 1341 (2021), which stripped the Commission of its most potent tool to recover money for consumers. Indeed, AMG would have prevented recovery of more than $81 million in consumer redress obtained in two of the Commission’s recent victories for gig workers. See Decision & Order, Amazon.com, Dkt. No. C-4746 (recovering $61.7 million for Section 5 violations); Stipulated Order, FTC v. Uber Techs., Inc., Case No. 3:17-cv-261-JST (N.D. Cal. Jan. 19, 2017) (recovering $20 million for Section 5 violations). 33 16 C.F.R. pts. 436 (Franchise Rule), 437 (Business Opportunity Rule). Whether the Franchise Rule or the Business Opportunity Rule applies to a particular gig arrangement requires a case-by-case factual analysis. See id. § 436.1(h) (defining a franchise); id. § 437.1(c) (defining a business opportunity). The Commission may seek civil penalties and consumer redress from companies that violate FTC rules. See 15 U.S.C. §§ 45(m)(1)(A), 57b(a)–(b). 34 See Fed. Trade Comm’n, Press Release, FTC Puts Businesses on Notice That False Money-Making Claims Could Lead to Big Penalties (Oct. 26, 2021); see also 15 U.S.C. § 45(m)(1)(B). 35 Cf. Decision & Order, Amazon.com, Dkt. No. C-4746 (requiring a gig company to obtain workers’ “express informed consent” before changing how workers’ tips are distributed). 36 See, e.g., Compl. ¶¶ 21–22, Uber Techs., Case No. 3:17-cv-261-JST (FTC alleging that Uber made various hourly earnings claims targeted to multiple U.S. cities that did not align with what drivers in those cities actually earned); see also Compl. ¶¶ 30–34, Amazon.com, Dkt. No. C-4746 (alleging that Amazon promised that workers would keep 100% of their tips, but instead used tips to reduce workers’ base pay). 37 See Anderson et al., The State of Gig Work in 2021, at 35 (“Overall, 44% of people who have ever earned money through online or delivery platforms say they at least somewhat understand how the companies that run these apps or sites determine how much they get paid . . . .”); see also Zipperer et al., National Survey of Gig Workers, at 6–7 (describing high rates of financial hardship among gig workers). 8 of 17 The Commission has initiated rulemaking proceedings to strengthen its ability to detect and deter deceptive earnings claims and has sought comment on the prevalence of deceptive earning claims relating to gig work.38 In the meantime, misleading earnings claims remain prohibited by Section 5 of the FTC Act.39 Likewise, pursuant to the Franchise Rule or the Business Opportunity Rule, gig companies that require new participants to make required payments may need to disclose any claims they make about potential earnings and have a reasonable basis for, and written materials on hand to support, those claims.40 The Commission has also issued Notices of Penalty Offenses related to earnings claims and testimonials41 to place gig companies, among others, on notice that the Commission is working to deter misleading representations throughout the gig economy, including by seeking civil penalties where appropriate.42 Undisclosed Costs or Terms of Work. By the same token, deceptive claims or nondisclosures about startup costs, training fees, other expenses, or other material terms can violate Section 5,43 and the failure to make required disclosures can violate the Franchise Rule or Business Opportunity Rule.44 When a firm requires consumers to make one or more required payments to sign up for a work opportunity, that arrangement may fall under the Franchise Rule 38 See Earnings Claims ANPRM, 87 Fed. Reg. at 13,955–56. 39 See id. at 13,951–52 (describing the FTC’s extensive history of prior enforcement actions against a wide variety of companies offering employment and other work opportunities with misleading earnings claims). 40 See 16 C.F.R. § 436.5(s) (describing the disclosures that franchisors must make to franchisees about financial performance); id. § 437.4 (explaining how sellers of business opportunities must substantiate any earnings claims regarding the opportunity, including when claims are presented in the general media). 41 See Fed. Trade Comm’n, Notice of Penalty Offenses Concerning Money-Making Opportunities (Oct. 26, 2021);
42 See FTC Press Release, FTC Puts Businesses on Notice That False Money-Making Claims Could Lead to Big Penalties (announcing that Notices of Penalty Offenses were sent to more than 1,100 businesses and advising that violating the Notices could result in civil penalties that now amount to $46,517 per violation, see 16 C.F.R. § 1.98(e)).
43 See, e.g., Compl. ¶¶ 31–33, 38, Uber Techs., Case No. 3:17-cv-261-JST (alleging that Uber violated Section 5 by understating the price and overstating the advantages of its auto financing program for drivers). 44 See 16 C.F.R. §§ 436.2, 437.2.
9 of 17 or the Business Opportunity Rule.45 The Rules require accurate, upfront disclosures—including information about the franchise or business opportunity, other workers, and prior lawsuits— before consumers make any commitment.46 B. Combating Unlawful Practices and Unlawful Constraints Imposed on Gig Workers Gig workers may lack key information about their working conditions, and can be subject to onerous contract terms and arbitrary evaluation requirements. Increasingly, gig workers are managed by algorithms, which use extensive data collected from workers and other consumers to make important management decisions using undisclosed criteria. Multiple laws enforced by the Commission may apply when these practices are deceptive, unfair, anticompetitive, or otherwise unlawful.
Unfair or Deceptive Practices by an Automated Boss. Section 5 of the FTC Act prohibits unfair or deceptive practices in any form, including practices involving artificial intelligence (“AI”) tools or algorithm-based decision-making.47 In the gig economy, companies may employ algorithms to govern how gigs are made available to workers, how workers are paid, how worker performance is rated, and when workers are suspended or terminated from the platform. Firms may deploy surveillance technology to monitor workers’ every move without 45 See id. § 436.1(h) (defining a franchise); id. § 437.1(c) (defining a business opportunity). 46 See id. §§ 436.2(a), 436.4, 436.5 (requiring franchisors to provide a disclosure document in business relationships that qualify as franchises covered by the Franchise Rule); id. §§ 437.3, 437.4, apps. A–B (requiring a disclosure document for business opportunities and providing templates). 47 Running these algorithms requires collecting troves of sensitive data from workers, which heightens the importance of FTC rules governing data security, see, e.g., 16 C.F.R. pt. 314 (Safeguards Rule), and gig companies’ obligation under Section 5 to safeguard collected information in line with their promises, see Compl. ¶¶ 28–32, Uber Techs., Dkt. No. C-4662 (alleging that, despite public representations, Uber failed to monitor internal access to drivers’ personal information and failed to provide reasonable security against potential data breaches). Workers are also entitled under the Fair Credit Reporting Act to know when a gig platform uses a background screening or other consumer report to take an adverse action against them, whether through an algorithm or otherwise. See 15 U.S.C. § 1681m(a). If information in a consumer report results in a worker being denied the requested opportunity, the consumer must receive notice that the denial was based on a consumer report and a chance to view the report and request any needed corrections. See id.
10 of 17 transparency about how it impacts worker pay or performance evaluation.48 Workers report unexpected drops in their performance ratings,49 unexplained changes in their pay,50 assignment of impossible or dangerous delivery routes,51 or other arbitrary evaluations that could lead to wrongful terminations.52 Companies are responsible for fulfilling their promises to their workers, even if they use automated management technologies.53 Gig companies that employ algorithmic tools to govern their workforce should ensure that they do so legally.54 Unfair Contractual Terms & Restrictions on Mobility. Restrictive contract terms may constitute unfair or deceptive acts and practices in violation of Section 5 of the FTC Act if they unfairly harm workers, render a gig company’s representations misleading, or prevent fair competition for workers. Gig companies often present workers with nonnegotiable contracts that may include lopsided provisions.55 Such take-it-or-leave-it provisions may, for example, hinder workers from seeking other jobs during or after their time with a company, bar negative reviews, 48 See Advance Notice of Proposed Rulemaking: Trade Regulation Rule on Commercial Surveillance and Data Security, 87 Fed. Reg. 51,273, 51,274 (Aug. 22, 2022) (noting the lack of transparency and informed consent around increasingly extensive data collected from workers).
49 See, e.g., Soper, Fired by Bot at Amazon: “It’s You Against the Machine”; see also Rahman, The Invisible Cage, 66 Admin. Sci. Q. at 964; Pierre Bérastégui, Eur. Trade Union Inst., Exposure to Psychosocial Risk Factors in the Gig Economy: A Systemic Review, at 47 (Jan. 2021) (noting that workers “are unsure about what data is gathered from them and how it is used to compute wages and ratings,” leading to “frustration about not being rated on the basis of ‘true’ performance”).
50 See, e.g., Alina Selyukh, At the Mercy of an App: Workers Feel the Instacart Squeeze, NPR (Nov. 25, 2019, 9:15 AM) (reporting that multiple gig platforms use “ever-changing pay structures” governed by algorithms); see also Calacci, Bargaining with the Algorithm (describing a gig platform’s pay structure as a “black-box algorithm”). 51 See Eve Livingston, Food Delivery Drivers Fired After “Cut Price” GPS App Sent Them on “Impossible” Routes, Guardian (July 2, 2022, 2:39 PM EDT).
52 See, e.g., Madhumita Murgia, Workers Demand Gig Economy Companies Explain Their Algorithms, Fin. Times (Dec. 12, 2021).
53 See Compl. ¶ 32, Amazon.com, Dkt. No. C-4746 (alleging that Amazon Flex changed the algorithm governing delivery drivers’ base pay, allowing Amazon to capture a greater portion of customer tips than it had disclosed). 54 Elisa Jillson, Fed. Trade Comm’n, Aiming for Truth, Fairness, and Equity in Your Company’s Use of AI (Apr. 19, 2021).
55 See U.S. Dep’t of the Treasury, The State of Labor Market Competition, at 14, 18 (noting that “restrictive employment agreements can both result from and reinforce employer market power,” while other clauses can reduce workers’ options “within the legal system”); Fed. Trade Comm’n, Strategic Plan for Fiscal Years 2022-2026, at 19 (Aug. 26, 2022) (announcing FTC interest in “non-compete and other potentially unfair contractual terms resulting from power asymmetries between workers and employers”). 11 of 17 or waive fundamental protections.56 If those provisions cause substantial injury that is not reasonably avoidable and not outweighed by countervailing benefits, they may constitute an unfair act or practice under Section 5(n) of the FTC Act.57 The Commission has used its unfairness authority to prohibit certain one-sided clauses in credit contracts,58 to stop abusive use of a one-sided clause allowing a financing entity to obtain uncontested judgments against small businesses,59 to prevent contractual clauses suppressing negative consumer reviews,60 and to invalidate illusory choice-of-law and venue-selection clauses that, in very fine print, left the forum state undetermined.61 The Commission will continue to scrutinize potentially unfair terms companies impose on gig workers or other consumers.
Certain unfair terms may also implicate the antitrust laws and raise concerns about unfair methods of competition with respect to gig labor markets. The Commission will continue to investigate the effects on workers and competition of any non-compete clauses in the gig economy. Non-compete provisions may undermine free and fair labor markets by restricting workers’ ability to obtain competitive offers for their services from existing companies, resulting in lower wages and degraded working conditions.62 These provisions may also raise barriers to 56 See, e.g., Exec. Order No. 14,036, 86 Fed. Reg. at 36,987–88; FTC v. Roca Labs, Inc., 345 F. Supp. 3d 1375, 1393–97 (M.D. Fla. 2018); U.S. Dep’t of the Treasury, The State of Labor Market Competition, at 18. 57 15 U.S.C. § 45(n); FTC Unfairness Policy Statement, Letter from the FTC to Hon. Wendell Ford & Hon. John Danforth, S. Comm. on Commerce, Sci. & Transp. (Dec. 17, 1980), appended to In re Int’l Harvester Co., 104 F.T.C. 949, 1070 (1984).
58 See FTC Trade Regulation Rule; Credit Practices, 49 Fed. Reg. 7,740, 7,744 (Mar. 1, 1984) (codified at 16 C.F.R.
59 See 1st Am. Compl. ¶¶ 24–28, 39–41, FTC v. RCG Advances, LLC, Case No. 20-CV-4432 (S.D.N.Y. June 10, 2021).
60 See Roca Labs, 345 F. Supp. 3d at 1393; see also 15 U.S.C. § 45b; FTC v. World Patent Mktg., Inc., Case No. 17-cv-20848-GAYLES, 2017 WL 3508639, at *15–16 (S.D. Fla. Aug. 16, 2017) (preliminarily enjoining a defendant’s “consumer complaint suppression practices” as unfair). 61 See Compl. ¶¶ 18, 32–33, FTC v. NorVergence, Inc., Civil Action No. 04-5414 (D.N.J. Nov. 4, 2004). 62 See Exec. Order No. 14,036, 86 Fed. Reg. at 36,987 (noting that non-compete agreements can “mak[e] it harder for workers to bargain for higher wages and better work conditions”); Matthew S. Johnson et al., The Labor Market Effects of Legal Restrictions on Worker Mobility, at 2 (Oct. 12, 2021) (“We find that increases in [non-compete clauses] decrease workers’ earnings and mobility.”); Evan P. Starr et al., Noncompetes in the U.S. Labor Force, 64 J.L. & Econ. 53, 81 (2021) (finding that non-compete provisions imposed in employment contracts “appear to be 12 of 17 entry for new companies.63 Such provisions may violate Section 1 of the Sherman Act64 and the FTC Act’s prohibition on unfair methods of competition.65 The Commission will also investigate contractual limitations, such as liquidated damages clauses66 or nondisclosure agreements,67 that may be excessive or overbroad and effectively operate as non-compete provisions. Moreover, the Commission recognizes that companies may be able to effectuate the same harmful results through imposing a variety of other restraints that restrict worker mobility.
65 See, e.g., Statement of Interest of the United States at 6, Beck v. Pickert Med. Grp., P.C., Case No. CV21-02092 (Nev. Dist. Ct. Feb. 25, 2022) (“Non-compete agreements between employers and employees constitute concerted action properly subject to scrutiny under Section 1 of the Sherman Act.”); see also U.S. Dep’t of the Treasury, The State of Labor Market Competition, at 16 (“[R]estrictive employment agreements can both result from and reinforce employer market power.”).
66 See, e.g., Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir. Unit A 1981) (“The contract clauses to which plaintiff object are, given the prohibitive magnitudes of liquidated damages they specify, de facto covenants not to compete . . . .”).
67 See, e.g., Brown v. TGS Mgmt. Co., 271 Cal. Rptr. 3d 303, 319 (Cal. Ct. App. 2020) (“Collectively, these overly restrictive [confidentiality] provisions operate as a de facto noncompete provision . . . .”). 13 of 17 among gig companies, from wage-fixing to the unlawful consolidation or exercise of market power.68 Wage-Fixing & Coordination. The Commission will investigate evidence of agreements between gig companies to fix wages, benefits, fees, or other terms relating to gig work that should be subject to competition.69 The Commission will also investigate evidence of no- poaching agreements, where companies agree not to solicit or hire each other’s workers, and agreements to share competitively sensitive information that might suppress compensation for workers.70 The Commission may further examine any use by gig companies of technology- enabled methods of collusion or exclusion. Agreements among gig companies that anticompetitively harm workers violate Section 1 of the Sherman Act and may be challenged by the Commission directly, and, in the case of wage-fixing or no-poaching agreements, may be referred to the U.S. Department of Justice (“DOJ”) for potential criminal prosecution.71 Market Consolidation & Monopolization. The Commission will review and, as appropriate, challenge mergers and other combinations of gig companies that may substantially 68 At least one court has ruled that the labor-dispute exemption under Section 1 of the Sherman Act applies to workers regardless of whether they are classified as employees or independent contractors. See Confederación Hípica de P.R., Inc. v. Confederación de Jinetes Puertorriqueños, 30 F.4th 306, 314–15 (1st Cir. 2022). Commission enforcement therefore will not focus on organizing efforts undertaken by gig workers. Despite past efforts, the Commission will also refrain from other enforcement or policy efforts that might undermine the ability of gig workers to organize. See, e.g., Brief for the United States & FTC as Amici Curiae Supporting Appellant at 2, 8, Chamber of Commerce v. City of Seattle, 890 F.3d 769 (9th Cir. 2018) (No. 17-35640), 2017 WL 5166667, at *2, *8 (arguing that the state action doctrine did not apply to shield a municipal ordinance allowing drivers to organize from antitrust scrutiny).
69 See, e.g., Compl. ¶¶ 11–27, In re Your Therapy Source, LLC, Dkt. No. C-4689 (FTC July 31, 2018) (alleging an agreement and invitation to collude among staffing agencies to lower payments to their independent contractors). 70 See U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidance for Human Resource Professionals, at 4–5 (“[P]eriodic exchange of current wage information in an industry with few employers could establish an antitrust violation because, for example, the data exchange has decreased or is likely to decrease compensation.”); U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for Collaborations Among Competitors, at 15 (Apr. 2000) (“[T]he sharing of information related to a market in which the collaboration operates or in which the participants are actual or potential competitors may increase the likelihood of collusion on matters such as price, output, or other competitively sensitive variables.”).
71 See U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidance for Human Resource Professionals, at 3–4 (explaining that naked wage-fixing agreements are per se illegal and DOJ intends to proceed criminally against naked wage-fixing).
14 of 17 lessen competition between or among gig companies.72 The Commission will also investigate any exclusionary or predatory conduct by dominant firms that may unlawfully create or maintain a monopoly (a dominant seller) or a monopsony (a dominant buyer or employer), resulting in harm to customers or reduced compensation or poorer working conditions for gig workers. Such conduct may include the use of exclusive contracting, predatory pricing, or other forms of monopolization, and may be subject to legal action by the Commission as a violation of Section 2 of the Sherman Act.73 IV. Policy, Partnerships, & Outreach In addition to robust enforcement, the Commission addresses issues in the gig economy through policy work, outreach, and partnerships with other law enforcement agencies. Governmental Collaboration. The FTC’s Regional Offices have spearheaded the agency’s efforts to identify law violations, develop policy, and collaborate with government partners in this space. The Commission is also partnering with other agencies on broad labor initiatives and individual enforcement actions. In December 2021, the FTC and DOJ hosted a workshop to promote competitive labor markets and worker mobility.74 And in July 2022, the FTC and National Labor Relations Board signed a Memorandum of Understanding that deepens the agencies’ collaboration around issues facing gig workers through sharing information, conducting cross-training for staff at each agency, and partnering on investigative efforts within each agency’s authority.75 72 See Exec. Order No. 14,036, § 1, 86 Fed. Reg. at 36,988 (directing federal attention “to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony—especially as these issues arise in labor markets”). 73 15 U.S.C. § 2.
74 Fed. Trade Comm’n, Making Competition Work: Promotion Competition in Labor Markets (Dec. 6–7, 2021). 75 Memorandum of Understanding Between the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB) Regarding Information Sharing, Cross-Agency Training, and Outreach in Areas of Common Regulatory Interest (July 19, 2022).
15 of 17 Ensuring Equity. The FTC’s Equity Action Plan reaffirms the Commission’s commitment to protecting the public, including meaningfully addressing barriers that historically underserved communities face in participating in and benefiting from a fair and thriving marketplace.76 As outlined in the Equity Action Plan, the FTC’s Bureau of Consumer Protection is focusing resources to aid staff in assessing whether certain communities are disproportionately affected or targeted by unfair or deceptive practices, including in the gig economy.77 Similarly, the Equity Action Plan outlines the FTC’s Bureau of Competition’s commitment to consider more explicitly the impact of mergers and anticompetitive conduct on workers, particularly low- wage workers.78 The FTC will address any such harms through robust law enforcement, community outreach, and new initiatives to better understand and address the impact of emerging technologies in the gig economy and elsewhere on historically underserved communities. Public Participation. The Commission continues to seek input from consumer and labor groups, industry, and experts on challenges facing gig workers through monthly Open Commission Meetings79 as well as targeted workshops like those on dark patterns80 and labor- market competition.81 Gig workers harmed by unlawful practices should continue to file reports at ReportFraud.ftc.gov so the Commission and other governmental agencies can promptly identify and take action against deceptive, unfair, and otherwise unlawful acts and practices. 76 See Fed. Trade Comm’n, Federal Trade Commission (FTC) Equity Action Plan, at 1 (Apr. 14, 2022) (promulgated pursuant to Executive Order No. 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, 86 Fed. Reg. 7,009 (Jan. 25, 2021)). 77 See id. at 4–5.
78 See id. at 6–7.
79 See Fed. Trade Comm’n, Open Meetings.
80 Fed. Trade Comm’n, Bringing Dark Patterns to Light: An FTC Workshop (Apr. 29, 2021) (exploring how user interfaces can, intentionally or not, obscure, subvert, or impair consumer autonomy, decision-making, or choice). 81 FTC Workshop, Making Competition Work (exploring recent developments at the intersection of antitrust and labor, as well as implications for efforts to protect and empower workers through enforcement and rulemaking). 16 of 17 V. Conclusion Successfully addressing the range of consumer protection and competition challenges associated with the gig economy requires innovative and collaborative approaches by governmental enforcers that are responsive to the public’s concerns and input. The Commission will continue to capitalize on its broad jurisdiction and interdisciplinary expertise to combat unlawful practices that harm gig workers.
17 of 17 Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act Commission File No. P221202 November 10, 2022 Section 5 of the Federal Trade Commission Act (FTC Act) prohibits “unfair methods of competition in or affecting commerce.”1 On July 1, 2021, the Federal Trade Commission (FTC) rescinded its 2015 Statement of Enforcement Principles Regarding “Unfair Methods of Competition” under Section 5 of the FTC Act.2 This statement supersedes all prior FTC policy statements and advisory guidance on the scope and meaning of unfair methods of competition under Section 5 of the FTC Act.
See, e.g. Fed. Trade Comm’n v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986) (holding that “[t]he standard of "unfairness" under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws”); Fed. Trade Comm’n v. Sperry & Hutchinson Co., 405 U.S. 233, 242 (1972) (holding that “the Commission has broad powers to declare trade practices unfair."); Fed. Trade Comm’n v. Texaco, 393 U.S. 223, 262 (1968) (holding that “[i]n large measure the task of defining "unfair methods of competition" was left to the [FTC]. . . and that the legislative history shows that Congress concluded that the best check on unfair competition would be [a practical and expert administrative body] . . . [that applies] the rule enacted by Congress to particular business situations”); Fed. Trade Comm’n v. Brown Shoe, 384 U.S. 316, 321 (1966) (holding that the FTC “has broad powers to declare trade practices unfair[,] particularly . . . with regard to trade practices which conflict with the basic policies of the Sherman and Clayton Acts”); Atlantic Refining Co. v. Fed. Trade Comm’n, 381 U.S. 357, 369 (1965) (holding that all that is necessary is to discover conduct that runs counter to the public policy declared in the Act. . .” and that “there are many unfair methods of competition that do not assume the proportions of antitrust violations”); Fed. Trade Comm’n v. Colgate-Palmolive et al., 380 U.S. 377, 384- 85 (1965) (noting that the proscriptions in section 5 are flexible); PAN AM v. United States, 371 U.S. 296, 306 -308 (1963) (“[Section 5] was designed to bolster and strengthen antitrust enforcement[,] and the definitions are not limited to precise practices that can readily be catalogued. They take their meaning from the facts of each case and the impact of particular practices on competition and monopoly”); Fed. Trade Comm’n v. Nat’l Lead Co., 352 U.S. 419, 428-29 (1957) (affirming past rulings finding that the commission is clothed with “wide discretion in. . . [bringing] an end to the unfair practices found to exist[;]. . . [is] ‘the expert body to determine what remedy is necessary to eliminate the unfair or deceptive trade practices which have been disclosed[;] . . . has wide latitude for This statement is intended to assist the public, business community, and antitrust practitioners by laying out the key general principles that apply to whether business practices constitute unfair methods of competition under Section 5 of the FTC Act. In considering whether conduct, either in a specific instance or as a category, constitutes an unfair method of competition, the Commission will directly consult applicable law. This statement does not pertain to any other statutory provision within the FTC’s jurisdiction.4 II. Background and Legislative History of Section 5 of the FTC Act A. The text, structure, and legislative history of Section 5 show that its mandate extends beyond the Sherman and Clayton Acts and reaches unfair conduct with a tendency to negatively affect competitive conditions As the Commission explained in its July 2021 withdrawal of the previous policy statement, the text, structure, and history of Section 5 reaches more broadly than the antitrust laws.5 Congress passed the FTC Act to push back against the judiciary’s adoption and use of the open-ended rule of reason for analyzing Sherman Act claims,6 which it feared would deliver inconsistent and unpredictable results and “substitute the court in the place of Congress.”7 judgment and[;]. . . [that] to attain the objectives Congress envisioned, [the FTC] cannot be required to confine its road block to the narrow lane the transgressor has traveled”); American Airlines, Inc. v. North American Airlines, Inc., 351 U.S. 79, 85 (1956) (finding that "[u]nfair or deceptive practices or unfair methods of competition". . . are broader concepts than the common-law idea of unfair competition”); Fed. Trade Comm’n v. Motion Picture Advertising Service Co., 344 U.S. 392, 394-95 (1953) (noting that “Congress advisedly left the concept [of unfair methods of competition] flexible . . . [and] designed it to supplement and bolster the Sherman Act and the Clayton Act[,] [so as] to stop . . . acts and practices [in their incipiency] which, when full blown, would violate those Acts[,]. . . as well as to condemn as "unfair methods of competition" existing violations of them”); Fed. Trade Comm’n v. Cement Institute, 333 U.S. 683, 708 (1948) (holding that conduct that falls short of violating the Sherman Act may violate Section 5); Fed. Trade Comm’n v. R. F. Keppel & Bro., Inc., 291 U.S. 304, 310 (1934) (finding that unfair methods of competition not limited to those “which are forbidden at common law or which are likely to grow into violations of the Sherman Act”).
This statement does not address the Commission’s authority to prevent unfair or deceptive acts or practices in 15 U.S.C. §§ 45(a),(n). This statement is limited to the scope of standalone unfair methods of competition Section 5 violations. Such standalone unfair methods of competition Section 5 claims may be brought under one or more of the theories set forth in this policy statement and combined with claims under other parts of the FTC Act or other statutes enforced by the Commission as warranted.
This statement does not address the language of 15 U.S.C. § 45(b), which states that the Commission will act when it has reason to believe such action is in the public interest. See generally Hills Bros. v. Fed. Trade Comm’n, 9 F.2d 481, 483–84 (9th Cir. 1926) (“the interest of the public, like the question whether the commission has reason to believe that any person, partnership, or corporation has been or is using any unfair method of competition in commerce, is committed to the discretion of the commission, is to be determined by the commission before proceedings are instituted, and is not thereafter a subject of controversy either before the commission or before the court, except in so far as the question of public interest is necessarily involved in the merits of the case, and, if the commission finds that the method of competition in question is prohibited by the act, no other or further finding on the question of public interest is required.”); see also Parke, Austin & Lipscomb, Inc., et al. v. Fed. Trade Comm’n, 142 F.2d 437, 441 (2d Cir. 1944).
5 Statement of Commission, supra note 2.
6 Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 60 (1911). 7 S. REP. NO. 62-1326, at 10 (1913) (“Cummins Report”). Senator Francis Newlands, one of the chief sponsors of the bill that became the FTC Act, expressed concern that Standard Oil left antitrust regulation “to the varying judgments of different courts.” 47 CONG. REC. 1225 (1911). After analyzing a series of Supreme Court decisions Congress therefore determined it would “establish[ ] a commission for the better administration of the law and to aid in its enforcement.”8 This led to the creation of the FTC in 1914 and to the enactment of a prohibition of “unfair methods of competition,” a new standard in federal competition law.9 In enacting Section 5, Congress’s aim was to create a new prohibition broader than, and different from, the Sherman and Clayton Acts. Congress purposely introduced the phrase, “unfair methods of competition,” in the FTC Act to distinguish the FTC’s authority from the definition of “unfair competition” at common law.10 It also made clear that Section 5 was designed to extend beyond the reach of the antitrust laws.11 Concluding that a static definition would soon become outdated,12 Congress wanted to give the Commission flexibility to adapt to changing circumstances.13 The key function of the FTC in applying its mandate to combat unfair methods of competition, according to Congress, would be to identify unfair forms of competition.14 The legislative record demonstrates that Congress enacted Section 5 to protect against various types of unfair or oppressive conduct in the marketplace.15 During debates over the meaning of unfair interpreting the Sherman Act, a Senate committee feared that the rule of reason resulted in a situation where, “in each instance it [would be] for the court to determine whether the established restraint of trade is a due restraint or an undue restraint.” Cummins Report, at 10. It lamented that the rule of reason had made it “impossible to predict with any certainty” whether courts would condemn the many “practices that seriously interfere with competition” and found it inconceivable that “the courts . . . be permitted to test each restraint of trade by the economic standard which the individual members of the court may happen to approve.” Id. at 10, 12. The committee believed this would result in a loss of confidence by the public in the courts and eventually lead to a “repudiat[ion] [of] the fundamental principles of representative government.” Id. at 11. 8 Id. at 12.
9 Federal Trade Commission Act of 1914, Pub. L. No. 63-203, 38 Stat. 717 (codified as amended at 15 U.S.C. § 41– 58). See 51 CONG. REC. 12146 (1914) (statement of Sen. Hollis) (“The Sherman Act is adequate for the abolition of monopoly; it is, however, but imperfectly adequate for the regulation of competition. The present Congress is charged with the duty of supplying the defect in the law”). 10 See 51 CONG. REC. 12936 (1914) (statement of Sen. Reed) (“It is my opinion that if we employ the term “unfair competition” as it is employed in this bill, without adding anything to it, the courts will adopt as the meaning of Congress that meaning which has been affixed to the term by all of the law dictionaries and by a great many legal authorities.”). See also 51 CONG. REC. 12814 (1914) (statement of Sen. George Sutherland). 11 See E.I. du Pont de Nemours v. Fed. Trade Comm’n (Ethyl), 729 F.2d 128, 136 (2d Cir. 1984) (“Congress’ aim was to protect society against oppressive anti-competitive conduct and thus assure that the conduct prohibited by the Sherman and Clayton Acts would be supplemented as necessary and any interstices filled”) (citing H.R. REP. NO. 63-1142, at 19 (1914) (Conf. Rep.)); 51 CONG. REC. 11236 (1914) (statement of Sen. Cummins) (stating that the purpose of Section 5 was “to make some things punishable, to prevent some things, that cannot be punished or prevented under the antitrust law”).
12 H.R. REP. NO. 63-1142, at 19.
13 See id. at 18–19.
14 Id. at 19.
15 Id. at 2 (declaring “unfair and oppressive competition to be unlawful”); S. REP. NO. 63-597, at 17 (1914) (citing a previous version of the bill, S. 2941, which would allow the commission to revoke the registration of any corporation using “materially unfair or oppressive methods of competition”); 51 CONG. REC. 8861 (1914) (statement of Rep. Hinebaugh) (seeking to prevent “unfair or oppressive competition” and proceeding to list examples); id. at 8979 (statement of Rep. Murdock) (seeking to protect to protect “smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals”); id. at 13117 (statement of Sen. Reed) (“intended to reach unfair, dishonest, crooked, oppressive, coercive acts. It is not intended to cover mere mistakes”). methods of competition, members of Congress had no difficulty identifying concrete examples.16 One congressman noted that when it comes to unfair methods of competition, “[t]here is that in the common sense of fairness and right dealing which indicates plainly the distinction between close bargaining and oppression.”17 Both the House and Senate also expressed a common understanding that unfair methods of competition encompassed conduct that tended to undermine “competitive conditions” in the marketplace.18 Congress evinced a clear aim that “unfair methods of competition” need not require a showing of current anticompetitive harm or anticompetitive intent in every case. First, the legislative history is replete with statements to the effect that Congress wanted the FTC to stop monopolies in their “incipiency.”19 Requiring the FTC to show current anticompetitive effects, 16 For instance, a Senate report referenced practices “such as local price cutting, interlocking directorates, and holding companies intended to restrain substantial competition.” S. REP. NO. 63-597, at 13. In considering what conduct should be prohibited, the House distinguished between “artificial bases” of monopolistic power and “natural bases.” See H.R. REP. NO. 63-533, at 23–25. The House viewed artificial bases of monopolistic power to include, for instance, the acceptance of rates or terms of service from common carriers not granted to other shippers; price discrimination not justified by differences in cost or distribution; procuring the secrets of competitors by bribery or any illegal means; procuring conduct on the part of employees of competitors inconsistent with their duties to their employers; making oppressive exclusive contracts; the maintenance of secret subsidiaries or secretly controlled agencies held out as independent; the destruction or material lessening of competition through the use of interlocking directorates; and the charging of exorbitant prices where the seller has a substantial monopoly. Id. Natural bases included control of natural resources, transportation facilities, financial resources, or any other economic condition inherent in the character of the industry, such as patent rights. Id. See also 51 CONG. REC. 11084–86 (1914) (statement of Sen. Newlands) (discussing jurisprudence on unfair competition); id. at 14928-14931 (statement of Rep. Covington) (discussing jurisprudence on unfair competition); id. at 11108 (statement of Sen. Newlands) (providing specific examples of unfair competition, such as local price cutting and organizing “bogus independent concerns . . . for the purpose of entering the field of the adversary and cutting prices with a view to his destruction[,]” among other things); id. at 11230 (statement of Sen. Robinson) (providing examples of unfair competition).
17 51 CONG. REC. 8979 (statement of Sen. Murdock).
18 See S. REP. NO. 1326, at 3–4 (stating that “Congress should maintain the policy established by the anti-trust law” to “‘maintain[ ] competitive conditions,” and that “every possible effort to create and preserve competitive conditions should be made”); id. at 2, 3-4, 11, & 13; S. REP. NO. 63-597, at 10 (“a commission is a necessary adjunct to the preservation of competition and to the practical enforcement of the law”); H.R. Rep. No. 63-533, at 2 (1914) (reported by Rep. Covington) (“The administration idea and the idea of business men generally, is for the preservation of proper competitive conditions in our great interstate commerce.”). The FTC Act’s legislative history makes it clear that Congress intended the statute to protect a broad array of market participants including workers and rival businesses. See 51 CONG. REC. 13312 (1914) (statement of Sen. Reed) (“it is not required to show restraint of trade or monopoly, but that the acts complained of hinder the business of another, or prohibit another from engaging in business, or restrain trade”); id. (statement of Sen. White) (“one of the main objects of this legislation is to prevent a rival in business from using unfair competition to drive his competitor out of business and to prevent this before the business is destroyed”); 51 CONG. REC. 8979 (1914) (statement of Rep. Murdock) (purpose of new Commission “is to protect the smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals”). The goals of “protecting consumers against the high prices and [guarding] the interests of employees” were expressed by the House. See H.R. REP. NO. 533, 63d Cong., 2d Sess. 14 (1914) (quoting from the Preliminary Report of the Industrial Commission, submitted to Congress in 1900). See also 51 CONG. REC. 8854 (1914) (statement of Rep. Morgan) (among goals of Section 5 “to secure labor the highest wage, the largest amount of employment under the most favorable conditions and circumstances”). 19 H.R. REP. NO. 63-1142, at 19 (“[t]he most certain way to stop monopoly at the threshold is to prevent unfair competition”); 51 CONG. REC. 13118) (1914) (statement of Sen. Reed) (“the same class of conspiracies exactly as the Sherman Antitrust Act deals with, except that we propose to strike those acts in their incipiency instead of after which are typically seen only after the monopoly has passed the “embryonic” stage, would undercut Congress’s hope to prohibit unfair business practices prior to, or near, monopoly power.20 In addition, many of the practices listed by Congress as patently unfair do not automatically carry with them measurable effects.21 Second, in considering and rejecting a definition of “unfair methods of competition” that would have required a showing of intent, legislators noted that such a requirement would inappropriately restrict the new provision to the metes and bounds of the antitrust laws and place an undue burden on the Commission in proving its cases.22 Congress struck an intentional balance when it enacted the FTC Act. It allowed the Commission to proceed against a broader range of anticompetitive conduct than can be reached under the Clayton and Sherman Acts, but it did not establish a private right of action under Section 5, and it limited the preclusive effects of the FTC’s enforcement actions in private antitrust cases under the Sherman and Clayton Acts.23 they have been actually worked out into a complete system of monopoly or restraint of trade”); id. at 14941 (statement of Rep. Stevens) (noting that section five “[would] give to this commission the power of preventing in their conception and in their beginning some of these unfair processes in competition which have been the chief source of monopoly”); id. at 12030 (statement of Sen. Newlands) (remarking that a commission would “check monopoly in the embryo”); id. at 11455 (statement of Sen. Cummins) (stating that the new law would “seize the offender before his ravages have gone to the length necessary in order to bring him within the law that we already have”); id. at 11087 (statement of Sen. Newlands) (citing the Cummins Report, which anticipated that a commission “could be vastly more effectual than through the courts alone, which in most cases will take no cognizance of violations of the law for months or years after the violation occurred, and when the difficulty of awarding reparation for the wrong is almost insurmountable”).
20 51 CONG. REC. 13118 (statement of Sen. Reed) (declaring that Congress intended “to do something that will strike a death blow to monopoly. . . to arrest it in its infancy . . . [and] to strike those acts in their incipiency instead of after they have been actually worked out into a complete system of monopoly or restraint of trade.”); id. at 14927 (statement of Rep. Covington) (“the best and most, effective way to deal with the various practices of unfair or destructive competition which, if permitted to go on unchecked and uncontrolled, become potential for restraint of trade or monopoly”); id. at 14929 (statement of Rep. Covington) (“We are seeking . . . to deal, with those practices of unfair trade in their incipient stages which if left untrammeled and uncontrolled become the acts which constitute in their culmination restraint of trade and monopoly and the groundwork of the trusts which have menaced us industrially”).
21 51 CONG. REC. 12217 (statement of Sen. Newlands) (“all you would have to prove would be an unfair method whose tendency was to stifle competition.”); 51 CONG. REC. 13312 (statement of Sen. White) (stating that “one of the main objects of this legislation is to prevent a rival in business from using unfair competition to drive his competitor out of business and to prevent this before the business is destroyed” and that “the unfair acts and practices had to have the effect to destroy or unreasonably hinder the business of another would neutralize this useful feature of the enactment”); 51 CONG. REC. 13311 (statement of Sen. Cummins) (“if the effect is to restrain trade or to create a monopoly[,] we have a complete and perfect prohibition in the antitrust law”); 51 CONG. REC. 13312 (1914) (statement of Sen. Reed) (“it is not required to show restraint of trade or monopoly, but that the acts complained of hinder the business of another, or prohibit another from engaging in business, or restrain trade”); 51 CONG. REC. 8979 (statement of Rep. Murdock) (purpose of new Commission “is to protect the smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals.”). 22 51 CONG. REC. 13311 (1914) (statement of Sen. Cummins) (“[t]here can be unfair competition in which the public is interested without any intent as described in the amendment”); id. (“[i]f the effect is to restrain trade or to create a monopoly we have a complete and perfect prohibition in the antitrust law”); id. at 13312 (statement of Sen. White) (“but we will have to carry the additional burden of proving the specific intent . . . [t]he proof of the specific intent with which an act was done is, as all lawyers know difficult to make”). 23 Treble damages are not available under the FTC Act. Civil penalties and Section 19’s monetary remedies are limited to unfair and deceptive acts or practices. See 15 U.S.C. § 45(m)(1)(A); 15 U.S.C. § 57b. A finding that The Supreme Court has affirmed this same broad view of the scope of Section 5 on numerous occasions.24 It has condemned coercive and otherwise facially unfair practices that have a tendency to stifle or impair competition.25 The federal circuit courts have likewise consistently held that the FTC’s authority extends not only to “the letter,” but also to “the spirit” of the antitrust laws.26 B. Congress created the FTC as an expert body charged with elucidating the meaning of Section 5 Congress was careful and deliberate when it created the FTC, an independent agency. The five Commissioners would serve for terms of seven years, which would “give them an opportunity to acquire the expertness” needed to determine what constitutes an unfair method of competition.27 The Commission would provide guidance to the business community on the legality of business practices (including by issuing advisory opinions),28 serve as an aid to the courts,29 and act as an enforcer against unfair methods of competition.30 Congress gave the Commission powers to conduct quasi-judicial hearings,31 directly seek injunctive relief in federal court,32 pursue investigations, prepare reports, and make rules.33 To balance the Commission’s powers, Congress created checks to ensure that the FTC would be accountable to it34 and that the conduct is an unfair method of competition under Section 5 is not given collateral estoppel effect in subsequent private antitrust actions. Holloway v. Bristol-Myers Corp., 485 F.2d 986 (D.C. Cir. 1973) (holding that private litigants cannot sue for violations of the FTC Act). See also 51 CONG. REC. 13115 (1914) (statement of Sen. Newlands) (“I do not believe in the principle, of assessing threefold damages.”); id. at 11317 (statement of Sen. McCumber) (moving to strike treble damages provision).
24 See supra, note 3.
25 Texaco, 393 U.S. at 225–26 (citing Atlantic Refining Co., 381 U.S. at 376). 26 Ethyl, 729 F.2d at 136–37 (citing Sperry & Hutchinson, 405 U.S. at 239); Grand Union Co. v. Fed. Trade Comm’n, 300 F.2d 92, 98–99 (2d Cir. 1962)). Cf., Chuck’s Feed & Seed Co. v. Ralston Purina Co., 810 F.2d 1289, 1292–93 (4th Cir. 1987) (describing Section 5 “as a kind of penumbra around the federal antitrust statutes”). 27 S. REP. NO. 63-597 at 11. See also id. at 11 (anticipating that the Commission would “build up a comprehensive body of information for the use and advantage of the Government and the business world”); id. at 22 (“we want trained experts; we want precedents; we want a body of administrative law built up.”). 28 See id. at 6–7 (citing an address by President Wilson, stating that “the business men of the country . . . desire the advice, the definite guidance and information which can be supplied by an administrative body.”); id. at 10 (anticipating that the Commission would “aid the business public.”). 29 See H.R. REP. NO. 63-533, at 8 (anticipating that the commission would use its investigatory powers in “aid of the courts.”).
30 S. REP. NO. 63-597, at 10 (anticipating that the Commission would have “sufficient power ancillary to the Department of Justice to aid materially and practically in the enforcement of the Sherman law and to aid the business public as well, and, incidentally, to build up a comprehensive body of information for the use and advantage of the Government and the business world”). See also H.R. REP. NO. 63-533, at 9. 31 15 U.S.C. § 45(b) (providing for adjudicatory hearings). 32 15 U.S.C. § 53(b).
33 Id. § 46(a),(b) (authorizing the Commission to investigate corporations and require reports); id. § 46(g) (authorizing the Commission to “make rules and regulations for the purpose of carrying out the provisions of this subchapter”); Nat’l Petroleum Refiners Ass’n v. Fed. Trade Comm’n, 482 F.2d 672, 673 (D.C. Cir. 1973) (holding that “the Federal Trade Commission is authorized to promulgate rules defining the meaning of the statutory standards of the illegality the Commission is empowered to prevent”). 34 See, e.g., 15 U.S.C. § 46(d),(f),(h) (requiring reports to Congress); Id. § 57a(f)(7) (requiring annual reports to Congress); Id. § 57b-2(d)(1)(A) (providing for disclosure of protected information to Congress). Congress also holds FTC’s decisions would be reviewable by federal courts of appeal.35 In the ensuing years, Congress has conducted vigorous oversight of the FTC and the courts have not hesitated to review Commission decisions.36 Congress intended for the FTC to be entitled to deference from the courts as an independent, expert agency.37 Over the years, courts have consistently held that FTC determinations as to what practices constitute an unfair method of competition deserve “great weight,”38 recognizing that the Commission is an expert agency, rather than “a carbon copy of the Department of Justice.”39 Even when courts have rejected the Commission’s factual conclusions, they have consistently reaffirmed the scope of its Section 5 authority.40 For example, Ethyl, Boise, and OAG cited prior decisions of the Supreme Court that affirm the distinctive scope of Section 5,41 but ultimately found that the particular facts at issue lacked evidence of unfairness, either “some indicia of oppressiveness”42 or some evidence that the conduct tended to negatively affect the market.43 All three appellate decisions reiterated the well-accepted principle that the Commission “is not confined to [the] letter” of the antitrust laws, and that “[i]t may bar incipient violations of the FTC accountable though the budgetary, appointment, and oversight processes, and through numerous statutory enactments and amendments relating to the FTC’s powers over the course of the hundred-plus years since the passage of the Federal Trade Commission Act.
35 15 U.S.C. § 45(b). Respondents in adjudicative proceedings may receive judicial review of the Commission’s decision in their circuit of residence or any circuit where they committed the conduct underlying the alleged violation: an unusually expansive form of judicial oversight. See, e.g., J. Thomas Rosch Commissioner, Fed. Trade Comm’n, Three Questions About Part Three: Administrative Proceedings at the FTC, Remarks Before the American Bar Association Section of Antitrust Law Fall Forum, Washington, D.C. 18 (Nov. 8, 2012), https://www.ftc.gov/sites/default/files/documents/public_statements/three-questions-about-part-three-administrative- proceedings-ftc/121108fallforum.pdf.
36 See William E. Kovacic, The Federal Trade Commission and Congressional Oversight of Antitrust Enforcement, 17 TULSA L.J. 587, 623–27 (1982). See also Ethyl, 729 F.2d at 137; Boise Cascade Corp. v. Fed. Trade Comm’n, 637 F.2d 573, 581–82 (9th Cir. 1980); Official Airline Guides, Inc. v. Fed. Trade Comm’n (OAG), 630 F.2d 920, 927 (2d Cir. 1980).
37 S. REP. NO. 63-597 at 11, 22.
38 OAG, 630 F.2d at 927 (quoting Cement Institute, 333 U.S. at 720); Atlantic Refining Co., 381 U.S. at 368; Fed. Trade Comm’n v. R.F. Keppel & Bro., Inc., 291 U.S. 304, 314 (1934). See also Ind. Fed’n of Dentists, 476 U.S. at 455; Texaco, 393 U.S. at 226; Motion Picture Advert. Serv. Co., 344 U.S. at 396. 39 Fed. Trade Comm’n v. Dean Foods Co., 384 U.S. 597, 618–19 (1966) (Fortas, J., dissenting). See also 51 CONG.
40 See, e.g., Ethyl, 729 F.2d at 128; Boise, 637 F.2d at 573; OAG, 630 F.2d at 920. 41 Boise, 637 F.2d at 581; Ethyl, 729 F.2d at 136–37; OAG, 630 F.2d at 927. 42 Ethyl, 729 F.2d at 139 (holding that “before business conduct in an oligopolistic industry may be labelled “unfair” within the meaning of § 5 a minimum standard demands that, absent a tacit agreement, at least some indicia of oppressiveness must exist”); OAG, 630 F.2d at 927–28 (finding that the monopolist had “no purpose to restrain competition or to enhance or expand his monopoly, and [did] not act coercively”). 43Boise, 637 F.2d at 581 (finding that “without proof of anticompetitive effects” it could not assume that there was a “deliberate restraint on competition”). Boise’s applicability to cases outside the realm of delivered pricing is limited – the court’s decision was driven by the Commission’s inconsistent position on delivered pricing practices in prior statements, its shifting litigation strategy, and the Commission’s failure to meets its own standard. Id. at 575–77, 582.
those statutes.”44 They also agreed that Section 5 reaches “conduct which, although not a violation of the letter of the antitrust laws, is close to a violation or is contrary to their spirit,”45 and further recognized the importance of deference to the Commission where it acts against conduct that is unfair.46 III. Unfair Methods of Competition Relying on the text, structure, legislative history of Section 5, precedent, and the FTC’s experience applying the law, this statement describes the most significant general principles concerning whether conduct is an unfair method of competition under Section 5 of the FTC Act.47 1. The conduct must be a method of competition Conduct must be a “method of competition” to violate Section 5. A method of competition is conduct undertaken by an actor in the marketplace—as opposed to merely a condition of the marketplace, not of the respondent’s making, such as high concentration or barriers to entry.48 The conduct must implicate competition, but the relationship can be indirect. For example, misuse of regulatory processes that can create or exploit impediments to competition (such as those related to licensing, patents, or standard setting) constitutes a method of competition.49 Conversely, violations of generally applicable laws by themselves, such as environmental or tax laws, that merely give an actor a cost advantage would be unlikely to constitute a method of competition.
46 Ind. Fed’n Dentists, 476 U.S. at 454.
47 Whether the conduct violates accepted norms of unfairness derived from external standards expressed in statutes, common law, and regulations outside of the federal antitrust laws may also be relevant to whether the conduct is an unfair method competition. See Ind. Fed’n of Dentists, 476 U.S. at 454 (“The standard of “unfairness” under the FTC Act …encompass[es] not only practices that violate the Sherman Act and the other antitrust laws. . . but also practices that the Commission determines are against public policy for other reasons.”). See also Sperry & Hutchinson, 405 U.S. at 244; Motion Picture Advertising Co., 344 U.S. at 395; R.F. Keppel & Bro., 291 U.S. at 313. This framework will not be used to analyze matters that constitute a violation of the letter of the antitrust laws. 48 See Ethyl, 729 F.2d at139.
49 Statement of the Federal Trade Commission In the Matter of Google Inc., FTC File No. 121-0120 (Jan. 3, 2013), https://www.ftc.gov/system/files/documents/public_statements/410931/130103googlemotorolastmtofcomm.p df; Statement of the Federal Trade Commission In the Matter of Robert Bosch GmbH, FTC. File No. 121-0081 (Apr. 24. 2013); Analysis of Proposed Consent Decree to Aid in Public Comment: In the Matter of Negotiated Data Solutions, LLC, FTC File No. 051-0094 (Jan. 23, 2008); In re Dell Computer Corp., 121 F.T.C. 616 (1996) (consent order). Cf., Walker Process Eqpt., Inc. v. Food Machinery Corp., 382 U.S. 172 (1965) (fraud on the patent office may constitute antitrust violation).
investment in research and development that leads to innovative outputs, or attracting employees and workers through the offering of better employment terms. 50 There are two key criteria to consider when evaluating whether conduct goes beyond competition on the merits. First, the conduct may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.51 It may also be otherwise restrictive or exclusionary, depending on the circumstances, as discussed below. Second, the conduct must tend to negatively affect competitive conditions.52 This may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers. These two principles are weighed according to a sliding scale. Where the indicia of unfairness are clear, less may be necessary to show a tendency to negatively affect competitive conditions.53 Even when conduct is not facially unfair, it may violate Section 5.54 In these circumstances, more information about the nature of the commercial setting may be necessary to determine whether there is a tendency to negatively affect competitive conditions. The size, power, and purpose of the respondent may be relevant, as are the current and potential future effects of the conduct.
The second principle addresses the tendency of the conduct to negatively affect competitive conditions—whether by affecting consumers, workers, or other market participants. In crafting Section 5, Congress recognized that unfair methods of competition may take myriad forms and hence that different types of evidence can demonstrate a tendency to interfere with competitive conditions. Because the Section 5 analysis is purposely focused on incipient threats to competitive conditions,55 this inquiry does not turn to whether the conduct directly caused 50 See generally U.S. v. Grinnell Corp., 384 U.S. 563, 571 (1966) (distinguishing unlawful acquisition or maintenance of monopoly power from consequences of “a superior product, business acumen, or historic accident”); U.S. v. Alum. Co. of America, 148 F.2d 416, 430 (2d Cir. 1945) (distinguishing conduct based on “superior skill, foresight and industry.”).
51 See e.g., Sperry & Hutchinson, 405 U.S. at 905 (construing Section 5 to reach conduct shown to exploit consumers, citing R.F. Keppel & Bro., 291 U.S. at 313); Atlantic Refining Co., 381 U.S. at 369 (finding an unfair method of competition where the defendant “utilize[ed] … economic power in one market to curtail competition in another,” which was “bolstered by actual threats and coercive practices”); Texaco, 393 U.S. at 228-29 (finding an unfair method of competition where the defendant used its “dominant economic power … in a manner which tended to foreclose competition”); Ethyl, 729 F.2d at 140 (finding that unfair methods of competition includes practices that are “collusive, coercive, predatory, restrictive, or deceitful” as well as “exclusionary”). 52 See, e.g., S. REP. NO. 1326, at 3–4 (1913) (stating that “Congress should maintain the policy established by the anti-trust law” to “‘maintain[ ] competitive conditions,” and that “every possible effort to create and preserve competitive conditions should be made”). Id. at 2, 3-4, 11, & 13; see also H.R. Rep. No. 63-533, at 2 (1914) (reported by Rep. Covington) (The administration idea and the idea of business men generally, is for the preservation of proper competitive conditions in our great interstate commerce”). 53 Ethyl, 729 F.2d at 137-39.
54 Hastings Mfg. Co. v. Fed. Trade Comm’n, 153 F.2d 253, 257 (6th Cir. 1946). 55 See generally supra notes 11 & 18. See also Fashion Originators’ Guild Am. v. Fed. Trade Comm’n (FOGA), 312 U.S. 457, 466 (1941) (holding that it was not determinative that petitioners had not yet “achieved a complete monopoly”; rather it was “sufficient if it really tends to that end, and to deprive the public of the advantages which flow from free competition”).
actual harm in the specific instance at issue.56 Instead, the second part of the principle examines whether the respondent’s conduct has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition. These consequences may arise when the conduct is examined in the aggregate along with the conduct of others engaging in the same or similar conduct,57 or when the conduct is examined as part of the cumulative effect of a variety of different practices by the respondent.58 Moreover, Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions.59 Given the distinctive goals of Section 5, the inquiry will not focus on the “rule of reason” inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.
57 Motion Picture Advertising, 344 U.S. at 395.
58 Consent Order, Statement in Support of Consent, In the Matter of Intel Corp., File No. 061-0247 (Dkt. 9341) (July 28, 2010); The Vons Co., FTC Complaints and Order, 1987-1993 Transfer Binder, Trade Reg. Rep. (CCH) ¶ 23,200 (Aug. 7, 1992).
59 Atlantic Refining Co., 381 U.S. at 371 (“unnecessary to embark upon a full scale economic analysis of competitive effects.”); Texaco, 393 U.S. at 230 (holding that “[i]t is enough that the Commission found that the practice in question unfairly burdened competition for a not insignificant volume of commerce.”); L.G. Balfour Co.
60 Atlantic Refining Co., 381 U.S. at 371 (considering the defendant’s argument that the distribution contracts at issue “may well provide Atlantic with an economical method of assuring efficient product distribution among its dealers” and nonetheless holding that the “Commission was clearly justified in refusing the participants an opportunity to offset these evils by a showing of economic benefit to themselves”); Texaco, 393 U.S. at 230 (following the same reasoning as Atlantic Refining and finding that the “anticompetitive tendencies of such system [were] clear”); Balfour, 442 F.2d at 15 (while relevant to consider the advantages of a trade practice on individual companies in the market, this cannot excuse an otherwise illegal business practice). For provisions of the antitrust laws where courts have not accepted justifications as part of the legal analysis, the Commission will similarly not accept justifications when these claims are pursued through Section 5. draw on the Commission’s long experience evaluating asserted justifications when enforcing Section 5, as well as its review of decided cases and past enforcement actions.61 First, it would be contrary to the text, meaning, and case law of Section 5 to justify facially unfair conduct on the grounds that the conduct provides the respondent with some pecuniary benefits.62 At the same time, some practices may impact competitive conditions in a manner that both harms and benefits market participants other than the party; at times, the harms and benefits may redound to the same participants, and at times they may be disparately distributed – that is, a practice may harm some market participants while simultaneously providing legitimate benefits to others.
If parties in these cases choose to assert a justification, the subsequent inquiry would not be a net efficiencies test or a numerical cost-benefit analysis. The unfair methods of competition framework explicitly contemplates a variety of non-quantifiable harms, and justifications and purported benefits may be unquantifiable as well. The nature of the harm is highly relevant to the inquiry; the more facially unfair and injurious the harm, the less likely it is to be overcome by a countervailing justification of any kind.63 In addition, whether harmed parties share in the purported benefits of the practice may be relevant to the inquiry. Some well-established limitations on what defenses are permissible in an antitrust case apply in the Section 5 context as well. It is the party’s burden to show that the asserted justification for the conduct is legally cognizable,64 non-pretextual,65 and that any restriction used to bring about the benefit is narrowly tailored to limit any adverse impact on competitive 61 See supra § II (B) (discussing Congressional intent to create an expert Commission entitled to deference for its determinations).
62 Supra note 51.
63 See FOGA, 312 U.S. at 467-68 (finding the Commission did not need to hear evidence of justifications where “[t]he purpose and object of this combination, its potential power, its tendency to monopoly, the coercion it could and did practice upon a rival method of competition, all brought it within the policy of the prohibition declared by the Sherman and Clayton Acts”).
64 See, e.g. Ind. Fed. Dentists, 476 U.S. at 463 (making clear that justifications that run directly counter to the “basic policy of the Sherman Act,” in this instance, limiting consumer access to relevant information because “an unrestrained market in which consumers are given access to the information they believe to be relevant to their choices will lead them to make unwise, and even dangerous, choices” are not cognizable); id. at 464 (affirming Commission’s finding that there was insufficient evidence that the restraint conferred the claimed benefit at all). See also Fed. Trade Comm’n v. Superior Ct. Trial Lawyers Ass’n, 493 U.S. 411, 423-24 (1990); NCAA v. Board of Regents, 468 U.S. 85, 113-15 (1984); United States v. Addyston Pipe Steel Co. 85 F. 271 (6th Cir. 1898), aff’d 175 U.S. 211 (1899).
65 Pretextual justifications include those that are not set forth in documents prior to, or contemporaneous with, the introduction of the conduct, or not plausibly based on the known facts. See, e.g. Ind. Fed’n of Dentists, 476 U.S. at 464 (affirming the Commission’s finding that there was insufficient evidence that the restraint conferred the claimed benefit at all). See also United States v. Microsoft Corp., 253 F.3d 35, 62-64, 72, 74, 76-77 (D.C. Cir. 2001); Eastman Kodak Co. v. Image Technical Tech. Svcs, 504 U.S. 541, 472, 484-85 (1992); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 608-10 (1985); Texas Specialty Physicians v. Fed. Trade Comm’n, 528 F.3d 346, 368-70 (5th Cir. 2008); United States v. Dentsply Int’l, Inc., 399 F.3d 181, 196-97 (3d Cir. 2005). See also Fed. Trade Comm’n & U.S. Dep’t of Justice, Antitrust Guidelines for Collaboration Among Competitors §3.36a (2000) (2000 Collaboration Guidelines) (“Efficiency claims are not considered if they are vague or speculative or otherwise cannot be verified by reasonable means”).
conditions.66 In addition, the asserted benefits must not be outside the market where the harm occurs.67 Finally, it is the party’s burden to show that, given all the circumstances, the asserted benefits outweigh the harm and are of the kind that courts have recognized as cognizable in standalone Section 5 cases.68 V. Historical Examples of Unfair Methods of Competition For the purpose of providing further guidance, the FTC lists here a non-exclusive set of examples and citations of past decisions and consent decrees based on Section 5, and, where applicable, other antitrust laws, focusing on conduct that constitutes an incipient violation of the antitrust laws or that violates the spirit of the antitrust laws. These illustrative examples are drawn from case law and from FTC experience.
A non-exclusive set of examples of conduct that have been found to violate Section 5 include:
• Practices deemed to violate Sections 1 and 2 of the Sherman Act or the provisions of the Clayton Act, as amended (the antitrust laws).69 • Conduct deemed to be an incipient violation of the antitrust laws. Incipient violations include conduct by respondents who have not gained full-fledged monopoly or market power, or by conduct that has the tendency to ripen into violations of the antitrust laws.70 Past examples of such use of Section 5 of the FTC Act include: invitations to collude,71 o 66 NCAA v. Alston, 141 S. Ct. 2141, 2162-64 (2021); Polygram Holding, Inc. v. Fed. Trade Comm’n, 416 F.3d 29, 38 (D.C. Cir. 2005); 2000 Collaboration Guidelines § 3.36b. 67 United States v. Philadelphia Nat’l Bank, 374 U.S. 321, 370-71 (1963); 2000 Collaboration Guidelines § 3.36a. 68 At all times, the burden of persuasion would remain with the Commission in administrative proceedings pursuant to 5 U.S.C. §556(d).
69 Motion Picture Advertising, 344 U.S. at 395 (conduct fell “within the prohibitions of the Sherman Act and is therefore an unfair method of competition within the meaning of s. 5(a).”); Cement Institute, 333 U.S. at 683; FOGA, 312 U.S. at 463; Fed. Trade Comm’n v. Pacific States Paper Trade Ass’n, 273 U.S. 52 (1926). 70 FOGA, 312 U.S. at 466 (FTC may challenge combinations “not merely in their fruition, but also in their incipiency combinations which could lead to . . .trade restraints and practices deemed undesirable”); Motion Picture Advertising, 344 U.S. at 394-95 (“[i]t is also clear that the Federal Trade Commission Act was designed to supplement and bolster the Sherman and the Clayton Act. . . to stop in their incipiency acts and practices which, when full blown, would violate those Acts.”); Cement Institute, 333 U.S. at 708; Triangle Conduit & Cable Co. v.
71 The Commission has challenged both public and private invitations to collude as unfair methods of competition. This type of conduct, if consummated would constitute a per se violation of the antitrust laws. Invitations to collude, even if unaccepted, represent both an incipient violation as well as a violation of the spirit of the antitrust laws within the meaning of the 2022 Section 5 policy statement. Under either theory, an invitation to collude constitutes an unfair method of competition under Section 5. In Re Quality Trailer Products Corp., 115 F.T.C. 944 (1992) (consent); In re Valassis Communs., Dkt. C-4160, 2006 FTC LEXIS 25 (2006) (consent); In re A.E. Clevite, 116 F.T.C. 389 (1993) (consent); In re YKK (USA), 108 F.T.C. 628 (1993) (consent); In re Precision Moulding Co., 122 F.T.C. 104 (1996) (consent); In re Stone Container Corp., 125 F.T.C. 853 (1998) (consent); In re U-Haul Int’l, Inc., File No. 081-0157, 6 (2010) (consent); In re Delta/AirTran Baggage Fee Antitrust Litig., 245 F.Supp. 2d 1343, mergers, acquisitions, or joint ventures that have the tendency to ripen into o violations of the antitrust laws,72 a series of mergers, acquisitions, or joint ventures that tend to bring about the o harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws,73 and loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the o tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry.74 • Conduct that violates the spirit of the antitrust laws. This includes conduct that tends to cause potential harm similar to an antitrust violation, but that may or may not be covered by the literal language of the antitrust laws or that may or may not fall into a “gap” in those laws.75 As such, the analysis may depart from prior precedent based on the provisions of the Sherman and Clayton Acts. Examples of such violations, to the extent not covered by the antitrust laws, include:
practices that facilitate tacit coordination,76 o parallel exclusionary conduct that may cause aggregate harm,77 o 1369-70 (N.D. Ga. 2017), aff’d sub. Nom., Siegel v. Delta Air Lines, Inc., 714 F. App’x 986 (11th Cir. 2018), cert. denied, 139 S. Ct. 827 (2019). Depending on the circumstances, an invitation to collude may also constitute attempted monopolization under Section 2 of the Sherman Act, United States v. American Airlines, 743 F.2d 1114 (5th Cir. 1984), or wire fraud, United States v. Ames Sintering, 927 F.2d 232 (6th Cir. 1990). Under appropriate circumstances, the Commission will refer evidence of per se illegal cartel agreements to the Department of Justice for criminal prosecution. See Commission Statement Regarding Criminal Referral and Partnership Process, File No. P094207 (Nov. 18, 2021), https://www.ftc.gov/system/files/documents/public_statements/1598439/commission_statement_regarding_criminal _referrals_and_partnership_process_updated_p094207.pdf. 72 Yamaha Motor Co. v. Fed. Trade Comm’n, 657 F.2d 971 (8th Cir. 1981), cert. denied, 456 U.S. 915 (1982). 73 Vons, 1987-1993 Transfer Binder ¶ 23,200. Such series of acquisitions or related conduct may also constitute an unfair method competition as a violation of the spirit of the antitrust laws. See infra note 82 and cases cited therein. 74 Luria Bros. v. Fed. Trade Comm’n, 389 F.2d 847, 864 (3d Cir. 1968), cert. denied, 393 U.S. 829 (1968). 75 Remarks of Jon Leibowitz, Comm’r, Fed. Trade Comm’n, “Tales from the Crypt” Episodes ’08 and ’09: The Return of Section 5 (“Unfair Methods of Competition in Commerce are Hereby Declared Unlawful”), Section 5 Workshop, at 4 (Oct. 17, 2008), https://www.ftc.gov/sites/default/files/documents/public_events/section-5-ftc-act- competition-statute/jleibowitz.pdf (“Simply put, consumers can still suffer plenty of harm for reasons not encompassed by the Sherman Act as it is currently enforced in the federal courts.”). 76 Cement Institute, 333 U.S. at 709-21 (multiple basing point pricing system contributed to unlawful coordinated pricing); Analysis to Aid Public Comment, In re BMG Music et. al, 65 Fed. Reg. 31,319 (2000), Docket No. C-3973 (2000) (Decision & Order) (distributors of pre-recorded music, acting in parallel but without agreement, impose identical coercive limits on retailer advertising of discounts). See generally William E. Kovacic, Antitrust Policy and Horizontal Collusion in the 21st Century, 9 LOY. CONSUMER L. REV. 97, 107 (1997) (“[T]he FTC remains perhaps the best vehicle for articulating standards designed to discourage anticompetitive coordination among competitors.”).
77 Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 897 (2007) (holding that the extent of adoption of resale price maintenance across the industry is relevant to legality); Motion Picture Advertising, 344 U.S. at 395 conduct by a respondent that is undertaken with other acts and practices that o cumulatively may tend to undermine competitive conditions in the market,78 fraudulent and inequitable practices that undermine the standard-setting process o or that interfere with the Patent Office’s full examination of patent applications,79 price discrimination claims such as knowingly inducing and receiving o disproportionate promotional allowances against buyers not covered by Clayton Act,80 de facto tying, bundling, exclusive dealing, or loyalty rebates that use market o power in one market to entrench that power or impede competition in the same or a related market,81 a series of mergers or acquisitions that tend to bring about the harms that the o antitrust laws were designed to prevent, but individually may not have violated the antitrust laws,82 mergers or acquisitions of a potential or nascent competitor that may tend to o lessen current or future competition,83 (“respondent and the three other major companies have foreclosed to competitors 75 percent of all available outlets.”); Standard Oil Co. of California v. United States, 337 U.S. 293, 309, 314 (1949) (taking into account extent of industry use of similar practices). See also C. Scott Hemphill & Tim Wu, Parallel Exclusion, 122 YALE L.J. 1182, 1243-45 (2012) (“parallel exclusion is a suitable subject for FTC enforcement under Section 5 of the FTC Act.”). 78 Intel Consent Order at 9341; Vons, 1987-1993 Transfer Binder ¶ 23,200. 79 U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST GUIDELINES FOR THE LICENSING OF INTELLECTUAL PROPERTY § 6 (2017); In re American Cyanamid Co., 72 F.T.C. 623, 684-85, aff’d sub nom, Charles Pfizer & Co., 401 F.2d 574 (6th Cir. 1968), cert. denied, 394 U.S. 920 (1969) (actual or attempted enforcement of patents obtained by inequitable conduct falling short of fraud).
80 Alterman Foods v. Fed. Trade Comm’n, 497 F.2d 993 (5th Cir. 1974); Colonial Stores v. Fed. Trade Comm’n, 450 F.2d 733 (5th Cir. 1971); R.H. Macy & Co. v. Fed. Trade Comm’n, 326 F.2d 445 (2d Cir. 1964); American News Co. v. Fed. Trade Comm’n, 300 F.2d 104 (2d Cir. 1962); Grand Union Co. v. Fed. Trade Comm’n, 300 F.2d 92 (2d Cir. 1962); In re Foremost-McKesson, Inc., 109 F.T.C. 127 (1987). 81 Atlantic Refining Co., 381 U.S. at 357; Texaco, Inc., 393 U.S. at 223; Shell Oil Co. v. Fed. Trade Comm’n, 360 F.2d 470 (5th Cir. 1966); Brown Shoe, 384 U.S. at 316.
82 The Vons Cos., 1987-1993 Transfer Binder ¶ 23,200. Section 5 has also been used to challenge individual transactions that do not meet the technical requirements of Section 7. In re Beatrice Foods, 67 F.T.C. 473 (1965), supplemented, 68 F.T.C. 1003 (1965), modified, 71 F.T.C. 797 (1967); In re Dean Foods, Co., 70 F.T.C. 1146 (1966); In re Foremost Dairies, Inc., 60 F.T.C. 944 (1962). 83 See, e.g., Fed. Trade Comm’n v. Facebook, 581 F.Supp. 3d 34 (D.D.C. 2022) (denying motion to dismiss challenging acquisition of WhatsApp and Instagram); Analysis of Agreement Containing Consent Orders to Aid Public Comment, In the Matter of Novartis AG, File No. 141-0141 (consent decree requiring divestiture in transaction eliminating future competition in oncology compounds); Analysis of Agreement Containing Consent Orders to Aid Public Comment, In the Matter of Össur Americas Holdings, Inc., File No. 191-0177 (consent decree requiring divestiture in transaction eliminating future competition in myoelectric elbows). See also Fed. Trade Comm’n v. Procter & Gamble Co., 386 U.S. 568 (1967) (barring acquisition of leading firm where acquirer was most likely potential entrant). See generally PHILIP AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 701at p. 200 (4th ed. 2015) (acquisition of “an using market power in one market to gain a competitive advantage in an adjacent o market by, for example, utilizing technological incompatibilities to negatively impact competition in adjacent markets,84 conduct resulting in direct evidence of harm, or likely harm to competition, that o does not rely upon market definition,85 interlocking directors and officers of competing firms not covered by the literal o language of the Clayton Act,86 commercial bribery and corporate espionage that tends to create or maintain o market power,87 false or deceptive advertising or marketing which tends to create or maintain o market power,88 or actual or likely potential competitor is properly classified, for it tends to augment or reinforce the monopoly by means other than competition on the merits.”); C. Scott Hemphill & Tim Wu, Nascent Competitors, 168 U. PA. L.
84 Eastman Kodak, 504 U.S. at 451; Newcal Industries v. Ikon Office Solution, 513 F.3d 1038 (9th Cir. 2008); SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir. 1978); LePage’s v. 3M Co., 324 F.3d 141 (3d Cir. 2003) (en banc).
85 Ind. Fed’n of Dentists, 476 U.S. at 460-61 (finding of sustained effects legally sufficient even in absence of elaborate market analysis); Toy’s “R” Us v. Fed. Trade Comm’n, 221 F.3d 928, 937 (7th Cir. 2000) (finding “sufficient proof of anticompetitive effects [such] that no more elaborate market analysis was necessary”). Cf., Fed. Trade Comm’n v. Staples, Inc., 970 F.Supp. 1066, 1075-6 (D.D.C. 1997) (relying in part on direct evidence that pricing for key products from office superstores lower where three such stores exist in same metropolitan area and higher where only one or two such stores present).
86 Perpetual Federal Savings & Loan, 90 F.T.C. 608 (1977) (complaint dismissed due to subsequent legislation). Cf., TRW, Inc. v. FTC, 647 F.2d 942 (9th Cir. 1981) (noting automatic nature of liability under Clayton §8 when prerequisites of statute established).
87 See Policy Statement of the Federal Trade Commission on Rebates and Fees in Exchange for Excluding Lower- Cost Drug Products (2022), at 6 n. 27 (“The Commission has a long history of addressing commercial bribery and will continue to do so.”), https://www.ftc.gov/legal-library/browse/policy-statement-federal-trade-commission- rebates-fees-exchange-excluding-lower-cost-drug-products; See Hon. Garland S. Ferguson, Jr., Chairman, Fed. Trade Comm’n, Commercial Bribery: An Address to the Conf. on Com. Bribery to the Comm. Standards Council and the Better Bus. Bureau of N.Y. (Oct. 17, 1930) (explaining the Commission’s focus on commercial bribery as an unfair method of competition even before it gained authority under the Robinson-Patman Act); see also Donald S. Clark, Sec’y, Fed. Trade Comm’n, Remarks Regarding The Robinson-Patman Act: Annual Update, Before the Robinson Patman Act Comm., Section of Antitrust Law, 46th Annual Spring Meeting (Apr. 2, 1998), See e.g., In re Lockheed Corp., 92 F.T.C. 968 (1978) (commercial bribery). 88 In re Coleco Industries, 111 F.T.C. 651 (1989) (consent decree barring claims of product availability unless actually available or company has reasonable basis for such claim); In re Xerox Corp., 86 F.T.C. 364 (1975) (repeated publicizing release date of new products with knowledge that products would not be available by that date); Analysis of Proposed Consent Order to Aid Public Comment: In the Matter of Intel Corp., Dkt No. 9341 at 5- 6 (describing acts of deception in Commission complaint). Cf, Microsoft, 253 F.3d at 76-77 (acts of deception relating to compatibility of Microsoft version of Java with competing software applications as unlawful monopoly maintenance under the Sherman Act). See generally Maurice E. Stucke, When a Monopolist Deceives, 76 ANTITRUST L.J. 823 (2010). See also DANIEL A. CRANE, THE INSTITUTIONAL STRUCTURE OF ANTITRUST ENFORCEMENT 138 (2011) (The Commission is on strongest ground when challenging market power created by fraud or deception).
discriminatory refusals to deal which tend to create or maintain market power.89 o VI. The Path Forward The FTC is committed to faithfully discharging its statutory obligations, including through enforcing and administering the prohibition against “unfair methods of competition” on a standalone basis, as laid out in Section 5 of the FTC Act, or in conjunction with its other statutory authorities.
89 Aspen, 472 U.S. at 610-11 (affirming antitrust liability for termination of joint venture where no legitimate business justification present for such conduct); Eastman Kodak, 504 U.S. at 483-85 (denying summary judgment where defendant manufacturer of copiers refused to deal with third party service providers); In re Grand Caillou Packing Co., 65 F.T.C. 799 (1964), aff’d in part and rev’d in part sub nom., LaPeyre v. Fed. Trade Comm’n, 366 F.2d 117 (5th Cir. 1966) (violation of Section 5 for monopoly manufacturer of shrimp peeling machines to lease machines at substantially different rates in different regions of the US); Analysis of Proposed Consent Order to Aid Public Comment: In the Matter of Intel Corp., Dkt No. 9341 at 4 (describing alleged threatens of refusal to deal with customers who purchased non-Intel CPUs). See generally Brett Frischmann & Spencer Weber Waller, Revitalizing Essential Facilities, 75 ANTITRUST L.J. 1 (2008).
Policy Statement of the Federal Trade Commission on Biometric Information and Section 5 of the Federal Trade Commission Act1 The increasing use of consumers’ biometric information and related marketing of technologies that use or purport to use biometric information (“biometric information technologies”)2 raise significant concerns with respect to consumer privacy, data security, and the potential for bias and discrimination. The Federal Trade Commission is committed to combatting unfair or deceptive acts related to the collection and use of consumers’ biometric information and the marketing and use of biometric information technologies. As used in this document, the term “biometric information” refers to data that depict or describe physical, biological, or behavioral traits, characteristics, or measurements of or relating to an identified or identifiable person’s body. Biometric information includes, but is not limited to, depictions, images, descriptions, or recordings of an individual’s facial features, iris or retina, finger or handprints, voice, genetics, or characteristic movements or gestures (e.g., gait or typing pattern). Biometric information also includes data derived from such depictions, images, descriptions, or recordings, to the extent that it would be reasonably possible to identify the person from whose information the data had been derived. By way of example, both a photograph of a person’s face and a facial recognition template, embedding, faceprint, or other data that encode measurements or characteristics of the face depicted in the photograph constitute biometric information.
Recent years have seen a proliferation of biometric information technologies. For instance, facial, iris, or fingerprint recognition technologies collect and process biometric information to identify individuals. Other biometric information technologies use or purport to use biometric information in order to determine characteristics of individuals, ranging from the individuals’ age, gender, or race to the individuals’ personality traits, aptitudes, or demeanor. Many biometric information technologies are developed using machine learning or similar data- driven processes that require large quantities of biometric information for “training” or testing purposes.
The Commission has been analyzing consumer protection issues related to biometric information for over a decade. Among other examples,3 in 2011, as the commercial use of facial 1 This Policy Statement does not confer any rights on any person and does not operate to bind the FTC or the public. In any enforcement action, the Commission must prove the challenged act or practice violates one or more existing statutory or regulatory requirements. In addition, this Policy Statement does not preempt federal, state, or local laws. Compliance with those laws, however, will not necessarily preclude Commission law enforcement action under the FTC Act or other statutes. Pursuant to the Congressional Review Act (5 U.S.C. § 801 et seq.), the Office of Information and Regulatory Affairs designated this Policy Statement as not a “major rule,” as defined by 5 U.S.C. § 804(2).
2 In some contexts, the terms “biometrics” or “biometric technologies” have been used to refer specifically to technologies that are used to identify individuals. We use the term “biometric information technologies” to refer to the broader category of all technologies that use or purport to use biometric information for any purpose. 3 See, e.g., Press Release, FTC, FTC to Host Identity Authentication Workshop (Feb. 21, 2007) https://www.ftc.gov/news-events/news/press-releases/2007/02/ftc-host-identity-authentication-w (announcing a public workshop on topics including biometrics and other emerging authentication technologies); You Don’t Say: An FTC Workshop on Voice Cloning Technologies, FTC (Jan. 28, 2020), https://www.ftc.gov/news- events/events/2020/01/you-dont-say-ftc-workshop-voice-cloning-technologies. recognition technology began to take off, the FTC hosted a public workshop, “Face Facts: A Forum on Facial Recognition Technology.”4 The workshop brought together stakeholders from government, academia, and industry to discuss the then-current capabilities and commercial uses of facial recognition technology, as well as potential consumer benefits of and privacy and security concerns about such technology. Following the workshop, in 2012, the FTC published a report entitled “Facing Facts: Best Practices For Common Uses of Facial Recognition Technologies.”5 Since 2012, some biometric information technologies, such as facial recognition technology, have made significant advances. For example, NIST found that between 2014 and 2018, facial recognition became 20 times better at finding a matching photograph from a database.6 Such improvements are due in significant part to advancements in machine learning,7 along with data collection, storage, and processing capabilities sufficient to support the use of these technologies.8 Simultaneously, many biometric information technologies have become less expensive to deploy.9 Owing in part to these developments, the use of biometric information technologies is increasingly pervasive. For example, the use of facial recognition and other biometric information technologies in physical locations – such as retail stores, arenas, airports, and other venues – is reportedly growing.10 4 FTC, FACE FACTS: A FORUM ON FACIAL RECOGNITION TECHNOLOGY (Dec. 8, 2011), https://www.ftc.gov/news- events/events/2011/12/face-facts-forum-facial-recognition-technology. 5 FTC, FACING FACTS: BEST PRACTICES FOR COMMON USES OF FACIAL RECOGNITION TECHNOLOGIES (Oct. 2012), https://www.ftc.gov/reports/facing-facts-best-practices-common-uses-facial-recognition-technologies. Recommendations in this report remain relevant, such as reasonable data security protections for biometric information and appropriate data retention and disposal policies and procedures. 6 NAT’L INSTITUTE FOR STANDARDS AND TECH., FACE RECOGNITION VENDOR TEST (FRVT) PART 2: IDENTIFICATION 6 (2018), https://nvlpubs.nist.gov/nistpubs/ir/2018/NIST.IR.8238.pdf; See also NIST, Press Release, NIST Evaluation Shows Advance in Face Recognition Software’s Capabilities (Nov. 30, 2018) https://www.nist.gov/news-events/news/2018/11/nist-evaluation-shows-advance-face-recognition-softwares- capabilities.
7 See id.
8 See A.K. Jain et al., 50 years of biometric research: Accomplishments, challenges, and opportunities, Pattern Recognition Letters 79 (2016) 100 (stating that “exponential improvements in computing and storage have enabled the deployment of more powerful algorithms to process the captured biometric data” and discussing how, “cloud- based biometrics can facilitate rapid analytics (e.g., recognizing a face using a smartphone camera, where the phone accesses the cloud).”)
9 See id. (“[E]xponential improvements in the performance and cost of processors and memory have already played a dominant role in the development of better biometric sensors. . . . In the case of biometric recognition, the direct impact of the rapid improvements in [integrated circuits] is the development of smaller, cheaper, and higher quality biometric sensors.”).
10 See, e.g., National Retail Federation and Loss Prevention Research Council, 2022 Retail Security Survey: The State of National Retail Security and Organized Retail Crime, 17, https://nrf.com/research/national-retail-security- survey-2022 (stating that 12.3% of respondents were implementing or planning to implement facial recognition for loss prevention); Fast, Frictionless Biometric Payments Gaining Ground in Grocery Stores, PYMNTS (May 24, 2022) https://www.pymnts.com/news/retail/2022/grocery-stores-will-be-big-winners-this-holiday-season/; Aaron Mok, These 16 US airports are reportedly testing facial recognition technology on passengers that could roll out nationwide next year, BUSINESS INSIDER (Dec. 6, 2022) https://www.businessinsider.com/these-16-us-airports-are- reportedly-testing-facial-recognition-tech-2022-12; Kashmir Hill and Corey Kilgannon, Madison Square Garden Uses Facial Recognition to Ban Its Owner’s Enemies, NYTIMES (Dec. 22, 2022) https://www.nytimes.com/2022/12/22/nyregion/madison-square-garden-facial-recognition.html; Randy Wimbley and David Komer, Black teen kicked out of skating rink after facial recognition camera misidentified her, During this same time period, the use of facial recognition and other biometric information technologies and the risks they pose have been the focus of significant public scrutiny and concern both in the U.S.11 and abroad.12 U.S. states and localities have passed laws specifically focused on regulating the commercial use of facial recognition and other biometric information technologies.13 The requirements in these laws vary – for example, banning the use of facial recognition in certain locations,14 requiring signs at the entrances of commercial establishments that collect biometric identifiers,15 or requiring consent to collect biometric information.16 In 2019 and 2021, the Commission also brought enforcement actions against companies that allegedly misrepresented their use of facial recognition technology.17 Consumers, businesses, and society now face new and increasing risks associated with the collection and use of biometric information. For example, biometric information can be used for the production of counterfeit videos or voice recordings (so-called “deepfakes”) that would allow bad actors to convincingly impersonate individuals in order to commit fraud or to defame or harass the individuals depicted.18 Large databases of biometric information may also be attractive targets for malicious actors because of the information’s potential to be used for other FOX2DETROIT (July 14, 2021) https://www.fox2detroit.com/news/teen-kicked-out-of-skating-rink-after-facial- recognition-camera-misidentified-her.
11 See, e.g., Privacy in the Age of Biometrics: Hearing Before the Subcomm. On Investigations and Oversight of the H. Comm. On Science, Space, and Technology (2022), https://www.congress.gov/event/117th-congress/house- event/114964?s=1&r=8; Facial Recognition Technology (Part III): Ensuring Commercial Transparency & Accuracy: Hearing Before the House Committee on Oversight and Government Reform (2020), https://docs.house.gov/Committee/Calendar/ByEvent.aspx?EventID=110380; Rebecca Koenig, New Advocacy Campaign Calls for Banning Facial Recognition on College Campuses, EDSURGE (Jan. 22, 2020), https://www.edsurge.com/news/2020-01-22-new-advocacy-campaign-calls-for-banning-facial-recognition-on- college-campuses.
12 See, e.g., Proposal for a Regulation Laying Down Harmonized Rule on Artificial Intelligence, European Commission, 2021 O.J. (C 206), https://digital-strategy.ec.europa.eu/en/library/proposal-regulation-laying-down- harmonised-rules-artificial-intelligence; Global Privacy Assembly, Adopted Resolution on Facial Recognition Technology, (2020), https://edps.europa.eu/sites/default/files/publication/final_gpa_resolution_on_facial_recognition_technology_en.pdf 13 See, e.g., Washington Biometric Privacy Protection Act, Wash. Rev. Code § 19.375 (2022) (effective July 23, 2017); Prohibit the Use of Face Recognition Technologies by Private Entities in Places of Public Accommodation in the City of Portland, PORTLAND, OR., CITY CODE Chapter 34.10 (2022) (effective Jan. 1, 2021); Biometric Identifier Information, NEW YORK, N.Y., ADMIN. CODE §§ 22-1201 – 1205 (2023) (effective July 9, 2021). Even prior to 2012, two states, Illinois and Texas, had enacted biometric privacy laws. See Illinois Biometric Information Privacy Act, 740 Ill. Comp. Stat. 14 (effective Oct. 3, 2008); Texas Capture or Use of Biometric Identifier, Tex. Bus. & Com. Code § 503.001 (effective Apr. 1, 2009). Additionally, states’ comprehensive privacy laws address biometric information. See, e.g., Colorado Privacy Act, 2021 Colo. Legis. Serv. Ch. 483 (S.B. 21-190) (West) (effective July 1, 2023).
14 PORTLAND, OR., CITY CODE Chapter 34.10 (prohibiting use of face recognition technologies by private entities in places of public accommodation).
15 NEW YORK, N.Y., ADMIN. CODE § 22-1202(a).
16 740 Ill. Comp. Stat. 14/15(b).
17 Complaint, In re Everalbum, FTC File No. 1923172 (May 6, 2021); Complaint, United States v. Facebook, No. 19-cv-2184 (D.D.C. July 24, 2019).
18 For example, in 2020, the Commission hosted a workshop to address the potential benefits and risks to consumers of technology that allows researchers to create a near-perfect voice clone with less than a five second recording of a person’s voice. FTC, You Don’t Say: An FTC Workshop on Voice Cloning Technologies (Jan. 28, 2020), https://www.ftc.gov/news-events/events/2020/01/you-dont-say-ftc-workshop-voice-cloning-technologies. illicit purposes, including to achieve further unauthorized access to devices, facilities or data.19 These issues pose risks not only to individual consumers, but also to businesses and society.20 Even outside of fraud, uses of biometric information or biometric information technology can pose significant risks to consumers. For instance, using biometric information technologies to identify consumers in certain locations could reveal sensitive personal information about them—for example, that they have accessed particular types of healthcare, attended religious services, or attended political or union meetings.21 Moreover, without clear disclosures and meaningful choices for consumers about the use of biometric information technologies, consumers may have little way to avoid these risks or unintended consequences of these technologies.22 Some technologies using biometric information, such as facial recognition technology, may perform differently across different demographic groups in ways that facilitate or produce discriminatory outcomes. For example, research published by the National Institute of Standards and Technology (NIST) found that many facial recognition algorithms produce significantly more false positive “matches” for images of West and East African and East Asian faces than for images of Eastern European faces.23 The research also found rates of false positives to be higher 19 See, e.g., Joseph Cox, How I Broke Into a Bank Account With an AI-Generated Voice, Motherboard, VICE (Feb. 23, 2023), https://www.vice.com/en/article/dy7axa/how-i-broke-into-a-bank-account-with-an-ai-generated-voice; Parmy Olson, Faces Are the Next Target for Fraudsters, WALL STREET JOURNAL (July 7, 2021), https://www.wsj.com/articles/faces-are-the-next-target-for-fraudsters-11625662828 (reporting, among other things, the successful hack of a Chinese facial recognition system by fraudsters who uploaded videos they had created from high-definition photographs purchased on the black market). Researchers have reportedly demonstrated techniques for replicating and using non-face biometric identifiers such as fingerprints to circumvent access controls. See, e.g., Alex Hern, Hacker fakes German minister's fingerprints using photos of her hands, THE GUARDIAN (Dec. 30, 2014), https://www.theguardian.com/technology/2014/dec/30/hacker-fakes-german-ministers-fingerprints-using-photos-of- her-hands. Unauthorized access could also be achieved using synthetic identifiers created by combining biometric information about a large number of individuals. See Philip Bontrager et al., DeepMasterPrint: Generating Fingerprints for Presentation Attacks (2017), https://www.researchgate.net/publication/317061803_DeepMasterPrint_Generating_Fingerprints_for_Presentation_ Attacks.
20 See, e.g., 50 years of biometric research: Accomplishments, challenges, and opportunities, Pattern Recognition Letters 79 (2016) 80–105 (discussing that “biometric system[s] may be vulnerable to a number of security threats . . . which may eventually affect the security of the end application.”); Bobby Chesney and Danielle Citron, Deep Fakes: A Looming Challenge for Privacy, Democracy, and National Security, 107 California Law Review 1753, 1758 (2018) (discussing that some harms of deepfakes may be “distortion of policy debates, manipulation of elections, erosion of trust in institutions, exacerbation of social divisions, damage to national security, and disruption of international relations.”).
21 See FTC, FACING FACTS: BEST PRACTICES FOR COMMON USES OF FACIAL RECOGNITION TECHNOLOGIES, supra n.4, at ii (recommending that businesses consider the sensitivity of information that may be collected by facial recognition systems in light of the locations in which the systems operate). 22 See generally FTC, FACING FACTS: BEST PRACTICES FOR COMMON USES OF FACIAL RECOGNITION TECHNOLOGIES, supra n.4, at iii (summarizing recommendations about providing clear notice and choices to consumers about the use of facial recognition technology). 23 See FRVT Demographic Effects in Face Recognition, NAT’L INSTITUTE FOR STANDARDS AND TECH., https://pages.nist.gov/frvt/html/frvt_demographics.html (last accessed Aug. 31, 2022); NAT’L INSTITUTE FOR STANDARDS AND TECH., FACE RECOGNITION VENDOR TEST (FRVT) PART 8: SUMMARIZING DEMOGRAPHIC DIFFERENTIALS (2022), https://pages.nist.gov/frvt/reports/demographics/nistir_8429.pdf; NAT’L INSTITUTE FOR STANDARDS AND TECH., FACE RECOGNITION VENDOR TEST (FRVT) PART 3: DEMOGRAPHIC EFFECTS 2 (2019), https://nvlpubs.nist.gov/nistpubs/ir/2019/nist.ir.8280.pdf. in women than men, and in the elderly and children compared to middle-aged adults.24 Demographic differentials may be even more pronounced when analyzed intersectionally (e.g., when comparing light-skinned males to dark-skinned females, rather than simply males to females and light-skinned subjects to dark-skinned subjects).25 Similarly, some biometric information technologies, such as those that process facial images or voice recordings, may be particularly prone to error when the subject of the analysis is a person with a disability.26 In light of this potential for bias, such technologies can lead or contribute to harmful or unlawful discrimination. This is particularly concerning when such technologies are used to determine whether consumers can receive important benefits and opportunities or are subject to penalties or less desirable outcomes. For example, if biometric information technologies are used to provide access to financial accounts, a false negative may result in the consumer being denied access to their own account, whereas a false positive may result in an identity thief gaining access to the account.27 If biometric information technologies are used for security surveillance, false positives may result in individuals being falsely accused of crimes, subjected to searches or questioning, or denied access to physical premises.
In light of the evolving technologies28 and risks to consumers, the Commission sets out below a non-exhaustive list of examples of practices it will scrutinize in determining whether companies collecting and using biometric information or marketing or using biometric information technologies are complying with Section 5 of the FTC Act.29 24 Id.
25 See, e.g., Joy Buolamwini and Timnit Gebru, Gender Shades: Intersectional Accuracy Disparities in Commercial Gender Classification, 81 Proceedings of Machine Learning Research 1, 11 (2018) (assessing commercial gender classification systems and finding that all three performed worst for females with darker skin tones). 26 See, e.g., U.S. EQUAL EMP. OPPORTUNITY COMM’N, EEOC-NVTA-2022-2, THE AMERICANS WITH DISABILITIES ACT AND THE USE OF SOFTWARE, ALGORITHMS, AND ARTIFICIAL INTELLIGENCE TO ASSESS JOB APPLICANTS AND EMPLOYEES (2022), https://www.eeoc.gov/laws/guidance/americans-disabilities-act-and-use-software-algorithms- and-artificial-intelligence (noting the potential that technologies analyzing the voice will be less accurate for individuals with speech impediments); SELIN E. NUGENT ET AL., INST. FOR ETHICAL A.I., RECRUITMENT AI HAS A DISABILITY PROBLEM: QUESTIONS EMPLOYERS SHOULD BE ASKING TO ENSURE FAIRNESS IN RECRUITMENT 12 (2020) (noting practical considerations that may affect the accuracy of facial analysis technology for individuals with certain disabilities).
27 See generally, Joseph Cox, How I Broke Into a Bank Account With an AI-Generated Voice, Motherboard, VICE (Feb. 23, 2023), https://www.vice.com/en/article/dy7axa/how-i-broke-into-a-bank-account-with-an-ai-generated- voice.
28 In some instances, biometric information technologies may utilize algorithms and/or artificial intelligence. The guidance below is consistent with and builds on previous publications by the Commission and Commission staff on those topics. See, e.g., FTC, COMBATTING ONLINE HARMS THROUGH INNOVATION (June 2022); FTC, BIG DATA A TOOL FOR INCLUSION OR EXCLUSION? UNDERSTANDING THE ISSUES (Jan. 2016); Elisa Jillson, Aiming for truth, fairness, and equity in your company’s use of AI, FTC: BUS. BLOG (Apr. 19, 2021) https://www.ftc.gov/business- guidance/blog/2021/04/aiming-truth-fairness-equity-your-companys-use-ai; Andrew Smith, Using Artificial Intelligence and Algorithms, FTC: BUS. BLOG (Apr. 8, 2020), https://www.ftc.gov/business- guidance/blog/2020/04/using-artificial-intelligence-algorithms. 29 Other laws and regulations enforced by the Commission, including but not limited to the Children’s Online Privacy Protection Act (15 U.S.C. §§ 6501–6506) and its implementing Rule (16 C.F.R. Part 312), the Health Breach Notification Rule (16 C.F.R. Part 318), and the Gramm-Leach-Bliley Act’s Safeguards Rule (16 C.F.R. Part 314) and Regulation P (12 C.F.R. Part 1016), may also govern the collection, use, or storage of biometric information.
Deception False or unsubstantiated marketing claims relating to the validity, reliability, accuracy, performance, fairness, or efficacy of technologies using biometric information As with other types of technologies, false or unsubstantiated marketing claims relating to the validity, reliability, accuracy, performance, fairness, or efficacy of technologies using biometric information constitute deceptive practices in violation of Section 5 of the FTC Act.30 These claims can mislead both individual consumers and businesses that use these technologies. If prospective users rely on false or unsubstantiated claims in choosing one product over another, honest technology vendors who do not oversell their product’s capabilities may be placed at a competitive disadvantage. Moreover, if business customers rely on these claims to use technologies that don’t work as promised, they may ultimately harm consumers by, for instance, wrongly denying them benefits and opportunities. Thus, the Commission intends to carefully scrutinize claims about these technologies.
As with all marketing claims, the law requires that representations about biometric information technologies be substantiated when made—that is, persons or individuals making such claims must have a reasonable basis for their claims.31 For example, businesses should be careful not to make false or unsubstantiated claims that technologies are unbiased. Claims of validity or accuracy are deceptive if they are true only for certain populations and if such limitations are not clearly stated.32 Further, businesses must not make false or unsubstantiated claims about real-world validity, accuracy, or performance of biometric information technologies when the claims are based on tests or audits that do not replicate real-world conditions or how the technology will be operationalized by its intended users.33 Businesses also should not make false or unsubstantiated claims that the technologies will deliver particular results or outcomes, such as reductions in rates of theft, violent incidents, fraud, or the elimination of bias in hiring.34 30 See Complaint, FTC v. Aura Labs, Inc., No. 8:16-cv-2147 (C.D. Cal. Dec. 2, 2016) (alleging company’s representations that mobile application measured blood pressure with accuracy comparable to a traditional blood pressure cuff were false, misleading, or unsubstantiated); Complaint, FTC v. New Consumer Solutions, LLC, No. 1:15-cv-01614 (N.D. Il. Feb. 23, 2015) (alleging company’s representations that a mobile application could detect melanoma by analyzing pictures of consumers’ skin were false or unsubstantiated). 31 See, e.g., FTC Policy Statement Regarding Advertising Substantiation, appended to In re Thompson Med. Co., Inc., 104 F.T.C. 648, 839 (1984), aff’d, 791 F.2d 189 (D.C. Cir. 1986). Where a company’s claims of accuracy, efficacy, or lack of bias refer to specific facts or figures, they must generally be supported by a high level of substantiation, such as scientific or engineering tests. See also Thompson Med., 104 F.T.C. at 822. 32 See, e.g., Complaint, In re Everalbum, FTC File No. 1923172 (May 6, 2021) (alleging company’s representations that it was not using facial recognition unless user enabled it were deceptive, where the representations were true only for users in Texas, Illinois, Washington, and the European Union, and users outside of those locations were not provided a setting to turn off facial recognition); In re J.B. Williams Co., Inc., 68 F.T.C. 481, 1965 WL 92965, *5 (1965), aff’d, 381 F.2d 884 (6th Cir. 1967) (claims that product could reduce fatigue were deceptive, where product was efficacious only in a small minority of cases where tiredness symptoms were due to an iron deficiency, and was of no benefit in all other cases).
33 See Opinion of the Commission at 43-46, In re ECM Biofilms, Inc., FTC File No. 1223118 (Oct. 19, 2015) (laboratory tests performed under aerobic conditions were not competent and reliable evidence of biodegradation in landfills, which are anaerobic environments), aff’d, 851 F.3d 599 (6th Cir. 2017). 34 Claims that “significantly involve. . . safety,” as well as claims relating to the performance or other central characteristics of a product or service, are generally material. FTC Policy Statement on Deception (Oct. 14, 1983), appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984). See also Complaint, In re Tapplock, FTC File Deceptive statements about the collection and use of biometric information False or misleading statements about the collection and use of biometric information constitute deceptive acts in violation of Section 5 of the FTC Act, as does failing to disclose any material information needed to make a representation non-misleading. In recent years, the Commission has taken action against businesses that it charged with engaging in deceptive practices related to the collection and use of biometric information.35 The Commission will continue to carefully scrutinize businesses’ conduct in this area to ensure they are not misleading consumers. Businesses should not make false statements about the extent to which they collect or use biometric information or whether or how they implement technologies using biometric information.36 Businesses also must ensure that they are not telling half-truths—for example, a business should not make an affirmative statement about some purposes for which it will use biometric information but fail to disclose other material uses of the information.37 Unfairness The use of biometric information or biometric information technology may be an unfair practice within the meaning of the FTC Act. Under Section 5, a practice is unfair if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or competition.38 As discussed above, the collection and use of biometric information can create a serious risk of harm to consumers. Such harms are not reasonably avoidable by consumers if the collection and use of such information is not clearly and conspicuously disclosed or if access to essential goods and services is conditioned on providing the information. For instance, if businesses automatically and surreptitiously collect consumers’ biometric information as they enter or move through a store, the consumers have no ability to avoid the collection or use of that information. Our past cases illustrate that collecting, retaining, or using consumers’ personal information in ways that cause or are likely to cause substantial injury, or disseminating No. 1923011 (May 18, 2020) (alleging that representations that smart padlock was secure were deceptive, where padlock had foreseeable information security vulnerabilities and could be quickly unlocked by unscrewing the back panel); Complaint, FTC v. Lifelock, Inc., No. 2:10-cv-00530-MHM (D. Az. Mar. 8, 2010) (alleging that representations that service provided complete protection against all forms of identity theft were deceptive). 35 See Complaint, In re Everalbum, FTC File No. 1923172 (May 6, 2021) (alleging that the company misrepresented that it was not using face recognition unless the user enabled it or turned it on); See also Complaint, United States v. Facebook, No. 19-cv-2184 (D.D.C. July 24, 2019) (alleging that the company misrepresented that users would have to “turn[ ] on” facial-recognition technology, violating a provision of a prior Commission order that prohibited misrepresenting the extent to which users could control the privacy of their data). 36 Id.
37 See Complaint, United States v. Twitter, No. 3:22-cv-03070 (N.D. Cal. May 25, 2022) (alleging that statements that users’ telephone numbers provided for two-factor authentication would be used for security purposes were deceptive when the company failed to adequately disclose that such numbers would also be used for targeted advertising); Complaint, In re Sears Holdings Mgmt. Corp., FTC File No. 082 3099 (Aug. 31, 2009) (alleging that respondents’ statement that they would track consumers’ “online browsing” was deceptive in light of failure to adequately disclose tracking of nearly all of the Internet behavior occurring on consumers’ computers as well as certain non-Internet related activities taking place on those computers). 38 15 U.S.C. § 45(n); see also Letter from the FTC to Hon. Wendell Ford & Hon. John Danforth, Ranking Minority Member, S. Comm. on Com., Sci. & Transp., Consumer Subcomm., Comm’n Statement of Pol’y on the Scope of Consumer Unfairness Jurisdiction (Dec. 17, 1980), reprinted in In re Int’l Harvester Co., 104 F.T.C. 949, 1070, 1073 (1984) (the “Unfairness Policy Statement”).
technology that enables others to do so without taking reasonable measures to prevent harm to consumers can be an unfair practice in violation of Section 5 of the FTC Act.39 For example, the FTC has previously charged that businesses have engaged in unfair practices by failing to protect consumers’ personal information using reasonable data security practices; by engaging in invasive surveillance, tracking, or collection of sensitive personal information that was concealed from consumers or contrary to their expectations;40 by, in certain circumstances, implementing privacy-invasive default settings;41 by disseminating an inaccurate technology that, if relied on by consumers, could endanger them or others;42 and by offering for sale technologies with the potential to cause or facilitate harmful and illegal conduct like covert tracking, and failing to take reasonable measures to prevent such conduct.43 Additionally, the FTC has charged that certain discriminatory practices can be unfair.44 Though many biometric information technologies are new, businesses must continue to abide by longstanding legal requirements and obligations. In order to avoid liability under the FTC Act, businesses should implement reasonable privacy and data security measures to ensure that any biometric information that they collect or maintain is protected from unauthorized access—whether that access stems from an external 39 See generally, Privacy and Security, FTC (last visited Mar. 29, 2023 11:28 AM), https://www.ftc.gov/business- guidance/privacy-security (collecting the FTC’s published business guidance related to data privacy and security). 40 See, e.g., Complaint, In re Lenovo, Inc., FTC File No. 1523134 3134 (Dec. 20, 2017) (alleging that preinstallation of ad-injecting software that, without adequate notice or informed consent, acted as a man-in-the-middle between consumers and all websites with which they communicated was unfair; and that failure to take reasonable measures to assess and address security risks created by the preinstalled software was unfair); Complaint, FTC v. Vizio, Inc. Case No. 2:17-cv-00758 (D.N.J. Feb. 6, 2017) (alleging that collection of sensitive television viewing activity without consent and contrary to consumer expectations, and sharing of such information with third parties, was an unfair practice); Complaint, In re Showplace, Inc., FTC File No. 1123151, (Apr. 11, 2013) (alleging that rent-to-own store’s use of monitoring and tracking software installed on rented computers was an unfair practice). 41 See Complaint, United States v. Epic Games, Inc., Case No. 5:22-CV-00518 (E.D.N.C. Dec. 19, 2022) (alleging that developing and operating a ubiquitous, freely-available, and internet-enabled video game directed at children and teens that publicly broadcasted players’ display names while putting children and teens in direct, real-time contact with others through on-by-default lines of voice and text communication (even after instituting an age gate on the service) was unfair); see also, Complaint, FTC v. Frostwire LLC, Case No. 111-cv-23643 (S.D. Fla. Oct. 11, 2011) (alleging that distributing an application with default settings that caused or were likely to cause consumers to unwittingly publicly share files already present on, or subsequently saved on, the consumers’ mobile devices, including, among others, consumers’ pictures, videos, and documents, was an unfair practice). 42 See Complaint, FTC v. Breathometer, Inc., No. 3:17-cv-314 (N.D. Cal. Jan. 23, 2017) (alleging that failing to notify consumers or take corrective action upon learning that device measuring blood alcohol levels was inaccurate was an unfair practice).
43 See, e.g., Complaint, In re Support King, LLC, FTC File No. 1923003 (Dec. 20, 2021) (alleging that the provider of software called “Spyfone,” which allowed users to surreptitiously monitor and track others’ devices, unfairly failed to take reasonable steps to ensure that the purchasers use the monitoring products and services only for legitimate and lawful purposes); Complaint, In re Retina-X Studios, LLC, FTC File No. 1723118 (Mar. 26, 2020) (alleging a failure to take reasonable steps to ensure that monitoring products and services that required circumventing certain security protections on mobile devices would be used only for legitimate and lawful purposes by the purchaser); Complaint, In re DesignerWare, LLC, FTC File No. 1123151 (Apr. 11, 2013) (alleging that furnishing rent-to-own stores with monitoring and tracking software to be installed on rented computers was an unfair practice).
44 See Complaint, FTC v. Passport Automotive Group, Case. No. 8:22-cv-02670-GLS (D. Md. Oct. 18, 2022) (alleging that imposing higher costs on Black and Latino consumers than on similarly situated non-Latino White consumers was unfair); see also Elisa Jillson, Aiming for truth, fairness, and equity in your company’s use of AI, FTC: BUS. BLOG (Apr. 19, 2021), https://www.ftc.gov/business-guidance/blog/2021/04/aiming-truth-fairness- equity-your-companys-use-ai.
cybersecurity intrusion or an internal incursion by unauthorized employees, contractors, or service providers.45 Businesses must also take care that their own collection and use of biometric information is not likely to cause substantial consumer injury. Determining whether a business’s use of biometric information or biometric information technology violates Section 5 requires a holistic assessment of the business’s relevant practices. In making such assessments, the Commission will draw on applicable lessons that can be derived from its past work—including, but not limited to, in privacy and data security matters. Importantly, in some situations, the adoption of a contemplated practice may be unjustifiable when weighing the potential risks to consumers against the anticipated benefits of the practice. For example, if more accurate, less risky alternatives are available, using a technology that is proven to have high error rates may present unjustifiable risk to consumers, even if the technology is more convenient, more efficient, or more profitable for the business considering implementing the technology. The Commission’s assessment will take into account factors including, but not limited to, the following:
Failing to assess foreseeable harms to consumers before collecting biometric information.46 Prior to collecting consumers’ biometric information, or deploying a biometric information technology, businesses should conduct a holistic assessment of the potential risks to consumers associated with the collection and/or use.47 For example, assessments should take into account the context in which the collection or use will take place and the extent to which the specific biometric information technologies to be used have been tested by the business or a third party.48 The results of testing should be evaluated in light of how well the testing environment mirrors real world implementation and use, including the particular context in which the technology will be deployed. Assessments should also consider the role of human operators. Businesses should not conclude without evidence that the involvement of a human operator is sufficient to mitigate risks to consumers. Businesses should assess whether deploying a biometric information technology system leads to or contributes to outcomes that disproportionately harm particular demographics of consumers. These assessments should take into account 45 Collecting or retaining biometric information without any legitimate business need or keeping that information indefinitely creates an increased risk of harm to consumers. See, e.g., Complaint, In re BJ’s Wholesale Club, Inc., FTC File No. 0423160 (Sept. 20, 2005) (alleging a failure to employ reasonable and appropriate data security measures where, among other things, the company created unnecessary risks to sensitive financial information by storing it for up to 30 days when it no longer had a business need to keep the information); Complaint, In re Residual Pumpkin Entity, LLC, FTC File No. 1923209 (June 23, 2022) (alleging that company created unnecessary risks to personal information by storing it indefinitely on its network without a business need). 46 See, e.g., Complaint, In re EPN, Inc., FTC File No. 1123143 (Oct. 3, 2012) (alleging a failure to assess risks to consumer personal information it collected and stored online.) 47 See, e.g., Complaint, In re Lenovo, Inc., FTC File No. 1523134 (Dec. 20, 2017) (alleging that respondent’s failure to take reasonable measures to assess and address security risks created by third-party software it installed on laptops it offered to consumers was an unfair practice); Complaint, In re SettlementOne Credit Corp., FTC File No. 0823208 (Aug. 17, 2011) (alleging that respondents failed to assess the risks of allowing end users with unverified or inadequate security to access consumer reports through respondents’ portal). 48 See, e.g., Complaint, In re Upromise, Inc., FTC File No. 1023116 (Mar. 27, 2012) (alleging unfair conduct, where defendant allegedly engaged a service provider to develop software that it distributed to consumers but failed, among other things, to assess and address risks posed by the software by testing, post-deployment monitoring, or other means).
whether technical components of the system, such as algorithms, have been specifically tested for differential performance across demographic groups—including intersectionally.
Failing to promptly address known or foreseeable risks,49 including by failing to identify and implement readily available tools for reducing or eliminating risks.50 For instance, if there is evidence that a particular biometric information technology is often prone to certain types of errors or biases, businesses should proactively take appropriate measures to reduce or eliminate the risk that such errors could lead to consumer injury. Steps taken to address risks may include organizational measures, such as policies and procedures to appropriately limit access to biometric information.51 They may also include technical measures. For example, businesses should timely update relevant systems, including both software components like algorithms and hardware components that are used to capture, process, or store biometric information, in order to ensure that the systems operate effectively and do not put consumers at risk.52 Engaging in surreptitious and unexpected collection or use of biometric information. 53 In some situations, such conduct may be unfair in and of itself. For instance, businesses may violate the law if they use or facilitate the use of biometric information or biometric information technology to surreptitiously identify or track a consumer in a manner that exposes the consumer to risks such as stalking, exposure to stigma, reputational harm, or 49 See, e.g., FTC v. Wyndham Worldwide Corp., 10 F.Supp.3d 602, 624-26 (D.N.J. Apr. 7, 2014) (holding that the FTC’s complaint adequately stated a claim for unfair data security practices where it alleged, among other things, defendant permitted its hotels to connect insecure servers to its network, including servers with outdated operating systems that could not receive patches to address known security vulnerabilities), aff’d, 799 F.3d 236 (3d Cir. 2015); Complaint, FTC v. Equifax, Inc., No. 1:19-cv-03297-TWT (N.D. Ga. July 22, 2019) (alleging failure to implement reasonable procedures to detect, respond to, and timely correct critical and other high-risk security vulnerabilities across Defendant’s systems); Complaint, In re Lookout Services, Inc., FTC File No. 1023076 (June 15, 2011) (alleging respondent’s failure to adequately assess or address the vulnerability of its web application to widely- known security flaws).
50 See, e.g., Complaint, In re Residual Pumpkin Entity, LLC, FTC File No. 1923209 (June 23, 2022) (alleging a failure to implement readily available protections against well-known and reasonably foreseeable vulnerabilities); Complaint, In re Compete, Inc., FTC File No. 1023155 (Feb. 20, 2013) (alleging a failure to use readily available, low-cost measures to assess/address the risk that data collection software would collect sensitive consumer information it was not authorized to collect).
51 See, e.g., Complaint, In re Residual Pumpkin Entity, LLC, FTC File No. 1923209 (June 23, 2022) (alleging that Residual Pumpkin failed to establish or enforce rules sufficient to make user credentials hard to guess and failed to implement patch management policies and procedures to ensure the timely remediation of critical security vulnerabilities and use of obsolete versions of database and web server software that no longer received patches); Complaint, FTC v. Equifax, Inc., No. 1:19-cv-03297-TWT (N.D. Ga. July 22, 2019) (alleging failure to implement or enforce reasonable access controls to prevent unauthorized access to sensitive personal information). 52 See, e.g., Complaint, In re Residual Pumpkin Entity, LLC, FTC File No. 1923209 (June 23, 2022) (alleging failure to implement patch management policies and procedures to ensure the timely remediation of critical security vulnerabilities and use of obsolete versions of database and web server software that no longer received patches). 53 See, e.g., Complaint, In re Aaron’s, Inc., FTC File No. 1223264 (Mar. 10, 2014) (alleging that allowing franchisees to install software facilitating surreptitious collection of private information on rented computers was an unfair practice, and noting that consumers were unable to avoid harm because collection was surreptitious). extreme emotional distress.54 Additionally, as discussed above, failing to clearly and conspicuously disclose the collection and use of biometric information makes such collection and use unavoidable by the consumer. Injuries to consumers may also be compounded if there is no mechanism for accepting and addressing consumer complaints and disputes related to businesses’ use of biometric information technologies. Failing to evaluate the practices and capabilities of third parties, including affiliates, vendors, and end users, who will be given access to consumers’ biometric information or will be charged with operating biometric information technologies. Businesses should seek relevant assurances and contractual agreements that require third parties to take appropriate steps to minimize risks to consumers. They should also go beyond contractual measures to oversee third parties and ensure they are meeting those requirements and not putting consumers at risk.55 Such oversight may include organizational and technical measures (including taking steps to ensure access to necessary information) to supervise, monitor or audit the third parties’ compliance with any requirements.
Failing to provide appropriate training for employees and contractors whose job duties involve interacting with biometric information or technologies that use such information.56 54 See, e.g., Complaint, In re Support King, FTC File No. 1923003 (Dec. 20, 2021) (alleging that respondents’ SpyFone monitoring products and services substantially injure device users by enabling purchasers to stalk them surreptitiously); Complaint, In re Retina-X Studios, LLC, FTC File No. 1723118 (Mar. 26, 2020) (similarly alleging respondent’s products and services substantially injure device users by enabling purchasers to surreptitiously stalk them); Complaint, FTC v. EMP Media, Inc., No. 2:18-cv-00035 (D. Nev. Jan. 9, 2018) (alleging that defendants published consumers’ intimate images without consent in a manner enabling the public to identify or contact the individuals depicted, causing a number of harms to consumers including an unwarranted invasion of privacy into consumers’ lives, depression, anxiety, loss of reputation, safety fears, medical and legal costs, and lost time, was unfair)).
55 See, e.g., FTC v. Wyndham Worldwide Corp., 799 F.3d 236, 241 (3d Cir. 2015) (affirming denial of motion to dismiss FTC’s complaint alleging unfair data security practices, which included allegations defendant allowed hotel property management systems to connect to its network without taking appropriate precautions, such as ensuring that the hotels implemented adequate information security policies and procedures); Complaint, In re GeneLink, Inc., FTC File No. 1123095 (May 8, 2014) (alleging that company unfairly failed to employ reasonable and appropriate measures to prevent unauthorized access to consumers’ personal information because, among other things, it failed to provide reasonable oversight of service providers); See, e.g., Complaint, In re Upromise, Inc., FTC File No. 1023116 (Mar. 27, 2012) (alleging failure to take adequate measures to ensure that its service provider employed reasonable and appropriate measures to protect consumer information and to implement the information collection program in a manner consistent with contractual provisions designed to protect consumer information). 56 See, e.g., Complaint, In re SkyMed Int’l , Inc., FTC File No. 1923140 (Jan. 26, 2021) (alleging a failure to provide adequate guidance or training for employees or third-party contractors regarding information security and safeguarding consumers’ personal information); Complaint, In re Zoom Video Communc’ns, Inc., FTC File No. 1923167 (Jan. 19, 2021) (alleging that failure to implement a training program on secure software development principles contributed to unfair conduct).
Failing to conduct ongoing monitoring of technologies that the business develops, offers for sale,57 or uses58 in connection with biometric information to ensure that the technologies are functioning as anticipated, that users of the technology are operating it as intended, and that use of the technology is not likely to harm consumers. The Commission notes that a practice need not be equally likely to harm all consumers in order to be considered unfair. In determining what constitutes reasonable practices to protect consumers from potential harms associated with the use of biometric information, therefore, the Commission will—and businesses should—consider the practices from the perspective of any population of consumers that is particularly at risk of those harms.59 Finally, the Commission wishes to emphasize that—particularly in view of rapid changes in technological capabilities and uses—businesses should continually assess whether their use of biometric information or biometric information technologies causes or is likely to cause consumer injury in a manner that violates Section 5 of the FTC Act. If so, businesses must cease such practices, whether or not the practices are specifically addressed in this statement. 57 See, e.g., Complaint, In re ASUSTeK Computer Inc., FTC File No. 1423156 (July 18, 2016) (alleging a failure to perform vulnerability and penetration testing on software that respondent offered for sale, including for well-known and reasonably foreseeable vulnerabilities that could be exploited to gain unauthorized access to consumers’ sensitive personal information and local networks).
58 See, e.g., Complaint, FTC v. Equifax, Inc., No. 1:19-cv-03297-TWT (N.D. Ga. July 22, 2019) (alleging failure to implement reasonable procedures to detect, respond to, and timely correct critical and other high-risk security vulnerabilities across Defendant’s systems); Complaint, In re SettlementOne Credit Corp., FTC File No. 0823208 (Aug. 19, 2011) (alleging that respondents failed to implement reasonable steps to maintain an effective system of monitoring access to consumer reports by end users).
59 See, e.g., Unfairness Policy Statement, supra n. 36, at 1074 (“[S]ome may exercise undue influence over highly susceptible classes of purchasers, as by promoting fraudulent ‘cures’ to seriously ill cancer patients.”); Complaint, In re Philip Morris, Inc., 82 F.T.C. 16 (1973) (alleging respondent engaged in an “unfair and deceptive act and practice” by distributing free-sample razor blades in home-delivered newspapers, which posed a particular hazard to young children).
Merger Guidelines U.S. Department of Justice and the Federal Trade Commission Issued: December 18, 2023 1. Overview These Merger Guidelines identify the procedures and enforcement practices the Department of Justice and the Federal Trade Commission (the “Agencies”) most often use to investigate whether mergers violate the antitrust laws. The Agencies enforce the federal antitrust laws, specifically Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2; Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45; and Sections 3, 7, and 8 of the Clayton Act,1 15 U.S.C. §§ 14, 18, 19.2 Congress has charged the Agencies with administering these statutes as part of a national policy to promote open and fair competition, including by preventing mergers and acquisitions that would violate these laws. “Federal antitrust law is a central safeguard for the Nation’s free market structures” that ensures “the preservation of economic freedom and our free-enterprise system.”3 It rests on the premise that “[t]he unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.”4 Section 7 of the Clayton Act (“Section 7”) prohibits mergers and acquisitions where “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”Competition is a process of rivalry that incentivizes businesses to offer lower prices, improve wages and working conditions, enhance quality and resiliency, innovate, and expand choice, among many other benefits. Mergers that substantially lessen competition or tend to create a monopoly increase, extend, or entrench market power and deprive the public of these benefits. Mergers can lessen competition when they diminish competitive constraints, reduce the number or attractiveness of alternatives available to trading partners, or reduce the intensity with which market participants compete. Section 7 was designed to arrest anticompetitive tendencies in their incipiency.5 The Clayton Act therefore requires the Agencies to assess whether mergers present risk to competition. The Supreme Court has explained that “Section 7 itself creates a relatively expansive definition of antitrust liability: To show that a merger is unlawful, a plaintiff need only prove that its effect ‘may be substantially to lessen competition’” or to tend to create a monopoly.6 Accordingly, the Agencies do not attempt to 1 As amended under the Celler-Kefauver Antimerger Act of 1950, Pub. L. No. 81-899, 64 Stat. 1125 (1950), and the Hart- Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a. 2 Although these Guidelines focus primarily on Section 7 of the Clayton Act, the Agencies consider whether any of these statutes may be violated by a merger. The various provisions of the Sherman, Clayton, and FTC Acts each have separate standards, and one may be violated when the others are not. 3 North Carolina State Bd. of Dental Examiners v. FTC, 574 U.S. 494, 502 (2015). 4 NCAA v. Board of Regents, 468 U.S. 85, 104 n.27 (1984) (quoting Northern Pac. R. Co. v. United States, 356 U.S. 1, 4-5 (1958)); see also NCAA v. Alston, 141 S. Ct. 2141, 2147 (2021) (quoting Board of Regents, 468 U.S. at 104 n.27). 5 See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 318 nn.32-33 (1962); see also United States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019) (Section 7 “halt[s] incipient monopolies and trade restraints outside the scope of the Sherman Act.” (quoting Brown Shoe, 370 U.S. at 318 n.32)); Saint Alphonsus Medical Center-Nampa v. St. Luke’s, 778 F.3d 775, 783 (9th Cir. 2015) (Section 7 “intended to arrest anticompetitive tendencies in their incipiency.” (quoting Brown Shoe, 370 U.S. at 322)); Polypore Intern., Inc. v. FTC, 686 F.3d 1208, 1213-14 (11th Cir. 2012) (same). Some other aspects of Brown Shoe have been subsequently revisited.
6 California v. Am. Stores Co., 495 U.S. 271, 284 (1990) (quoting 15 U.S.C. § 18 with emphasis) (citing Brown Shoe, 370 U.S. at 323).
predict the future or calculate precise effects of a merger with certainty. Rather, the Agencies examine the totality of the evidence available to assess the risk the merger presents. Competition presents itself in myriad ways. To assess the risk of harm to competition in a dynamic and complex economy, the Agencies begin the analysis of a proposed merger by asking: how do firms in this industry compete, and does the merger threaten to substantially lessen competition or to tend to create a monopoly? The Merger Guidelines set forth several different analytical frameworks (referred to herein as “Guidelines”) to assist the Agencies in assessing whether a merger presents sufficient risk to warrant an enforcement action. These frameworks account for industry-specific market realities and use a variety of indicators and tools, ranging from market structure to direct evidence of the effect on competition, to examine whether the proposed merger may harm competition. How to Use These Guidelines: When companies propose a merger that raises concerns under one or more Guidelines, the Agencies closely examine the evidence to determine if the facts are sufficient to infer that the effect of the merger may be to substantially lessen competition or to tend to create a monopoly (sometimes referred to as a “prima facie case”).7 Section 2 describes how the Agencies apply these Guidelines. Specifically, Guidelines 1-6 describe distinct frameworks the Agencies use to identify that a merger raises prima facie concerns, and Guidelines 7-11 explain how to apply those frameworks in several specific settings. In all of these situations, the Agencies will also examine relevant evidence to determine if it disproves or rebuts the prima facie case and shows that the merger does not in fact threaten to substantially lessen competition or tend to create a monopoly. Section 3 identifies rebuttal evidence that the Agencies consider, and that merging parties can present, to rebut an inference of potential harm under these frameworks.8 Section 4 sets forth a non-exhaustive discussion of analytical, economic, and evidentiary tools the Agencies use to evaluate facts, understand the risk of harm to competition, and define relevant markets. These Guidelines are not mutually exclusive, as a single transaction can have multiple effects or raise concerns in multiple ways. To promote efficient review, for any given transaction the Agencies may limit their analysis to any one Guideline or subset of Guidelines that most readily demonstrates the risks to competition from the transaction.
Guideline 1: Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market. Market concentration is often a useful indicator of a merger’s likely effects on competition. The Agencies therefore presume, unless sufficiently disproved or rebutted, that a merger between competitors that significantly increases concentration and creates or further consolidates a highly concentrated market may substantially lessen competition. Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms. The Agencies examine whether competition between the merging parties is substantial since their merger will necessarily eliminate any competition between them. 7 See, e.g., United States v. AT&T, Inc., 916 F.3d at 1032 (explaining that a prima facie case can demonstrate a “reasonable probability” of harm to competition either through “statistics about the change in market concentration” or a “fact-specific” showing (quoting Brown Shoe, 370 U.S. at 323 n.39)); United States v. Baker Hughes, 908 F.2d 981, 982-83 (D.C. Cir. 1990). 8 These Guidelines pertain only to the Agencies’ consideration of whether a merger or acquisition may substantially lessen competition or tend to create a monopoly. The consideration of remedies appropriate for mergers that pose that risk is beyond the Merger Guidelines’ scope. The Agencies review proposals to revise a merger in order to alleviate competitive concerns consistent with applicable law regarding remedies.
Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination. The Agencies examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is inherently vulnerable and the Agencies will infer, subject to rebuttal evidence, that the merger may substantially lessen competition. In a market that is not highly concentrated, the Agencies investigate whether facts suggest a greater risk of coordination than market structure alone would suggest. Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market. The Agencies examine whether, in a concentrated market, a merger would (a) eliminate a potential entrant or (b) eliminate current competitive pressure from a perceived potential entrant.
Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete. When a merger creates a firm that can limit access to products or services that its rivals use to compete, the Agencies examine the extent to which the merger creates a risk that the merged firm will limit rivals’ access, gain or increase access to competitively sensitive information, or deter rivals from investing in the market. Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position. The Agencies examine whether one of the merging firms already has a dominant position that the merger may reinforce, thereby tending to create a monopoly. They also examine whether the merger may extend that dominant position to substantially lessen competition or tend to create a monopoly in another market.
Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly. A trend toward consolidation can be an important factor in understanding the risks to competition presented by a merger. The Agencies consider this evidence carefully when applying the frameworks in Guidelines 1-6.
Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series. If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the Agencies consider the cumulative effect of the pattern or strategy when applying the frameworks in Guidelines 1-6.
Guideline 9: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform. Multi-sided platforms have characteristics that can exacerbate or accelerate competition problems. The Agencies consider the distinctive characteristics of multi-sided platforms when applying the frameworks in Guidelines 1-6. Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers. The Agencies apply the frameworks in Guidelines 1-6 to assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly. Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition. The Agencies apply the frameworks in Guidelines 1-6 to assess if an acquisition of partial control or common ownership may substantially lessen competition. * * * This edition of the Merger Guidelines consolidates, revises, and replaces the various versions of Merger Guidelines previously issued by the Agencies. The revision builds on the learning and experience reflected in those prior Guidelines and successive revisions. These Guidelines reflect the collected experience of the Agencies over many years of merger review in a changing economy and have been refined through an extensive public consultation process. As a statement of the Agencies’ law enforcement procedures and practices, the Merger Guidelines create no independent rights or obligations, do not affect the rights or obligations of private parties, and do not limit the discretion of the Agencies, including their staff, in any way. Although the Merger Guidelines identify the factors and frameworks the Agencies consider when investigating mergers, the Agencies’ enforcement decisions will necessarily continue to require prosecutorial discretion and judgment. Because the specific standards set forth in these Merger Guidelines will be applied to a broad range of factual circumstances, the Agencies will apply them reasonably and flexibly to the specific facts and circumstances of each merger. Similarly, the factors contemplated in these Merger Guidelines neither dictate nor exhaust the range of theories or evidence that the Agencies may introduce in merger litigation. Instead, they set forth various methods of analysis that may be applicable depending on the availability and/or reliability of information related to a given market or transaction. Given the variety of industries, market participants, and acquisitions that the Agencies encounter, merger analysis does not consist of uniform application of a single methodology. The Agencies assess any relevant and meaningful evidence to evaluate whether the effect of a merger may be substantially to lessen competition or to tend to create a monopoly. Merger review is ultimately a fact-specific exercise. The Agencies follow the facts and the law in analyzing mergers as they do in other areas of law enforcement. These Merger Guidelines include references to applicable legal precedent. References to court decisions do not necessarily suggest that the Agencies would analyze the facts in those cases identically today. While the Agencies adapt their analytical tools as they evolve and advance, legal holdings reflecting the Supreme Court’s interpretation of a statute apply unless subsequently modified. These Merger Guidelines therefore reference applicable propositions of law to explain core principles that the Agencies apply in a manner consistent with modern analytical tools and market realities. References herein do not constrain the Agencies’ interpretation of the law in particular cases, as the Agencies will apply their discretion with respect to the applicable law in each case in light of the full range of precedent pertinent to the issues raised by each enforcement action.
12 The Agencies may instead measure market concentration using the number of significant competitors in the market. This measure is most useful when there is a gap in market share between significant competitors and smaller rivals or when it is difficult to measure shares in the relevant market.
13 For illustration, the HHI for a market of five equal firms is 2,000 (5 x 202 = 2,000) and for six equal firms is 1,667 (6 x
concentrated market that involves an increase in the HHI of more than 100 points14 is presumed to substantially lessen competition or tend to create a monopoly.15 The Agencies also may examine the market share of the merged firm: a merger that creates a firm with a share over thirty percent is also presumed to substantially lessen competition or tend to create a monopoly if it also involves an increase in HHI of more than 100 points.16 Indicator Threshold for Structural Presumption Market HHI greater than 1,800 Post-merger HHI AND Change in HHI greater than 100 Share greater than 30% Merged Firm’s Market Share AND Change in HHI greater than 100 When exceeded, these concentration metrics indicate that a merger’s effect may be to eliminate substantial competition between the merging parties and may be to increase coordination among the remaining competitors after the merger. This presumption of illegality can be rebutted or disproved. The higher the concentration metrics over these thresholds, the greater the risk to competition suggested by this market structure analysis and the stronger the evidence needed to rebut or disprove it. 2.2. Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.
Impact of Competitive Actions on Rivals. When one firm takes competitive actions to attract customers, this can benefit the firm at the expense of its rivals. The Agencies may gauge the extent of competition between the merging firms by considering the impact that competitive actions by one of the merging firms has on the other merging firm. The impact of a firm’s competitive actions on a rival is generally greater when customers consider the firm’s products and the rival’s products to be closer substitutes, so that a firm’s competitive action results in greater lost sales for the rival, and when the profitability of the rival’s lost sales is greater.
Impact of Eliminating Competition Between the Firms. In some instances, evidence may be available to assess the impact of competition from one firm on the other’s actions, such as firm choices leads them to compete less aggressively with one another, other firms in the market can in turn compete less aggressively, decreasing the overall intensity of competition.
18 See also United States v. First Nat’l Bank & Trust Co. of Lexington, 376 U.S. 665, 669-70 (1964) (per curiam) (“[I]t [is] clear that the elimination of significant competition between [merging parties] constitutes an unreasonable restraint of trade in violation of § 1 of the Sherman Act. . . . It [can be] enough that the two . . . compete[], that their competition [is] not insubstantial and that the combination [would] put an end to it.”); ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559, 568-70 (6th Cir. 2014), cert. denied, 575 U.S. 996 (2015).
about price, quality, wages, or another dimension of competition. Section 4.2 describes a variety of approaches to measuring such impacts.
Tacit coordination can lessen competition even when it does not rise to the level of an agreement and would not itself violate the law. For example, in a concentrated market a firm may forego or soften an aggressive competitive action because it anticipates rivals responding in kind. This harmful behavior is more common the more concentrated markets become, as it is easier to predict the reactions of rivals when there are fewer of them.
To assess the extent to which a merger may increase the likelihood, stability, or effectiveness of coordination, the Agencies often consider three primary factors and several secondary factors. The Agencies may consider additional factors depending on the market. 2.3.A. Primary Factors The Agencies may conclude that post-merger market conditions are susceptible to coordinated interaction and that the merger materially increases the risk of coordination if any of the three primary factors are present.
Highly Concentrated Market. By reducing the number of firms in a market, a merger increases the risk of coordination. The fewer the number of competitively meaningful rivals prior to the merger, the greater the likelihood that merging two competitors will facilitate coordination. Markets that are highly concentrated after a merger that significantly increases concentration (see Guideline 1) are presumptively susceptible to coordination. If merging parties assert that a highly concentrated market is not susceptible to coordination, the Agencies will assess this rebuttal evidence using the framework 19 See Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 229-30 (1993) (“In the § 7 context, it has long been settled that excessive concentration, and the oligopolistic price coordination it portends, may be the injury to competition the Act prohibits.”).
described below. Where a market is not highly concentrated, the Agencies may still consider other risk factors.
Aligned Incentives. Removing a firm that has different incentives from most other firms in a market can increase the risk of coordination. For example, a firm with a small market share may have less incentive to coordinate because it has more to gain from winning new business than other firms. The same issue can arise when a merger more closely aligns one or both merging firms’ incentives with the other firms in the market. In some cases, incentives might be aligned or strengthened when firms compete with one another in multiple markets (“multi-market contact”). For example, firms might compete less aggressively in some markets in anticipation of reciprocity by rivals in other markets. The Agencies examine these and any other market realities that suggest aligned incentives increase susceptibility to coordination.
Profitability or Other Advantages of Coordination for Rivals. The Agencies regard coordinated interaction as more likely to occur when participants in the market stand to gain more from successful coordination. Coordination generally is more profitable or otherwise advantageous for the coordinating firms the less often customers substitute outside the market when firms offer worse terms. Rebuttal Based on Structural Barriers to Coordination Unique to the Industry. When market structure evidence suggests that a merger may substantially lessen competition through coordination, the merging parties sometimes argue that anticompetitive coordination is nonetheless impossible due to structural market barriers to coordinating. The Agencies consider this rebuttal evidence using the framework in Section 3. In so doing, the Agencies consider whether structural market barriers to coordination are “so much greater in the [relevant] industry than in other industries that they rebut the normal presumption” of coordinated effects.20 In the Agencies’ experience, structural conditions that prevent coordination are exceedingly rare in the modern economy. For example, coordination is more difficult when firms are unable to observe rivals’ competitive offerings, but technological change has made this situation less common than in the past and reduced many traditional barriers or obstacles to observing the behavior of rivals in a market. The greater the level of concentration in the relevant market, the greater must be the structural barriers to coordination in order to show that no substantial lessening of competition is threatened.
2.4. Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market.
Mergers can substantially lessen competition by eliminating a potential entrant. For instance, a merger can eliminate the possibility that entry or expansion by one or both firms would have resulted in new or increased competition in the market in the future. A merger can also eliminate current competitive pressure exerted on other market participants by the mere perception that one of the firms might enter. Both of these risks can be present simultaneously. A merger that eliminates a potential entrant into a concentrated market can substantially lessen competition or tend to create a monopoly.21 The more concentrated the market, the greater the magnitude of harm to competition from any lost potential entry and the greater the tendency to create a monopoly. Accordingly, for mergers involving one or more potential entrants, the higher the market concentration, the lower the probability of entry that gives rise to concern. 20 See H.J. Heinz Co., 246 F.3d at 724.
21 United States v. Marine Bancorp., 418 U.S. 602, 630 (1974). A concentrated market is one with an HHI greater than 1,000 (See Guideline 1, n.15).
24 United States v. Penn-Olin Chemical Co., 378 U.S. 158 (1964) (holding that a merger between two firms, each or both of which might have entered the relevant market, could violate Section 7). 25 See id. at 175-76; Marine Bancorp., 418 U.S. at 622, 633 (“[T]he proscription expressed in § 7 against mergers ‘when a “tendency” toward monopoly or [a] “reasonable likelihood” of a substantial lessening of competition in the relevant market is shown’ applies alike to actual- and potential-competition cases.” (quoting Penn-Olin, 378 U.S. at 171)); see also Yamaha Motor Co. v. FTC, 657 F.2d 971, 980-981 (8th Cir. 1981) (acquisition of potential entrant violated Section 7). competitive significance, such as market share, its business strategy, the anticipated response of competitors, or customer preferences or interest.
The Agencies evaluate whether a merger may substantially lessen competition when the merged firm can limit access to a product, service, or route to market27 that its rivals may use to compete. Mergers involving products or services rivals may use to compete can threaten competition in several ways, for example: (A) the merged firm could limit rivals’ access to the products or services, thereby weakening or excluding them, lessening competition; (B) the merged firm may gain or increase access to rivals’ competitively sensitive information, thereby facilitating coordination or undermining their incentives to compete; or (C) the threat of limited access can deter rivals and potential rivals from investing.
These problems can arise from mergers involving access to any products, services, or routes to market that rivals use to compete, and that are competitively significant to those rivals, whether or not they involve a traditional vertical relationship such as a supplier and distributor relationship. Many types of related products can implicate these concerns, including products rivals currently or may in the future use as inputs, products that provide distribution services for rivals or otherwise influence customers’ purchase decisions, products that provide or increase the merged firm’s access to competitively sensitive information about its rivals, or complements that increase the value of rivals’ products. Even if the related product is not currently being used by rivals, it might be competitively significant because, for example, its availability enables rivals to obtain better terms from other providers in negotiations. The Agencies refer to any product, service, or route to market that rivals use to compete in that market as a “related product.”
The Agencies analyze competitive effects in the relevant market in which the merged firm competes with rivals that use the related product. The Agencies do not always define a market around the related product, although they may do so (see Section 2.5.A.2). 2.5.A. The Risk that the Merged Firm May Limit Access A merger involving products, services, or routes to market that rivals use to compete may substantially lessen competition when the merged firm has both the ability and incentive to limit access to the related product so as to weaken or exclude some of its rivals (the “dependent” rivals) in the relevant market.
The merged firm could limit access to the related product in different ways. It could deny rivals access altogether, deny access to some features, degrade its quality, worsen the terms on which rivals 27 A “route to market” refers to any way a firm accesses its trading partners, such as distribution channels, marketplaces, or customers.
can access the related product, limit interoperability, degrade the quality of complements, provide less reliable access, tie up or obstruct routes to market, or delay access to product features, improvements, or information relevant to making efficient use of the product. All these ways of limiting access are sometimes referred to as “foreclosure.”28 Dependent rivals can be weakened if limiting their access to the related product would make it harder or more costly for them to compete; for example, if it would lead them to charge higher prices or offer worse terms in the relevant market, reduce the quality of their products so that they were less attractive to trading partners, or interfere with distribution so that those products were less readily available. Competition can also be weakened if the merger facilitates coordination among the merged firm and its rivals, for example by giving the merged firm the ability to threaten to limit access to uncooperative rivals.
firm to benefit from facilitating coordination by threatening to limit dependent rivals’ access to the related product. These benefits can make it profitable to limit access to the related product and thereby substantially lessen competition, even though it would not have been profitable for the firm that controlled the related product prior to the merger.
Market Structure. Evidence of market structure can be informative about the availability of substitutes for the related product and the competition in the market for the related product or the relevant market. (See Section 2.5.A.2)
2.5.A.2. Analysis of Industry Factors and Market Structure The Agencies also sometimes determine, based on an analysis of factors related to market structure, that a merger may substantially lessen competition by allowing the merged firm to limit access to a related product.29 The Agencies’ assessment can include evidence about the structure, history, and probable future of the market.
Structure of the Related Market. In some cases, the market structure of the related product market can give an indication of the merged firm’s ability to limit access to the related product. In these cases, the Agencies define a market (termed the “related market”) around the related product (see Section 4.3). The Agencies then define the “foreclosure share” as the share of the related market to which the merged firm could limit access. If the share or other evidence show that the merged firm is 29 See Brown Shoe, 370 U.S. at 328-34; Illumina, slip op. at 20-22 (“There is no precise formula when it comes to applying these factors. Indeed, the Supreme Court has found a vertical merger unlawful by examining only three of the Brown Shoe factors.” (cleaned up)); Fruehauf Corp. v. FTC, 603 F.2d 345, 353 (2d Cir. 1979); U.S. Steel Corp. v. FTC, 426 F.2d 592, 599 (6th Cir. 1970).
approaching or has monopoly power over the related product, and the related product is competitively significant, those factors alone are a sufficient basis to demonstrate that the dependent firms do not have adequate substitutes and the merged firm has the ability to weaken or exclude them by limiting their access to the related product. (See Considerations 1 and 2 in Section 2.5.A.1).30 Structure of the Relevant Market. Limiting rivals’ access to the related product will generally have a greater effect on competition in the relevant market if the merged firm and the dependent rivals face less competition from other firms. In addition, the merged firm has a greater incentive to limit access to the dependent firms when it competes more closely with them. Market share and concentration measures for the merged firm, the dependent rivals, and the other firms, can sometimes provide evidence about both issues.
unit. A merger may substantially lessen competition or tend to create a monopoly regardless of the claimed intent of the merging companies or their executives. (See Section 4.1) If the merged firm has the ability and incentive to limit access to the related product and lessen competition in the relevant market, there are many ways it could act on those incentives. The merging parties may put forward evidence that there are no reasonably probable ways in which they could profitably limit access to the related product and thereby make it harder for rivals to compete, or that the merged firm will be more competitive because of the merger. 2.5.B. Mergers Involving Visibility into Rivals’ Competitively Sensitive Information If rivals would continue to access or purchase a related product controlled by the merged firm post-merger, the merger can substantially lessen competition if the merged firm would gain or increase visibility into rivals’ competitively sensitive information. This situation could arise in many settings, including, for example, if the merged firm learns about rivals’ sales volumes or projections from supplying an input or a complementary product; if it learns about promotion plans and anticipated product improvements or innovations from its role as a distributor; or if it learns about entry plans from discussions with potential rivals about compatibility or interoperability with a complementary product it controls. A merger that gives the merged firm increased visibility into competitively sensitive information could undermine rivals’ ability or incentive to compete aggressively or could facilitate coordination.
The Agencies consider whether a merger may entrench or extend an already dominant position. The effect of such mergers “may be substantially to lessen competition” or “may be . . . to tend to create a monopoly” in violation of Section 7 of the Clayton Act. Indeed, the Supreme Court has explained that a merger involving an “already dominant[] firm may substantially reduce the competitive structure of the industry by raising entry barriers.”32 The Agencies also evaluate whether the merger may extend that dominant position into new markets.33 Mergers that entrench or extend a dominant position can also violate Section 2 of the Sherman Act.34 At the same time, the Agencies distinguish anticompetitive entrenchment from growth or development as a consequence of increased competitive capabilities or incentives.35 The Agencies therefore seek to prevent those mergers that would entrench or extend a dominant position through exclusionary conduct, weakening competitive constraints, or otherwise harming the competitive process.
To undertake this analysis, the Agencies first assess whether one of the merging firms has a dominant position based on direct evidence or market shares showing durable market power. For example, the persistence of market power can indicate that entry barriers exist, that further entrenchment may tend to create a monopoly, and that there would be substantial benefits from the emergence of new competitive constraints or disruptions. The Agencies consider mergers involving dominant firms in the context of evidence about the sources of that dominance, focusing on the extent to which the merger relates to, reinforces, or supplements these sources.
Creating or preserving dominance and the profits it brings can be an important motivation for a firm to undertake an acquisition as well as a driver of the merged firm’s behavior after the acquisition. In particular, a firm may be willing to undertake costly short-term strategies in order to increase the chance that it can enjoy the longer-term benefits of dominance. A merger that creates or preserves dominance may also reduce the merged firm’s longer-term incentives to improve its products and services.
A merger can result in durable market power and long-term harm to competition even when it initially provides short-term benefits to some market participants. Thus, the Agencies will consider not just the impact of the merger holding fixed factors like product quality and the behavior of other industry participants, but they may also consider the (often longer term) impact of the merger on market 32 FTC v. Procter & Gamble Co., 386 U.S. 568, 577-578 (1967); see, e.g., Fruehauf, 603 F.2d at 353 (the “entrenchment of a large supplier or purchaser” can be an “essential” showing of a Section 7 violation). 33 Ford, 405 U.S. at 571 (condemning acquisition by dominant firm to obtain a foothold in another market when coupled with incentive to create and maintain barriers to entry into that market). 34 See, e.g., United States v. Grinnell Corp., 384 U.S. 563 (1966) (acquisitions are among the types of conduct that may violate the Sherman Act).
35 See, e.g., id. at 570-71.
power and industry dynamics. Important dynamic competitive effects can arise through the entry, investment, innovation, and terms offered by the merged firm and other industry participants, even when the Agencies cannot predict specific reactions and responses with precision. If the ultimate result of the merger is to protect or preserve dominance by limiting opportunities for rivals, reducing competitive constraints, or preventing competitive disruption, then the Agencies will approach the merger with a heightened degree of scrutiny. The degree of scrutiny and concern will increase in proportion to the strength and durability of the dominant firm’s market power. 2.6.A. Entrenching a Dominant Position Raising Barriers to Entry or Competition. A merger may create or enhance barriers to entry or expansion by rivals that limit the capabilities or competitive incentives of other firms. Barriers to entry can entrench a dominant position even if the nature of future entry is uncertain, if the identities of future entrants are unknown, or if there is more than one mechanism through which the merged firm might create entry barriers. Some examples of ways in which a merger may raise barriers to entry or competition include:
37 The Agencies assess acquisitions of nascent competitive threats by non-dominant firms under the other Guidelines. Separate from and in addition to its Section 7 analysis, the Agencies will consider whether the merger violates Section 2 of the Sherman Act. For example, under Section 2 of the Sherman Act, a firm that may challenge a monopolist may be characterized as a “nascent threat” even if the impending threat is uncertain and may take several years to materialize.38 The Agencies assess whether the merger is reasonably capable of contributing significantly to the preservation of monopoly power in violation of Section 2, which turns on whether the acquired firm is a nascent competitive threat.39 2.6.B. Extending a Dominant Position into Another Market The Agencies also examine the risk that a merger could enable the merged firm to extend a dominant position from one market into a related market, thereby substantially lessening competition or tending to create a monopoly in the related market. For example, the merger might lead the merged firm to leverage its position by tying, bundling, conditioning, or otherwise linking sales of two products. A merger may also raise barriers to entry or competition in the related market, or eliminate a nascent competitive threat, as described above. For example, prior to a merger, a related market may be characterized by scale economies but still experience moderate levels of competition. If the merged firm takes actions to induce customers of the dominant firm’s product to also buy the related product from the merged firm, the merged firm may be able to gain dominance in the related market, which may be supported by increased barriers to entry or competition that result from the merger. These concerns can arise notwithstanding that the acquiring firm already enjoys the benefits associated with its dominant position. The prospect of market power in the related market may strongly affect the merged firm’s incentives in a way that does not align with the interests of its trading partners, both in terms of strategies that create dominance for the related product and in the form of reduced incentives to invest in its products or provide attractive terms for them after dominance is attained. In some cases, the merger may also further entrench the firm’s original dominant position, for example if future competition requires the provision of both products. * * * If the merger raises concerns that its effect may be to entrench or extend a dominant position, then any claim that the merger also provides competitive benefits will be evaluated under the rebuttal framework in Section 3. For example, the framework of Section 3 would be used to evaluate claims that a merger would generate cost savings or quality improvements that would be passed through to make their products more competitive or would otherwise create incentives for the merged firm to offer better terms. The Agencies’ analysis will consider the fact that the incentives to pass through benefits to customers or offer attractive terms are affected by competition and the extent to which entry barriers insulate the merged firm from effective competition. It will also consider whether any claimed benefits are specific to the merger, or whether they could be instead achieved through contracting or other means.
38 United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc) (per curiam). 39 See id. at 79 (“[I]t would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will. . . .”).
Trend Toward Concentration. If an industry has gone from having many competitors to becoming concentrated, it may suggest greater risk of harm, for example, because new entry may be less likely to replace or offset the lessening of competition the merger may cause. Among other implications, in the context of a trend toward concentration, the Agencies identify a stronger presumption of harm from undue concentration (see Guideline 1), and a greater risk of substantially lessening competition when a merger eliminates competition between the merging parties (see Guideline 2) or increases the risk of coordination (see Guideline 3).
Trend Toward Vertical Integration. The Agencies will generally consider evidence about the degree of integration between firms in the relevant and related markets and whether there is a trend toward further vertical integration. If a merger occurs amidst or furthers a trend toward vertical integration, the Agencies consider the implications for the competitive dynamics of the industry moving forward. For example, a trend toward vertical integration could magnify the concerns discussed in Guideline 5 by making entry at a single level more difficult and thereby preventing the emergence of new competitive threats over time.
Arms Race for Bargaining Leverage. The Agencies sometimes encounter mergers through which the merging parties would, by consolidating, gain bargaining leverage over other firms that they transact with. This can encourage those other firms to consolidate to obtain countervailing leverage, encouraging a cascade of further consolidation. This can ultimately lead to an industry where a few powerful firms have leverage against one another and market power over would-be entrants or over trading partners in various parts of the value chain. For example, distributors might merge to gain leverage against suppliers, who then merge to gain leverage against distributors, spurring a wave of mergers that lessen competition by increasing the market power of both. This can exacerbate the problems discussed in Guidelines 1-6, including by increasing barriers to single-level entry, encouraging coordination, and discouraging disruptive innovation.
40 United States v. Pabst Brewing, 384 U.S. 546, 552-53 (1966). 41 Phila. Nat’l Bank, 374 U.S. at 362 (quoting Brown Shoe, 370 U.S. at 317). Multiple Mergers. The Agencies sometimes see multiple mergers at once or in succession by different players in the same industry. In such cases, the Agencies may examine multiple deals in light of the combined trend toward concentration.
44 See Brown Shoe, 370 U.S. at 334 (citing S. Rep. No. 81-1775, at 5 (1950); H.R. Rep. No. 81-1191, at 8 (1949)). the Agencies consider competition between platforms, competition on a platform, and competition to displace the platform.
Network effects occur when platform participants contribute to the value of the platform for other participants and the operator. The value for groups of participants on one side may depend on the number of participants either on the same side (direct network effects) or on the other side(s) (indirect network effects).46 Network effects can create a tendency toward concentration in platform industries. Indirect network effects can be asymmetric and heterogeneous; for example, one side of the market or segment of participants may place relatively greater value on the other side(s).
A conflict of interest can arise when a platform operator is also a platform participant. The Agencies refer to a “conflict of interest” as the divergence that can arise between the operator’s incentives to operate the platform as a forum for competition and its incentive to operate as a competitor on the platform itself. As discussed below, a conflict of interest sometimes exacerbates competitive concerns from mergers. Consistent with the Clayton Act’s protection of competition “in any line of commerce,” the Agencies will seek to prohibit a merger that harms competition within a relevant market for any product or service offered on a platform to any group of participants—i.e., around one side of the platform (see Section 4.3).47 45 For example, on 1990s operating-system platforms for personal computer (PC) software, software developers were on one side, PC manufacturers on another, and software purchasers on another. 46 For example, 1990s PC manufacturers, software developers, and consumers all contributed to the value of the operating system platform for one another.
47 In the limited scenario of a “special type of two-sided platform known as a ‘transaction’ platform,” under Section 1 of the Sherman Act, a relevant market encompassing both sides of a two-sided platform may be warranted. Ohio v. American Express Co., 138 S. Ct. 2274, 2280 (2018). This approach to Section 1 of the Sherman Act is limited to platforms with the “key feature . . . that they cannot make a sale to one side of the platform without simultaneously making a sale to the other.” Id. Because “they cannot sell transaction services to [either user group] individually . . . transaction platforms are better understood as supplying only one product—transactions.” Id. at 2286. This characteristic is not present for many types of two-sided or multi-sided platforms; in addition, many platforms offer simultaneous transactions as well as other products and services, and further they may bundle these products with access to transact on the platform or offer quantity discounts. The Agencies protect competition between platforms by preventing the acquisition or exclusion of other platform operators that may substantially lessen competition or tend to create a monopoly. This scenario can arise from various types of mergers:
with a firm that makes a product offered on the platform may change how the platform operator balances these competing interests. For example, the platform operator may find it is more profitable to give its own product greater prominence even if that product is inferior or is offered on worse terms after the merger—and even if some participants leave the platform as a result.48 This can harm competition in 48 However, few participants will leave if, for example, the switching costs are relatively high or if the advantaged product is a small component of the overall set of services those participants access on the platform. Moreover, in the long run few participants will leave if scale economies, network effects, or entry barriers enable the advantaged product to eventually gain market power of its own, with rivals of the advantaged product exiting or becoming less attractive. After these dynamics play the product market for the advantaged product, where the harm to competition may be experienced both on the platform and in other channels.
A merger between competing buyers may harm sellers just as a merger between competing sellers may harm buyers.49 The same—or analogous—tools used to assess the effects of a merger of sellers can be used to analyze the effects of a merger of buyers, including employers as buyers of labor. Firms can compete to attract contributions from a wide variety of workers, creators, suppliers, and service providers. The Agencies protect this competition in all its forms. A merger of competing buyers can substantially lessen competition by eliminating the competition between the merging buyers or by increasing coordination among the remaining buyers. It can likewise lead to undue concentration among buyers or entrench or extend the position of a dominant buyer. Competition among buyers can have a variety of beneficial effects analogous to competition among sellers. For example, buyers may compete by raising the payments offered to suppliers, by expanding supply networks, through transparent and predictable contracting, procurement, and payment practices, or by investing in technology that reduces frictions for suppliers. In contrast, a reduction in competition among buyers can lead to artificially suppressed input prices or purchase volume, which in turn reduces incentives for suppliers to invest in capacity or innovation. Labor markets are important buyer markets. The same general concerns as in other markets apply to labor markets where employers are the buyers of labor and workers are the sellers. The Agencies will consider whether workers face a risk that the merger may substantially lessen competition for their labor.50 Where a merger between out, the platform operator could advantage its own products without losing as many participants, as there would be fewer alternative products available through other channels.
49 See, e.g., Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219, 235-36 (1948) (“The [Sherman Act] does not confine its protection to consumers, or to purchasers, or to competitors, or to sellers. . . . The Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated.”). 50 See, e.g., Alston, 141 S. Ct. 2141 (applying the Sherman Act to protect workers from an employer-side agreement to limit compensation).
employers may substantially lessen competition for workers, that reduction in labor market competition may lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality.51 When assessing the degree to which the merging firms compete for labor, evidence that a merger may have any one or more of these effects can demonstrate that substantial competition exists between the merging firms.
52 Often, mergers that harm competition among buyers also harm competition among sellers as a result. For example, when a monopsonist lowers purchase prices by decreasing input purchases, they will generally decrease sales in downstream markets as well. (See Section 4.2.D)
54 See United States v. Dairy Farmers of Am., Inc., 426 F.3d 850, 860-61 (6th Cir. 2005). 55 See Denver & Rio Grande v. United States, 387 U.S. 485, 504 (1967) (identifying Section 7 concerns with a 20% investment).
reduce the value of its investment in its rival. This reduction in the incentive of the acquiring firm to compete arises even when it cannot directly influence the conduct or decision making of the target firm. Third, a partial acquisition can lessen competition by giving the acquiring firm access to non- public, competitively sensitive information from the target firm. Even absent any ability to influence the conduct of the target firm, access to competitively sensitive information can substantially lessen competition through other mechanisms. For example, it can enhance the ability of the target and the partial owner to coordinate their behavior and make other accommodating responses faster and more targeted. The risk of coordinated effects is greater if the transaction also facilitates the flow of competitively sensitive information from the investor to the target firm. Even if coordination does not occur, the partial owner may use that information to preempt or appropriate a rival’s competitive business strategies for its own benefit. If rivals know their efforts to win trading partners can be immediately appropriated, they may see less value in taking competitive actions in the first place, resulting in a lessening of competition.
Whatever frameworks the Agencies use to identify that a merger may substantially lessen competition or tend to create a monopoly, they also examine rebuttal evidence under the framework in Section 3.
57 See United States v. Gen. Dynamics Corp., 415 U.S. 486, 498 (1974); Baker Hughes, 908 F.2d at 990 (quoting General Dynamics and describing its holding as permitting rebuttal based on a “finding that ‘no substantial lessening of competition occurred or was threatened by the acquisition’”).
58 Citizen Publ’g Co. v. United States, 394 U.S. 131, 138 (1969). 59 Id.
60 Id.
61 Id. at 136-39 (quoting Int’l Shoe Co. v. FTC, 280 U.S. 291, 302 (1930)). 62 Any offer to purchase the assets of the failing firm for a price above the liquidation value of those assets will be regarded as a reasonable alternative offer. Parties must solicit reasonable alternative offers before claiming that the business is failing. Although merging parties sometimes argue that a poor or weakening position should serve as a defense even when it does not meet these elements, the Supreme Court has “confine[d] the failing company doctrine to its present narrow scope.”63 The Agencies evaluate evidence of a failing firm consistent with this prevailing law.64 3.2. Entry and Repositioning Merging parties sometimes raise a rebuttal argument that a reduction in competition resulting from the merger would induce entry or repositioning65 into the relevant market, preventing the merger from substantially lessening competition or tending to create a monopoly in the first place. This argument posits that a merger may, by substantially lessening competition, make the market more profitable for the merged firm and any remaining competitors, and that this increased profitability may induce new entry. To evaluate this rebuttal evidence, the Agencies assess whether entry induced by the merger would be “timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of concern.”66 Timeliness. To show that no substantial lessening of competition is threatened by a merger, entry must be rapid enough to replace lost competition before any effect from the loss of competition due to the merger may occur. Entry in most industries takes a significant amount of time and is therefore insufficient to counteract any substantial lessening of competition that is threatened by a merger. Moreover, the entry must be durable: an entrant that does not plan to sustain its investment or that may exit the market would not ensure long-term preservation of competition. Likelihood. Entry induced by lost competition must be so likely that no substantial lessening of competition is threatened by the merger. Firms make entry decisions based on the market conditions they expect once they participate in the market. If the new entry is sufficient to counteract the merger’s effect on competition, the Agencies analyze why the merger would induce entry that was not planned in pre-merger competitive conditions.
64 The Agencies do not normally credit claims that the assets of a division would exit the relevant market in the near future unless: (1) applying cost allocation rules that reflect true economic costs, the division has a persistently negative cash flow on an operating basis, and such negative cash flow is not economically justified for the firm by benefits such as added sales in complementary markets or enhanced customer goodwill; and (2) the owner of the failing division has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its assets in the relevant market and pose a less severe danger to competition than does the proposed acquisition. Because firms can allocate costs, revenues, and intra-company transactions among their subsidiaries and divisions, the Agencies require evidence that is not solely based on management plans that could have been prepared for the purpose of demonstrating negative cash flow or the prospect of exit from the relevant market.
65 Repositioning is a supply-side response that is evaluated like entry. If repositioning requires movement of assets from other markets, the Agencies will consider the costs and competitive effects of doing so. Repositioning that would reduce competition in the markets from which products or services are moved is not a cognizable rebuttal for a lessening of competition in the relevant market.
66 FTC v. Sanford Health, 926 F.3d 959, 965 (8th Cir. 2019). strategies that make entry more difficult. Entry can be particularly challenging when a firm must enter at multiple levels of the market at sufficient scale to compete effectively. Sufficiency. Even where timely and likely, the prospect of entry may not effectively prevent a merger from threatening a substantial lessening of competition. Entry may be insufficient due to a wide variety of constraints that limit an entrant’s effectiveness as a competitor. Entry must at least replicate the scale, strength, and durability of one of the merging parties to be considered sufficient. The Agencies typically do not credit entry that depends on lessening competition in other markets. As part of their analysis, the Agencies will consider the economic realities at play. For example, lack of successful entry in the past will likely suggest that entry may be slow or difficult. Recent examples of entry, whether successful or unsuccessful, provide the starting point for identifying the elements of practical entry barriers and the features of the industry that facilitate or interfere with entry. The Agencies will also consider whether the parties’ entry arguments are consistent with the rationale for the merger or imply that the merger itself would be unprofitable. 3.3. Procompetitive Efficiencies The Supreme Court has held that “possible economies [from a merger] cannot be used as a defense to illegality.”67 Competition usually spurs firms to achieve efficiencies internally, andfirms also often work together using contracts short of a merger to combine complementary assets without the full anticompetitive consequences of a merger.
69 In general, evidence related to efficiencies developed prior to the merger challenge is much more probative than evidence developed during the Agencies’ investigation or litigation. 70 If inter-firm collaborations are achievable by contract, they are not merger specific. The Agencies will credit the merger specificity of efficiencies only in the presence of evidence that a contract to achieve the asserted efficiencies would not be practical. See Anthem, 855 F.3d at 357.
4.1. Sources of Evidence This subsection describes the most common sources of evidence the Agencies draw on in a merger investigation. The evidence the Agencies rely upon to evaluate whether a merger may substantially lessen competition or tend to create a monopoly is weighed based on its probative value. In assessing the available evidence, the Agencies consider documents, testimony, available data, and analysis of those data, including credible econometric analysis and economic modeling. Merging Parties. The Agencies often obtain substantial information from the merging parties, including documents, testimony, and data. Across all of these categories, evidence created in the normal course of business is more probative than evidence created after the company began anticipating a merger review. Similarly, the Agencies give less weight to predictions by the parties or their employees, whether in the ordinary course of business or in anticipation of litigation, offered to allay competition concerns. Where the testimony of outcome-interested merging party employees contradicts ordinary course business records, the Agencies typically give greater weight to the business records. Evidence that the merging parties intend or expect the merger to lessen competition, such as plans to coordinate with other firms, raise prices, reduce output or capacity, reduce product quality or variety, lower wages, cut benefits, exit a market, cancel plans to enter a market without a merger, withdraw products or delay their introduction, or curtail research and development efforts after the merger, can be highly informative in evaluating the effects of a merger on competition. The Agencies give little weight, however, to the lack of such evidence or the expressed contrary intent of the merging parties.
Customers, Workers, Industry Participants, and Observers. Customers can provide a variety of information to the Agencies, ranging from information about their own purchasing behavior and choices to their views about the effects of the merger itself. The Agencies consider the relationship between customers and the merging parties in weighing customer evidence. The ongoing business relationship between a customer and a merging party may discourage the customer from providing evidence inconsistent with the interests of the merging parties. Workers and representatives from labor organizations can provide information regarding, among other things, wages, non-wage compensation, working conditions, the individualized needs of workers in the market in question, the frictions involved in changing jobs, and the industry in which they work. Similarly, other suppliers, indirect customers, distributors, consultants, and industry analysts can also provide information helpful to a merger inquiry. As with other interested parties, the Agencies give less weight to evidence created in anticipation of a merger investigation and more weight to evidence developed in the ordinary course of business.
Market Effects in Consummated Mergers. Evidence of observed post-merger price increases or worsened terms is given substantial weight. A consummated merger, however, may substantially lessen competition even if such effects have not yet been observed, perhaps because the merged firm may be aware of the possibility of post-merger antitrust review and is therefore moderating its conduct. Consequently, in evaluating consummated mergers, the Agencies also consider the same types of evidence when evaluating proposed mergers.
Econometric Analysis and Economic Modeling. Econometric analysis of data and other types of economic modeling can be informative in evaluating the potential effects of a merger on competition. The Agencies give more weight to analysis using high quality data and adhering to rigorous standards. But the Agencies also take into account that in some cases, the availability or quality of data or reliable modeling techniques might limit the availability and relevance of econometric modeling. When data is available, the Agencies recognize that the goal of economic modeling is not to create a perfect representation of reality, but rather to inform an assessment of the likely change in firm incentives resulting from a merger.
Transaction Terms. The financial terms of the transaction may also be informative regarding a merger’s impact on competition. For example, a purchase price that exceeds the acquired firm’s stand- alone market value can sometimes indicate that the acquiring firm is paying a premium because it expects to be able to benefit from reduced competition. 4.2. Evaluating Competition Among Firms This subsection discusses evidence and tools the Agencies look to when assessing competition among firms. The evidence and tools in this section can be relevant to a variety of settings, for example: to assess competition between rival firms (Guideline 2); the ability and incentive to limit access to a product rivals use to compete (Guideline 5); or for market definition (Section 4.3), for example when carrying out the Hypothetical Monopolist Test (Section 4.3.A). For clarity, the discussion in this subsection often focuses on competition between two suppliers of substitute products that set prices. Analogous analytic tools may also be relevant in more general settings, for example when considering: competition among more than two suppliers; competition among buyers or employers to procure inputs and labor; competition that derives from customer willingness to buy in different locations; and competition that takes place in dimensions other than price or when terms are determined through, for example, negotiations or auctions. Guideline 2 describes how different types of evidence can be used in assessing the potential harm to competition from a merger; some portions of Guideline 2 that are relevant in other settings are repeated below.
4.2.A. Generally Applicable Considerations The Agencies may consider one or more of the following types of evidence, tools, and metrics when assessing the degree of competition among firms:
Strategic Deliberations or Decisions. The Agencies may analyze the extent of competition among firms, for example between the merging firms, by examining evidence of their strategic deliberations or decisions in the regular course of business. For example, in some markets, the firms may monitor each other’s pricing, marketing campaigns, facility locations, improvements, products, capacity, output, input costs, and/or innovation plans. This can provide evidence of competition between the merging firms, especially when they react by taking steps to preserve or enhance the competitiveness or profitability of their own products or services.
Prior Merger, Entry, and Exit Events. The Agencies may look to historical events to assess the presence and substantiality of direct competition between the merging firms. For example, the Agencies may examine the impact of recent relevant mergers, entry, expansion, or exit events on the merging parties or their competitive behavior.
Customer Substitution. Customers’ willingness to switch between different firms’ products is an important part of the competitive process. Firms are closer competitors the more that customers are willing to switch between their products, for example because they are more similar in quality, price, or other characteristics.
Evidence commonly analyzed to show the extent of substitution among firms’ products includes: how customers have shifted purchases in the past in response to relative changes in price or other terms and conditions; documentary and testimonial evidence such as win/loss reports, evidence from discount approval processes, switching data, customer surveys, as well as information from suppliers of complementary products and distributors; objective information about product characteristics; and market realities affecting the ability of customers to switch. Impact of Competitive Actions on Rivals. When one firm takes competitive actions to attract customers, this can benefit the firm at the expense of its rivals. The Agencies may gauge the extent of competition among firms by considering the impact that competitive actions by one firm have on the others. The impact of a firm’s competitive actions on a rival generally depends on how many sales a rival would lose as a result of the competitive actions, as well as the profitability of those lost sales. The Agencies may use margins to measure the profitability of the sale a rival would have made.72 Impact of Eliminating Competition Between the Firms. In some instances, evidence may be available to assess the impact of competition from one or more firms on the other firms’ actions, such as firm choices about price, quality, wages, or another dimension of competition. This can be gauged by comparing the two firms’ actions when they compete and make strategic choices independently against the actions the firms might choose if they acted jointly. Actual or predicted changes in these results of competition, when available, can indicate the degree of competition between the firms. To make this type of comparison, the Agencies sometimes rely on economic models. Often, such models consider the firms’ incentives to change their actions in one or more selected dimensions, such as price, in a somewhat simplified scenario. For example, a model might focus on the firms’ short-run incentives to change price, while abstracting from a variety of additional competitive forces and dimensions of competition, such as the potential for firms to reposition their products or for the merging firms to coordinate with other firms. Such a model may incorporate data and evidence in order to produce quantitative estimates of the impact of the merger on firm incentives and corresponding choices. This type of exercise is sometimes referred to by economists as “merger simulation” despite the fact that the hypothetical setting considers only selected aspects of the loss of competition from a merger. The Agencies use such models to give an indication of the scale and importance of competition, not to precisely predict outcomes.
72 The margin on incremental units is the difference between incremental revenue (often equal to price) and incremental cost on those units. The Agencies may use accounting data to measure incremental costs, but they do not necessarily rely on accounting margins recorded by firms in the ordinary course of business because such margins often do not align with the concept of incremental cost that is relevant in economic analysis of a merger. 4.2.B. Considerations When Terms Are Set by Firms The Agencies may use various types of evidence and metrics to assess the strength of competition among firms that set terms to their customers. Firms might offer the same terms to different customers or different terms to different groups of customers. Competition in this setting can lead firms to set lower prices or offer more attractive terms when they act independently than they would in a setting where that competition was eliminated by a merger. When considering the impact of competition on the incentives to set price, to the extent price increases on one firm’s products would lead customers to switch to products from another firm, their merger will enable the merged firm to profit by unilaterally raising the price of one or both products above the pre- merger level. Some of the sales lost because of the price increase will be diverted to the products of the other firm, and capturing the value of these diverted sales can make the price increase profitable even though it would not have been profitable prior to the merger. A measure of customer substitution between firms in this setting is the diversion ratio. The diversion ratio from one product to another is a metric of how customers likely would substitute between them. The diversion ratio is the fraction of unit sales lost by the first product due to a change in terms, such as an increase in its price, that would be diverted to the second product. The higher the diversion ratio between two products made by different firms, the stronger the competition between them. A high diversion ratio between the products owned by two firms can indicate strong competition between them even if the diversion ratio to another firm is higher. The diversion ratio from one of the products of one firm to a group of products made by other firms, defined analogously, is sometimes referred to as the aggregate diversion ratio or the recapture rate. A measure of the impact on rivals of competitive actions is the value of diverted sales from a price increase. The value of sales diverted from one firm to a second firm, when the first firm raises its price on one of its products, is equal to the number of units that would be diverted from the first firm to the second, multiplied by the difference between the second firm’s price and the incremental cost of the diverted sales. To interpret the magnitude of the value of diverted sales, the Agencies may use as a basis of comparison either the incremental cost to the second firm of making the diverted sales, or the revenues lost by the first firm as a result of the price increase. The ratio of the value of diverted sales to the revenues lost by the first firm can be an indicator of the upward pricing pressure that would result from the loss of competition between the two firms. Analogous concepts can be applied to analyze the impact on rivals of worsening terms other than price.
Output or capacity reductions also may affect the market’s resilience in the face of future shocks to supply or demand, and the Agencies will consider this loss of resilience in assessing whether the merger may substantially lessen competition or tend to create a monopoly. 4.2.E. Considerations for Innovation and Product Variety Competition Firms can compete for customers by offering varied and innovative products and features, which could range from minor improvements to the introduction of a new product category. Features can include new or different product attributes, services offered along with a product, or higher-quality services standing alone. Customers value the variety of products or services that competition generates, including having a variety of locations at which they can shop. Offering the best mix of products and features is an important dimension of competition that may be harmed as a result of the elimination of competition between the merging parties. When a firm introduces a new product or improves a product’s features, some of the sales it gains may be at the expense of its rivals, including rivals that are competing to develop similar products and features. As a result, competition between firms may lead them to make greater efforts to offer a variety of products and features than would be the case if the firms were jointly owned, for example, if they merged. The merged firm may have a reduced incentive to continue or initiate development of new products that would have competed with the other merging party, but post-merger would “cannibalize” what would be its own sales.73 A service provider may have a reduced incentive to continue valuable upgrades offered by the acquired firm. The merged firm may have a reduced incentive to engage in disruptive innovation that would threaten the business of one of the merging firms. Or it may have the incentive to change its product mix, such as by ceasing to offer one of the merging firms’ products, leaving worse off the customers who previously chose the product that was eliminated. For example, competition may be harmed when customers with a preference for a low-price option lose access to it, even if remaining products have higher quality.
The incentives to compete aggressively on innovation and product variety depend on the capabilities of the firms and on customer reactions to the new offerings. Development of new features depends on having the appropriate expertise and resources. Where firms are two of a small number of companies with specialized employees, development facilities, intellectual property, or research projects in a particular area, competition between them will have a greater impact on their incentives to innovate. Innovation may be directed at outcomes beyond product features; for example, innovation may be directed at reducing costs or adopting new technology for the distribution of products. 4.3. Market Definition The Clayton Act protects competition “in any line of commerce in any section of the country.”74 The Agencies engage in a market definition inquiry in order to identify whether there is any line of commerce or section of the country in which the merger may substantially lessen competition or tend to create a monopoly. The Agencies identify the “area of effective competition” in which competition may be lessened “with reference to a product market (the ‘line of commerce’) and a geographic market (the ‘section of the country.’).”75 The Agencies refer to the process of identifying market(s) protected by the Clayton Act as a “market definition” exercise and the markets so defined as “relevant antitrust markets,” 73 Sales “cannibalization” refers to a situation where customers of a firm substitute away from one of the firm’s products to another product offered by the same firm.
74 15 U.S.C. § 18.
75 Brown Shoe, 370 U.S. at 324.
or simply “relevant markets.” Market definition can also allow the Agencies to identify market participants and measure market shares and market concentration. A relevant antitrust market is an area of effective competition, comprising both product (or service) and geographic elements. The outer boundaries of a relevant product market are determined by the “reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.”76 Within a broad relevant market, however, effective competition often occurs in numerous narrower relevant markets.77 Market definition ensures that relevant antitrust markets are sufficiently broad, but it does not always lead to a single relevant market. Section 7 of the Clayton Act prohibits any merger that may substantially lessen competition “in any line of commerce” and in “any section of the country,” and the Agencies protect competition by challenging a merger that may lessen competition in any one or more relevant markets.
77 Id. (“[W]ithin [a] broad market, well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes.”). Multiple overlapping markets can be appropriately defined relevant markets. For example, a merger to monopoly for food worldwide would lessen competition in well-defined relevant markets for, among others, food, baked goods, cookies, low-fat cookies, and premium low-fat chocolate chip cookies. Illegality in any of these in any city or town comprising a relevant geographic market would suffice to prohibit the merger, and the fact that one area comprises a relevant market does not mean a larger, smaller, or overlapping area could not as well. 78 United States v. Cont’l Can Co., 378 U.S. 441, 449 (1964); see also FTC v. Advoc. Health Care Network, 841 F.3d 460, 469 (7th Cir. 2016) (“A geographic market does not need to include all of the firm’s competitors; it needs to include the competitors that would substantially constrain the firm’s price-increasing ability.” (cleaned up)). 79 Phila. Nat’l Bank, 374 U.S. at 360 n.37.
81 See FTC v. Penn State Hershey Med. Center, 838 F.3d 327, 338 (3d Cir. 2016). While these guidelines focus on applying the hypothetical monopolist test in analyzing mergers, the test can be adapted for similar purposes in cases involving alleged monopolization or other conduct. See, e.g., McWane, Inc. v. FTC, 783 F.3d 814, 829-30 (11th Cir. 2015). product in the group.82 For the purpose of analyzing this issue, the terms of sale of products outside the candidate market are held constant. Analogously, when considering a merger of buyers, the Agencies ask the equivalent question for a hypothetical monopsonist. This Section often focuses on merging sellers to simplify exposition.
83 In the entrenchment context, if the inquiry is being conducted after market or monopoly power has already been exercised, using prevailing prices can lead to defining markets too broadly and thus inferring that dominance does not exist when, in Magnitude of the SSNIPT. What constitutes a “small but significant” worsening of terms depends upon the nature of the industry and the merging firms’ positions in it, the ways that firms compete, and the dimension of competition at issue. When considering price, the Agencies will often use a SSNIP of five percent of the price charged by firms for the products or services to which the merging firms contribute value. The Agencies, however, may consider a different term or a price increase that is larger or smaller than five percent.84 The Agencies may base a SSNIP on explicit or implicit prices for the firms’ specific contribution to the value of the product sold, or an upper bound on the firms’ specific contribution, where these can be identified with reasonable clarity. For example, the Agencies may derive an implicit price for the service of transporting oil over a pipeline as the difference between the price the pipeline firm paid for oil at one end and the price it sold the oil for at the other and base the SSNIP on this implicit price. 4.3.C. Evidence and Tools for Carrying Out the Hypothetical Monopolist Test Section 4.2 describes some of the qualitative and quantitative evidence and tools the Agencies can use to assess the extent of competition among firms. The Agencies can use similar evidence and analogous tools to apply the HMT, in particular to assess whether competition among a set of firms likely leads to better terms than a hypothetical monopolist would undertake. To assess whether the hypothetical monopolist likely would undertake at least a SSNIP on one or more products in the candidate market, the Agencies sometimes interpret the qualitative and quantitative evidence using an economic model of the profitability to the hypothetical monopolist of undertaking price increases; the Agencies may adapt these tools to apply to other forms of SSNIPTs. One approach utilizes the concept of a “recapture rate” (the percentage of sales lost by one product in the candidate market, when its price alone rises, that is recaptured by other products in the candidate market). A price increase is profitable when the recapture rate is high enough that the incremental profits from the increased price plus the incremental profits from the recaptured sales going to other products in the candidate market exceed the profits lost when sales are diverted outside the candidate market. It is possible that a price increase is profitable even if a majority of sales are diverted outside the candidate market, for example if the profits on the lost sales are relatively low or the profits on the recaptured sales are relatively high.
84 The five percent price increase is not a threshold of competitive harm from the merger. Because the five percent SSNIP is a minimum expected effect of a hypothetical monopolist of an entire market, the actual predicted effect of a merger within that market may be significantly lower than five percent. A merger within a well-defined market that causes undue concentration can be illegal even if the predicted price increase is well below the SSNIP of five percent. critical loss. While this “breakeven” analysis differs somewhat from the profit-maximizing analysis called for by the HMT, it can sometimes be informative. The Agencies require that estimates of the predicted loss be consistent with other evidence, including the pre-merger margins of products in the candidate market used to calculate the critical loss. Unless the firms are engaging in coordinated interaction, high pre-merger margins normally indicate that each firm’s product individually faces demand that is not highly sensitive to price. Higher pre-merger margins thus indicate a smaller predicted loss as well as a smaller critical loss. The higher the pre- merger margin, the smaller the recapture rate85 necessary for the candidate market to satisfy the hypothetical monopolist test. Similar considerations inform other analyses of the profitability of a price increase.
Analogous considerations arise for a merger involving one or more buyers or employers. In this case, the analysis considers whether buyers target suppliers, for example by paying targeted suppliers or workers less, or by degrading the terms of supply contracts for targeted suppliers. Arbitrage would involve a targeted supplier selling to the buyer indirectly, through a different supplier who could obtain more favorable terms from the buyer.
If the HMT is applied in a setting where targeting of customers is feasible, it requires that a hypothetical profit-maximizing firm that was the only present or future seller of the relevant product(s) to customers in the targeted group would undertake at least a SSNIPT on some, though not necessarily all, customers in that group. The products sold to those customers form a relevant market if the hypothetical monopolist likely would undertake at least a SSNIPT despite the potential for customers to substitute away from the product or to take advantage of arbitrage. In this exercise, the terms of sale for products sold to all customers outside the region are held constant. 4.3.D.2. Geographic Markets A relevant antitrust market is an area of effective competition, comprising both product (or service) and geographic elements. A market’s geography depends on the limits that distance puts on some customers’ willingness or ability to substitute to some products, or some suppliers’ willingness or ability to serve some customers. Factors that may limit the geographic scope of the market include transportation costs, language, regulation, tariff and non-tariff trade barriers, custom and familiarity, reputation, and local service availability.
4.3.D.2.a. Geographic Markets Based on the Locations of Suppliers The Agencies sometimes define geographic markets as regions encompassing a group of supplier locations. When they do, the geographic market’s scope is determined by customers’ willingness to switch between suppliers. Geographic markets of this type often apply when customers receive goods or services at suppliers’ facilities, for example when customers buy in-person from retail stores. A single firm may offer the same product in a number of locations, both within a single geographic market or across geographic markets; customers’ willingness to substitute between products may depend on the location of the supplier. When calculating market shares, sales made from supplier locations in the geographic market are included, regardless of whether the customer making the purchase travelled from outside the boundaries of the geographic market (see Section 4.4 for more detail about calculating market shares).
If the HMT is used to evaluate the geographic scope of the market, it requires that a hypothetical profit-maximizing firm that was the only present or future supplier of the relevant product(s) at supplier locations in the region likely would undertake at least a SSNIPT in at least one location. In this exercise, the terms of sale for products sold to all customers at facilities outside the region are typically held constant.87 87 In some circumstances, as when the merging parties operate in multiple geographies, if applying the HMT, the Agencies may apply a “Hypothetical Cartel” framework for market definition, following the approach outlined in Section 4.3.A, n.81. 4.3.D.2.b. Geographic Markets Based on Targeting of Customers by Location When targeting based on customer location is feasible (see Section 4.3.D.1), the Agencies may define geographic markets as a region encompassing a group of customers.88 For example, geographic markets may sometimes be defined this way when suppliers deliver their products or services to customers’ locations, or tailor terms of trade based on customers’ locations. Competitors in the market are firms that sell to customers that are located in the specified region. Some suppliers may be located outside the boundaries of the geographic market, but their sales to customers located within the market are included when calculating market shares (see Section 4.4 for more detail about calculating market shares).
If prices are negotiated individually with customers that may be targeted, geographic markets may be as narrow as individual customers. Nonetheless, the Agencies often define a market for a cluster of customers located within a region if the conditions of competition are reasonably similar for these customers. (See Section 4.3.D.4 for further discussion of cluster markets.) A firm’s attempt to target customers in a particular area with worsened terms can sometimes be undermined if some customers in the region substitute by travelling outside it to purchase the product. Arbitrage by customers on a modest scale may be possible but sufficiently costly or limited that it would not deter or defeat a targeting strategy.89 If the HMT is used to evaluate market definition when customers may be targeted by location, it requires that a hypothetical profit-maximizing firm that was the only present or future seller of the relevant product(s) to customers in the region likely would undertake at least a SSNIPT on some, though not necessarily all, customers in that region. The products sold in that region form a relevant market if the hypothetical monopolist would undertake at least a SSNIPT despite the potential for customers to substitute away from the product or to locations outside the region. In this exercise, the terms of sale for products sold to all customers outside the region are held constant.90 4.3.D.3. Supplier Responses Market definition focuses solely on demand substitution factors, that is, on customers’ ability and willingness to substitute away from one product or location to another in response to a price increase or other worsening of terms. Supplier responses may be considered in the analysis of competition between firms (Guideline 2 and Section 4.2), entry and repositioning (Section 3.2), and in calculating market shares and concentration (Section 4.4). 4.3.D.4. Cluster Markets A relevant antitrust market is generally a group of products that are substitutes for each other. However, when the competitive conditions for multiple relevant markets are reasonably similar, it may be appropriate to aggregate the products in these markets into a “cluster market” for analytic convenience, even though not all products in the cluster are substitutes for each other. For example, competing hospitals may each provide a wide range of acute health care services. Acute care for one health issue is not a substitute for acute care for a different health issue. Nevertheless, the Agencies may 88 For customers operating in multiple locations, only those customer locations within the targeted region are included in the market.
89 Arbitrage by suppliers is a type of supplier response and is thus not considered in market definition. (See Section 4.3.D.3) 90 In some circumstances, as when the merging parties operate in multiple geographies, the Agencies may apply a “Hypothetical Cartel” framework for market definition, as described in Section 4.3.A, n.81. aggregate them into a cluster market for acute care services if the conditions of competition are reasonably similar across the services in the cluster.
When defining a market for labor the Agencies will consider the job opportunities available to workers who supply a relevant type of labor service, where worker choice among jobs or between geographic areas is the analog of consumer choices among products and regions when defining a product market. The Agencies may consider workers’ willingness to switch in response to changes to wages or other aspects of working conditions, such as changes to benefits or other non-wage compensation, or adoption of less flexible scheduling. Depending on the occupation, alternative job opportunities might include the same occupation with alternative employers, or alternative occupations. Geographic market definition may involve considering workers’ willingness or ability to commute, including the availability of public transportation. The product and geographic market definition may involve assessing whether workers may be targeted for less favorable wages or other terms of employment according to factors such as education, experience, certifications, or work locations. The Agencies may define cluster markets for different jobs when firms employ workers in a variety of jobs characterized by similar competitive conditions (see Section 4.3.D.4). 4.4. Calculating Market Shares and Concentration This subsection further describes how the Agencies calculate market shares and concentration metrics.
91 See Illumina, slip op. at 12 (affirming a relevant market defined around “what . . . developers reasonably sought to achieve, not what they currently had to offer”).
Firms that are not currently active in a relevant market, but that very likely would rapidly enter with direct competitive impact in the event of a small but significant change in competitive conditions, without incurring significant sunk costs, are also considered market participants. These firms are termed “rapid entrants.” Sunk costs are entry or exit costs that cannot be recovered outside a relevant market. Entry that would take place more slowly in response to a change in competitive conditions, or that requires firms to incur significant sunk costs, is considered in Section 3.2. Firms that are active in the relevant product market but not in the relevant geographic market may be rapid entrants. Other things equal, such firms are most likely to be rapid entrants if they are already active in geographies that are close to the geographic market. Factors such as transportation 92 For simplicity, the discussion in the text focuses on the case where concerns arise that involve competition among the suppliers of products; analogous considerations may also arise for suppliers of services, or when concerns arise about competition among buyers of a product or service, or when analyzing market shares in certain specific settings (see Section 4.3.D).
costs are important; or for services or digital goods, other factors may be important, such as language or regulation.
Revenues in a relevant market often provide a readily available basis on which to compute shares and are often a good measure of attractiveness to customers. Unit sales may provide a useful measure of competitive significance in cases where one unit of a low-priced product can serve as a close substitute for one unit of a higher-priced product. For example, a new, much less expensive product may have great competitive significance if it substantially erodes the revenues earned by older, higher-priced products, even if it earns relatively low revenues.
Revenues earned from recently acquired customers (or paid to recently acquired buyers, in the case of merging buyers) may provide a useful measure of competitive significance of firms in cases where trading partners sign long-term contracts, face switching costs, or tend to re-evaluate their relationships only occasionally.
Measures based on capacities or reserves may be used to calculate market shares in markets for homogeneous products where a firm’s competitive significance may derive principally from its ability and incentive to rapidly expand production in a relevant market in response to a price increase or output reduction by others in that market (or to rapidly expand its purchasing in the case of merging buyers).
Non-price indicators, such as number of users or frequency of use, may be useful indicators in markets where price forms a relatively small or no part of the exchange of value. Federal Trade Commission Statement Concerning Brand Drug Manufacturers’ Improper Listing of Patents in the Orange Book I. Introduction Brand drug manufacturers may be harming generic competition through the improper listing of patents in the Food and Drug Administration’s (“FDA”) Approved Drug Products with Therapeutic Equivalence Evaluations, known as the “Orange Book.”1 Generic competition for brand-name drugs results in lower prices, increased access, and significant cost savings for consumers and the healthcare system. The Hatch-Waxman Act and FDA regulations set forth the criteria for listing patents in the Orange Book.2 The Orange Book puts generic companies on notice of certain types of patents that a brand company claims cover its product. Patents listed in the Orange Book must claim the reference listed drug or a method of using it. By listing patents, brand drug manufacturers may benefit from a 30-month stay of FDA approval of generic drug applications, regardless of whether a court ultimately finds the patent at issue is valid or infringed by the competing product.
Brand drug manufacturers are responsible for ensuring their patents are properly listed. Yet certain manufacturers have submitted patents for listing in the Orange Book that claim neither the reference listed drug nor a method of using it. When brand drug manufacturers abuse the regulatory processes set up by Congress to promote generic drug competition, the result may be to increase the cost of and reduce access to prescription drugs. The goal of this policy statement3 is to put market participants on notice that the FTC intends to scrutinize improper Orange Book listings to determine whether these constitute unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act.4 1 The Orange Book is the FDA’s official source for listing prescription (and nonprescription) drug products approved in an application under Section 505 of the Federal Food, Drug, and Cosmetic Act (“FDCA”), codified at 21 U.S.C. §301, et seq., related patent and exclusivity information, and other important information including therapeutic equivalence.
2 21 U.S.C. §§ 355(b)(1)(A)(viii), 355(c)(2); 21 C.F.R. § 314.53(b)(1). 3 This Policy Statement does not confer any rights on any person and does not operate to bind the FTC or the public. In any enforcement action, the Commission must prove the challenged act or practice violates one or more existing statutory or regulatory requirements. In addition, this Policy Statement does not preempt federal, state, or local laws. Compliance with those laws, however, will not necessarily preclude Commission law enforcement action under the FTC Act or other statutes. Pursuant to the Congressional Review Act (5 U.S.C. § 801 et seq.), the Office of Information and Regulatory Affairs designated this Policy Statement as not a “major rule,” as defined by 5 U.S.C. § 804(2).
4 Although this statement focuses on unfair methods of competition, the Commission may also investigate such conduct under the Commission’s authority to prevent unfair or deceptive acts or practices. See 15 U.S.C. §§ 45(a), (n).
Under 21 U.S.C. § 355, as amended by the Orange Book Transparency Act of 2020,10 the brand manufacturers must submit for listing a patent that:
6 See 21 U.S.C. § 355(j)(2)(A)(iv).
7 Fed. Trade Comm’n v. AbbVie Inc., 976 F.3d 327, 339 (3d Cir. 2020) (discussing 21 U.S.C. § 355(b)(2)). Like an ANDA applicant, a 505(b)(2) applicant can rely on the FDA’s finding of safety and effectiveness for the brand drug product and need only “produce some data, including whatever ‘information [is] needed to support the modification(s).”’ Id. (quoting 21 C.F.R. § 314.54(a)). 8 In re Restasis (Cyclosporine Ophthalmic Emulsion) Antitrust Litig., 333 F. Supp. 3d 135, 149 (E.D.N.Y. 2018). 9 As used herein, “505(b)(2)” refers to Section 505(b)(2) of the FDCA, codified at 21 U.S.C. § 355(b)(2). 10 Pub. L. No. 116-290, 134 Stat. 4889 (2021).
11 21 U.S.C. § 355(b)(1)(A)(viii). See also 21 U.S.C. §§ 355(c)(2), 21 C.F.R. § 314.53 (submission of patent information). Only the patent information submitted under section §355(c)(2) is listed in the Orange Book. A patent that is identified as claiming a method of using such drug shall be filed pursuant to section §355(c)(2) for listing in the Orange Book only if the patent claims a method of use approved in the application. 12 21 U.S.C. § 355(c)(2).
which the applicant is seeking approval.”13 If the Orange Book listed patents are not expired, the generic company can file a “paragraph IV” certification stating the generics’ view that the brand company’s patent is “invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.”14 A paragraph IV certification generally triggers an immediate right for the brand company to sue for infringement,15 which if done timely, generally results in an automatic, 30-month stay of any approval of the generic company’s ANDA or 505(b)(2) application by the FDA.16 NDA holders17 are responsible for ensuring that Orange Book patent information is consistent with the listing requirements in 21 C.F.R. § 314.53, and subsection (c)(2)(ii)(R) requires the person who submits the patent information to attest under penalty of perjury that the submission complies with this regulation.18 III. Improper listing of patents in the Orange Book may harm competitive conditions in pharmaceutical markets Brand manufacturers’ listing in the Orange Book patents that do not meet the statutory listing criteria undermines the competitive process and may constitute an unfair method of competition in violation of Section 5 of the FTC Act.
Improper Orange Book listings may have played a role in distorting pharmaceutical markets for decades. The Supreme Court has observed that since the late 1990s there has been evidence that some brand drug companies were exploiting the Orange Book listing process “to prevent or delay the marketing of generic drugs.”19 The FTC examined the potential anticompetitive effect of improper Orange Book listings as part of a 2002 study, in which it identified numerous instances in which the 30-month stay was used to block competition.20 The same year, the FTC charged Biovail Corporation for, among other things, wrongfully listing a 13 Id. at § 355(j)(2)(A)(vii).
14 Id. at § 355(j)(2)(A)(vii)(IV). If the generic is not contending the patents are invalid or not infringed, it would simply file a “paragraph III” certification signifying it will wait to come to market until patent expiry. Id. 15 There is no right to file an infringement suit in response to a paragraph IV certification if the patent was obtained by fraud on the United States Patent and Trademark Office or if the infringement suit would be objectively baseless. See, e.g., AbbVie Inc., 976 F.3d at 361 (“[W]e must not immunize a brand-name manufacturer who uses the Hatch- Waxman Act’s automatic, 30-month stay to thwart competition. Doing so would excuse behavior that Congress proscribed in the antitrust laws.”).
16 21 U.S.C. § 355(j)(5)(B)(iii).
17 For purposes of this statement the terms “brand drug manufacturer” and “NDA holder” are used synonymously. 18 According to 21 C.F.R. § 314.53(c)(2)(ii)(R), NDA holders are required to submit a signed verification as part of Form FDA 3542 that states:
The undersigned declares that this is an accurate and complete submission of patent information for the NDA, amendment, or supplement pending under section 505 of the Federal Food, Drug, and Cosmetic Act. This time-sensitive patent information or response to a request under 21 C.F.R 314.53(f)(1) is submitted pursuant to 21 C.F.R. 314.53. I attest that I am familiar with 21 C.F.R. 314.53 and this submission complies with the requirements of the regulation. I verify under penalty of perjury that the foregoing is true and correct.
19 Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 566 U.S. 399, 408 (2012). 20 FED. TRADE COMM’N., GENERIC DRUG ENTRY PRIOR TO PATENT EXPIRATION: AN FTC STUDY 39-52 (2022) www.ftc.gov/sites/default/files/documents/reports/generic-drug-entry-prior-patent-expiration-ftc- study/genericdrugstudy_0.pdf.
patent in the Orange Book to block generic competition in violation of the FTC Act.21 Over the years, the FTC has filed amicus briefs in private litigations relating to the anticompetitive effects of improper Orange Book patent listings, including most recently in Jazz Pharms., Inc. v. Avadel CNS Pharms.22 Improper Orange Book patent listings may disincentivize investments in developing a competing product and increase the risk of delayed generic and follow-on product entry, reducing patient access to more affordable prescription drugs and increasing costs to the healthcare system. Given the enormous profit margins of many branded drugs, even small delays in generic competition can generate substantial additional profits for brand companies at the expense of patients.
In the Hatch-Waxman framework, Congress struck a careful balance between preserving financial incentives for innovative drug development and accelerating the availability of follow- on lower-priced generics.23 When brand companies improperly list patents in the Orange Book that do not meet the statutory criteria, it undermines the pro-competitive goals of Congress and risks significantly harming patients. By improperly listing a patent and timely filing an infringement suit, a brand can generally rely on the automatic stay to block FDA approval of a competing drug product, generally for 30 months, regardless of the validity or scope of the patent and regardless of whether the patent meets the statutory listing criteria. As a result, a generic company with a competing product facing an infringement suit based on a patent that was improperly listed in the Orange Book cannot launch its product because the automatic stay would prevent the FDA from granting approval to market the product. Patients suffer because they are deprived of the ability to choose between competing products and may be forced to pay inflated prices.24 21 Decision and Order, In re Biovail Corp., FTC Dkt. No. C-4060 (Oct. 2, 2002). 22 See Brief for Fed. Trade Comm’n as Amicus Curiae, Jazz Pharms., Inc. v, Avadel CNS Pharms. No. 1:21-cv- 00691 (D. Del. Nov. 10, 2022) (Doc. No. 22-3) (arguing that a patent covering a system for implementing a REMS was not properly listed), https://www.ftc.gov/system/files/ftc_gov/pdf/P163500JazzPharmaAmicusBrief.pdf; Mem. of Law of the Federal Trade Commission as Amicus Curiae, SmithKline Beecham Corp. v. Apotex Corp., No. 99-cv- 4304 (E.D. Pa. January 28, 2003), https://www.ftc.gov/sites/default/files/documents/amicus_briefs/smithkline- beechamcorp.v.apotex-corp./smithklineamicus.pdf; Mem. of Law of Amicus Curiae the Federal Trade Commission In Opposition to Defendant’s Motion to Dismiss, In re: Buspirone Patent Litig., MDL Docket No. 1410 (S.D.N.Y.
23 The FDA has noted that these requirements “reflect an attempt to balance two competing interests: Promoting competition between ‘brand name’ or ‘innovator drugs’ and ‘generic’ drugs and encouraging research and innovation.” Applications for FDA Approval to Market a New Drug: Patent Submission and Listing Requirements and Application of 30-Month Stays on Approval of Abbreviated New Drug Applications Certifying That a Patent Claiming a Drug Is Invalid or Will Not Be Infringed, 68 Fed. Reg. 36,676 (June 18, 2003) (codified at 21 C.F.R. pt. 314).
24 See Fed. Trade Comm’n Generic Drug Entry Study, supra note 20.
The improper listing of patents in the Orange Book may also constitute illegal monopolization. Monopolization requires proof of “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”29 This requires proof that “the defendant has engaged in improper conduct that has or is likely to have the effect of controlling prices or excluding competition,”30 and courts have recognized that improperly listing patents in the 25 Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf. 26 Id. at 8 (“The conduct must implicate competition, but the relationship can be indirect. For example, misuse of regulatory processes that can create or exploit impediments to competition (such as those related to licensing, patents, or standard setting) constitutes a method of competition.”). See Charles Pfizer & Co. v. FTC, 401 F.2d 574, 585 (6th Cir. 1968), cert. denied, 394 U.S. 920 (1969) (affirming Commission order holding that defendants violated Sec. 5 of the Federal Trade Commission Act where substantial evidence supported the Commission’s findings that misrepresentations and withholding of material information misled Patent Office officials into granting a patent on tetracycline).
27 Fed. Trade Comm’n Unfair Methods of Competition Policy Statement, supra note 25 at 8-9. 28 Id. at 15 n.85 (citing Fed. Trade Comm’n v. Ind. Fed’n of Dentists, 476 U.S. 447, 460-61 (1986) (finding of sustained effects legally sufficient even in absence of elaborate market analysis); Toys “R” Us v. Fed. Trade Comm’n, 221 F.3d 928, 937 (7th Cir. 2000) (finding “sufficient proof of anticompetitive effects [such] that no more elaborate market analysis was necessary”). Cf. Fed. Trade Comm’n v. Staples, Inc., 970 F. Supp. 1066, 1075-6 (D.D.C. 1997) (relying in part on direct evidence that pricing for key products from office superstores lower where three such stores exist in same metropolitan area and higher where only one or two such stores present). 29 U.S. v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). 30 PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 108 (2d Cir. 2002). Orange Book may constitute an “improper means” of competition.31 Accordingly, improperly listing patents in the Orange Book may also be worthy of enforcement scrutiny from government and private enforcers under a monopolization theory. Additionally, the FTC may also scrutinize a firm’s history of improperly listing patents during merger review.32 Individuals who submit or cause the submission of improper Orange Book patent listings, including those who certify compliance under 21 C.F.R. § 314.53(c)(2)(ii)(R), may be held individually liable.33 Further, if the FTC encounters false certifications filed under 21 C.F.R. § 314.53(c)(2)(ii)(R) that may constitute a potential criminal violation for the submission of false statements,34 the Commission may refer such cases to the U.S. Department of Justice for further investigation.
NDA holders must ensure that submitted patent information complies with all applicable Orange Book requirements under the law. Accordingly, NDA holders that currently have patents listed in the Orange Book must ensure that those listings comply with the law and should immediately remove any patents that fail to meet listing requirements. Failure to remove improperly listed patents from the Orange Book promptly may result in legal liability under the FTC Act. The FTC may also dispute patent listings through the FDA process set out in 21 C.F.R. 314.53(f)(1), which allows any interested person to request correction of patent information published in the Orange Book.
Patents improperly listed in the Orange Book can significantly undermine fair competition and harm the American public. The FTC will continue to use all its tools to halt unlawful business practices that contribute to high drug prices. 31 In re Lantus Direct Purchaser Antitrust Litig., 950 F.3d 1, 7 (1st Cir. 2020) (quoting Town of Concord v. Bos. Edison Co., 915 F.2d 17, 21 (1st Cir. 1990)). In In re Lantus, the First Circuit found a device patent covering an injector pen drive mechanism that drugmaker Sanofi submitted for listing in the Orange Book was improperly listed because the patent did not claim insulin glargine or the Lantus SoloSTAR product. Id. See also United Food & Com. Workers Local 1776 v. Takeda Pharm. Co., 11 F.4th 118, 134-136 (2d Cir. 2021). 32 15 U.S.C. § 18. See also Michael A. Carrier, et al., Prior Bad Acts and Merger Review, 111 GEO. L. J. 106 (2023).
33 See Fed. Trade Comm’n v. Shkreli, 581 F. Supp. 3d 579, 637 (S.D.N.Y. 2022) (citing Hartford-Empire Co. v. United States, 323 U.S. 386, 407 (1945)); Lorain Journal Co. v. United States, 342 U.S. 143, 145 n.2 (1951) (officers and directors “participated in the conduct alleged to constitute the attempt to monopolize”). 34 18 U.S.C. § 1001. FDA Form 3542—the form used by NDA holders to submit their patent information for listing in the Orange Book—warns those submitting patents for listing that “[a] willfully and knowingly false statement is a criminal offense under 18 U.S.C. 1001” directly beneath the declaration certifying to the accuracy and completeness of the submission. See FDA Form 3542, Section 6, https://www.fda.gov/media/133512/download. Policy Statement of the Federal Trade Commission on Franchisors’ Use of Contract Provisions, Including Non-Disparagement, Goodwill, and Confidentiality Clauses1 I. Introduction The Federal Trade Commission (“Commission” or “FTC”) is charged with protecting franchisees from unfair methods of competition and unfair and deceptive practices.2 Communications with franchisees are essential for the Commission to accomplish this statutory mandate. The FTC is concerned that franchisees are reluctant or unwilling to voluntarily discuss or file reports about their experiences with franchisors, even if the franchisees believe a law violation has occurred.3 The Commission is issuing this Policy Statement to make clear its view that provisions included in franchise agreements or other contractual documents between franchisors and franchisees4 may not restrict franchisees’ communications with the Commission or any other state or federal law enforcer or regulator about potential law violations.5 In 2022, after hearing that franchisees may have had difficulty filing reports using the Commission’s reportfraud.ftc.gov portal, the Commission streamlined the reporting process.6 Since then, the number of reports has increased but the FTC remains concerned that some franchisees continue to report that they feel chilled or even contractually prohibited from 1This Policy Statement does not confer any rights on any person and does not operate to bind the FTC or the public. In any enforcement action, the Commission must prove the challenged act or practice violates one or more existing statutory or regulatory requirements. In addition, this Policy Statement does not preempt federal, state, or local laws. Compliance with those laws, however, will not necessarily preclude Commission law enforcement action under the FTC Act or other statutes.
215 U.S.C. 41-58, as amended; Franchise Rule, 16 C.F.R. pt. 436. The Franchise Rule is a pre-sale disclosure rule, which requires franchisors to provide prospective franchisees with material information to help prospective franchisees determine whether a franchise deal is in his or her best interest. 72 FR 15444 (Mar. 30, 2007). 3 This concern is not unique to franchising. See, e.g., Contracts that Impede Bureau of Competition Investigations, FED. TRADE COMM’N (June 15, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/Formal-Analysis.pdf. 4 Typically, a written contractual agreement – often called a “franchise agreement” – is entered into between a franchisee and franchisor. (That agreement also typically references, incorporates, or attaches the franchisor’s Operating Manual.) Once signed, the franchise agreement remains in effect for a specified period of time stated in the agreement. As part of the Franchise Disclosure Document required by the FTC’s Franchise Rule, franchisors must provide prospective franchisees with copies of all contracts, including the franchise agreement, at least fourteen days before the prospect signs any contract or makes any payment to the franchisor or an affiliate. 5 The Commission does not intend to provide legal advice to any potential report filers or witnesses and advises anyone with concerns about liability to consult an attorney. The Commission takes no issue with a company’s legitimate interest in protecting its intellectual property rights. The Commission notes that it will continue to analyze, on a case-by-case basis, whether contract provisions, such as confidentiality clauses, are unfair or deceptive under Section 5.
6 ReportFraud, FED. TRADE COMM’N, https://reportfraud.ftc.gov (last visited June 6, 2024); Lesley Fair, Franchise Fundamentals: Reducing the risks – and reporting if things go awry, FED. TRADE COMM’N (Sept. 5, 2023), https://consumer.ftc.gov/consumer-alerts/2023/09/franchise-fundamentals-reducing-risks-and-reporting-if-things-go- awry (describing how to file a report via reportfraud.ftc.gov). reporting to the FTC.7 Franchisee reports and voluntary interviews are a critical part of FTC investigations. If franchisees are unwilling or unable to file reports and discuss their experiences, the FTC’s ability to protect franchisees is weakened. Furthermore, the competitive and consumer protection benefits that flow from the franchise business model are undermined.
9 See infra n.13.
10 Fed. Trade Comm’n, Solicitation for Public Comments on Provisions of Franchise Agreements and Franchisor Business Practices, https://www.ftc.gov/system/files/ftc_gov/pdf/Franchise-RFI.pdf. 11 Id.
12 The Commission received 5,291 comments. Of those, 2,216 were publicly posted on the docket; the remainder were nonresponsive.
13 FTC-2023-0026-0042, filed by Anonymous (“Even submitting comments such as this one, to a governmental agency, is fraught due to the non-disparag[e]ment clauses included in all Franchise Agreements.”); FTC-2023-0026- 0049, filed by Anonymous (“Furthermore, the non-disparagement and goodwill clauses are concerning. Franchisors often enforce these clauses to prevent franchisees from filing complaints about unfair or deceptive conduct. This not only harms franchisees but also consumers and workers.”); FTC-2023-0026-0167, filed by Caroline Fichter (“The mere presence of a non-disparagement clause in the franchise agreement has an immediate and devastating effect on the franchisee’s behavior. It prevents them from providing honest feedback to prospective franchisees and from reporting unfair and deceptive practices to federal or state authorities.”); FTC-2023-0026-1034, filed by Coalition of Franchisee Associations (“Non-disparagement clauses contained in the FA further prohibit franchisees from comments anonymously.14 At least one commenter stated that a franchisor threatened to terminate franchisees who spoke with regulators.15 Some noted a fear of retaliation for filing reports or otherwise communicating with regulators about their experience.16 Commenters disagreed about the extent to which franchisors use non-disparagement clauses, but agreed that confidentiality clauses are often included in settlement agreements and that goodwill clauses are very common. For example, one commenter noted that, while historically common in settlement agreements, non-disparagement and goodwill clauses are routinely included in franchise agreements and have expanded dramatically over the past several years.17 Others noted that, in their experience, specific non-disparagement clauses are uncommon, but clauses that prohibit the franchisee from doing anything that reflects negatively on the franchisor’s goodwill are very discussing their concerns with prospective franchisees or anyone at all - including government agencies.”); FTC- 2023-0026-1093, filed by Maryland State Bar Association (“[W]e encourage the FTC to make a clear distinction between clauses that prohibit disparaging the franchisor or the brand in consumer-facing public forums, as opposed to clauses that inhibit franchisee communications with prospective franchisees, their fellow active franchisees, or with governmental agencies or in courts with regard to the franchise relationship.”); FTC-2023-0026-1557, filed by Anonymous (“Non-disparagement, goodwill or similar clauses, by their very nature, ABSOLUTELY inhibit franchisees from filing complaints with state, local, or federal agencies related to unfair or deceptive conduct by franchisors. As a franchisee, the fear of retribution and legal action is too great to justify risking a complaint that can be tied back to them.”); FTC-2023-0026-2104, filed by North American Securities Administrators Association (“Nondisparagement and goodwill clauses are also ubiquitous in franchising. Those agreements that limit franchisees’ ability to complain to government agencies are of particular concern. One such agreement states that the franchisee ‘must covenant never to commence any action or proceeding against [the franchisor], file any complaint with any regulatory authority concerning [the franchisor] or otherwise assert any claim against [the franchisor].’”); FTC-2023-0026-2062, filed by National Owners Association (“The nondisparagement clause, paired with systemic threats, intimidation, and retaliation, significantly inhibits franchisees from filing complaints with state, local, or federal agencies related to unfair or deceptive conduct by franchisors, or even from speaking publicly or participating in franchisee-only organizations designed to protect and pursue franchisee interests.”). 14 FTC-2023-0026-0042, filed by Anonymous; FTC-2023-0026-0049, filed by Anonymous; FTC-2023-0026-1557, filed by Anonymous.
15 FTC-2023-0026-1952, filed by Thomas Ayres, Warner, Federico & Ryan LLP (“The franchisor has threatened to terminate franchisees that sought clarification from regulators on new policies and that were quoted in trade publications because such actions falsely stating [sic] that the comments reflected materially and unfavorably upon the operation and reputation of the system and disclosed sensitive and confidential information.”). 16 FTC-2023-0026-2062, filed by National Owners Association; FTC-2023-0026-2123, filed by North American Subway Association of Franchisees (“Franchisees, anecdotally, are and have been fearful of retribution for launching complaints to proper authorities.”); FTC-2023-0026-2170, filed by American Association of Franchisees and Dealers (“Many franchise agreements now consider anything said negatively about the brand, no matter who it is said to, a violation of the non-disparagement clause. This includes between franchisees that are part of a chapter or franchisee association or a franchisee post on their private discussion groups. Often any negative discussion is followed by a threatening legal letter to the franchisee which quickly silences them. But it often does not stop there; increased inspections follow and amazingly, these franchisees are found in default for another reason. The retaliation is obvious, but often hard to prove, especially since in many businesses it is not that hard to find some level of default.”); FTC-2023-0026-1943, filed by Independent Association of Home Instead Franchisees, Inc (“We are aware of at least one case in our network where a franchisee was sanctioned for communications with government regulatory authority but will not provide additional details for fear of further retaliation against the franchisee.”) 17 FTC-2023-0026-1941, filed by Bundy & Fichter; see also FTC-2023-0026-2104, filed by North American Securities Administrators Association (“Non-disparagement and goodwill clauses are also ubiquitous in franchising”).
common.18 A few commenters stated that, while franchise agreements may include non- disparagement or goodwill clauses, the franchisors either do not enforce them or such provisions do not inhibit franchisees’ ability to communicate with regulators.19 III. Analysis The Commission has seen contract provisions that may restrict current and former franchisees from speaking about potential law violations. These provisions may take the form of non- disparagement clauses (“franchisee shall not disparage the brand in any way”), confidentiality or non-disclosure clauses (“franchisee is prohibited from sharing any information about the franchise or their experience”), goodwill clauses (“franchisee shall not engage in any conduct that may tarnish the goodwill of the brand”), and similar clauses. They are sometimes included in franchise agreements or may be entered into post-sale, including at termination of the relationship.20 Generally, case law establishes that clauses that impair or prohibit free communication about potential law violations with an administrative agency acting within its statutory mandate are void and unenforceable. For example, courts have struck down contractual clauses that otherwise prevent a government agency from seeking and obtaining complete, candid information in 18 FTC-2023-0026-1093, filed by Maryland State Bar Association (“It is our experience that these clauses are not usually present in Franchise Agreements, other than a general clause that the Franchisee does not do anything that can reflect negatively on the Franchisor’s goodwill.”); FTC-2023-0026-1936, filed by Lathrop GPM, LLP (“We are aware of very few instances where non-disparagement provisions are used in standard franchise agreements, with such provisions appearing in approximately 6% of the FDDs we surveyed. Such clauses are generally used in termination, release, and settlement agreements to resolve disputes and prevent adverse actions by both parties. It is not clear what is meant in the RFI by “goodwill” clauses. If this is intended to mean that the trademark goodwill arising from the franchisee’s use of the franchised brand inures to the benefit of the franchisor, then such clauses are likely universal in franchising…”).
19 FTC-2023-0026-1724, filed by Wyndham Hotels & Resorts (“The existence of the goodwill provision in our franchise agreements does not inhibit franchisees from pursuing claims they feel they may have relating to unfair or deceptive conduct or from providing non-confidential, non-trade secret information to prospective or current franchisees or third parties.”); FTC-2023-0026-2152, filed by International Franchise Association (“IFA believes that franchisees generally support such clauses and that the clauses do not inhibit franchisees from sharing information with other franchisees, prospective franchisees or with regulators.”); FTC-2023-0026-2129, filed by Domino’s Pizza, Inc. (“The SFA contains a non-disclosure provision which is intended, in part, to prohibit franchisees from disclosing non-public information about Domino’s or the Domino’s system to others outside the Domino’s system, including financial analysts, or from disparaging Domino’s or the Domino’s system in the manner that would harm the Domino’s brand. The provision is not intended to prohibit franchisees from communicating with other franchisees, prospective franchisees, or federal, state, or local government agencies, nor has Domino’s sought to enforce this provision to prevent any such communication.”). 20 The Franchise Rule requires franchisors to disclose the use of confidentiality clauses, and nothing in this Statement alters that requirement. See 16 C.F.R. § 436.5(t)(7). To the extent, however, such clauses, as drafted, impair or prohibit the free communication about potential law violations with a government agency acting within its statutory mandate, the Commission views such clauses as void and unenforceable and in violation of Section 5 of the FTC Act. To the extent such clauses narrowly articulate a company’s legitimate interest in protecting its intellectual property rights, however, they raise no concern under this Statement. See supra n.5. furtherance of a statutory mandate.21 Such clauses cannot operate to inhibit a franchisee from reporting potential law violations to the government.
Similarly, the FTC has challenged companies’ use of tactics, including non-disparagement clauses, that discourage purchasers from speaking or publishing truthful or non-defamatory negative comments or reviews as unfair practices under the FTC Act. For example, in FTC v. Roca Labs, Inc., the court found on summary judgment that Defendants’ use of gag clauses to prohibit purchasers from speaking or publishing truthful or non-defamatory negative comments or reviews about the Defendants, their products, or their employees was an unfair practice in violation of Section 5 of the FTC Act.22 A practice is unfair if it causes or is likely to cause substantial consumer injury, which consumers cannot reasonably avoid, and which is not outweighed by benefits to consumers or competition.23 Clauses that prohibit a franchisee from reporting potential law violations to the government are unfair. Similarly, implicit or explicit threats of retaliation, by legal action or otherwise, against a franchisee for reporting potential law violations to the government are unfair. By suppressing reports of potential legal violations by franchisors to the government, franchisors impede the flow of franchisee reports and voluntary interviews that are critical to government 21 See, e.g., EEOC v. Astra USA, 94 F.3d 738, 744–45 (1st Cir. 1996) (holding that employers may not use confidentiality agreements to interfere with or restrict law enforcement agencies’ ability to interview their employees); FTC v. AMG Services, Inc., No. 2:12-cv-00536-GMN-VCF, 2013 WL 12320929, at *2 (D. Nev. Aug. 20, 2013) (“[T]he court finds that the confidentiality agreements at issue before the court are unenforceable to prohibit former employees from willingly cooperating with the FTC.”); Sparks v. Seltzer, No. 05-CV-1061 (NG) (KAM), 2006 WL 2358157, at *4 (E.D.N.Y. Aug. 14, 2006) (“Indeed, agreements restricting former employee revelation of events in the workplace which are not privileged but may involve violations of federal law have the effect of hindering implementation of the Congressionally mandated duty to enforce the provisions of federal statutes.”) (internal quotations and citation omitted); EEOC v. Int’l Profit Assocs., No. 01 C 4427, 2003 U.S. Dist. LEXIS 6761 at *6 (N.D. Ill. Apr. 21, 2003) (“[A]ny contractual impairment of present or former [] employees’ ability to communicate freely with the EEOC is void as against public policy.”); Hoffman v. Sbarro, Inc., No. 97 CIV. 4484(SS), 1997 WL 736703, at *1 (S.D.N.Y. Nov. 26, 1997) (“To the extent that the [nondisclosure] agreement might be construed as requiring an employee to withhold evidence relevant to litigation designed to enforce federal statutory rights, it is void.”).
22 FTC v. Roca Labs, Inc., 345 F. Supp. 3d 1375, 1393-96 (M.D. Fla. 2018); see also FTC v. World Patent Mktg., Inc., No. 17-CV-20848-DPG (S.D. Fla. May 25, 2017) (in entering a preliminary injunction, court found that “by intimidating, threatening, and coercing consumers from reporting Defendants’ misrepresentations, Defendants are able to hinder competition and harm legitimate competitors in the marketplace.”), 2017 WL 3508639, Preliminary Injunction entered August 16, 2017; id., Compl. ¶ 36 (alleging that “if consumers do complain to the BBB or law enforcement about Defendants’ business practices, Defendants and their lawyers often make legal threats against the complainants until they retract their complaints.”).
The Consumer Review Fairness Act (CRFA), 15 U.S.C. § 45b, makes it illegal for companies to include standardized contract provisions that threaten or penalize people for posting honest reviews. Regardless of whether the franchisor/franchisee relationship would fall outside of the CRFA, the Commission is of the view that any contract provision that directly or indirectly restricts or chills communications between franchisees and law enforcers or regulators is an unfair or deceptive act or practice, or an unfair method of competition under Section 5 of the FTC Act. To the extent a contract provision chills communications outside of law enforcers or regulators, the Commission will evaluate its legality on a case-by-case basis. 23 15 U.S.C. § 45(n); see also Federal Trade Commission Policy Statement on Unfairness, appended to Int’l. Harvester Co., 104 F.T.C. 949, 1070-76 (1984).
investigations.24 Suppressing such information undermines the government’s ability to learn about practices that violate the Franchise Rule, the FTC Act, and other laws. It also impedes the ability of franchisees to demand lawful conduct from the franchisor by exposing such conduct to the government. These limitations undermine the government’s ability to police the marketplace and the ability of prospective and existing franchisees to protect themselves, and are thus likely to cause substantial harm. For example, prospective franchisees may not learn about deceptive practices before they invest. Such harm, resulting from the franchisor’s contract provisions or communications, is not reasonably avoidable. Most prospective and existing franchisees would need to seek legal counsel on such contractual terms to understand that they are illegal, thus effectively chilling truthful communication with government agencies.25 No benefits flow from the suppression of truthful information to the government. Indeed, the competitive and consumer protection benefits that flow from the franchise business model are compromised.26 Other federal agencies, including the Securities and Exchange Commission, the National Labor Relations Board, the Federal Aviation Administration, and the National Highway Traffic Safety Administration, have determined that such contractual provisions can impede agencies’ ability to conduct lawful investigations and, as a result, run contrary to public policy.27 24 See also supra n.22.
25 C.f. Complaint, United States v. Square One Dev. Grp., (E.D. Mo. Nov. 21, 2022) (No. 4:22-cv-01243) (complaint alleged unfairness where defendants induced consumers into signing contracts for timeshare exit services containing non-negotiable and unenforceable terms). See also Complaint ¶¶ 30-34, 56-58, United States v. Asset Acceptance Corp. (M.D. Fla. Jan. 30, 2012) (No. 8:12-cv-182-T-27-EAJ), https://www.ftc.gov/sites/default/files/documents/cases/2012/01/120130assetcmpt.pdf (alleging deception where defendant failed to disclose in debt collection activities that it cannot require that consumers pay debts beyond the statute of limitations).
26 To be clear, this Statement is focused on clauses that restrict or inhibit franchisees from discussing their experience with law enforcers and regulators. The concern is that these types of contract provisions are obstructing the Commission’s statutory mandate to protect consumers, including franchisees, from unfair methods of competition and unfair or deceptive acts or practices. This issue is distinct from the potential harm analyzed by the Commission as part of the 2007 rulemaking proceeding for the Franchise Rule focused on whether such clauses would inhibit prospective franchisees’ ability to conduct due diligence regarding particular franchise opportunities. 72 Fed. Reg. 15444, 15454-55, 15504-07 (Mar. 30, 2007). Notably, in the amended Franchise Rule, the Commission limited the definition of “confidentiality clause” in a way that it would apply only to restricted speech to prospective franchisees and not to regulators. 16 C.F.R. § 436.1(c). At least one commenter noted in the rulemaking that the use of confidentiality clauses may restrict franchisees’ willingness to talk to regulators, but the Commission’s analysis focused on the harm such clauses would have on prospective franchisees. 72 Fed. Reg. at 15505 (“In addition, one franchisee representative, contended that the harm flowing from confidentiality provisions goes beyond individual franchise sales, noting that such provisions intimidate franchisees into not testifying before legislative committees and public agencies, such as the Federal Trade Commission.”). 27 The U.S. Securities and Exchange Commission adopted Rule 21F-17, which prohibits enforcing or threatening to enforce a confidentiality agreement that would impede communications with the agency. 17 C.F.R. § 240.21F-17. The National Highway Transportation Safety Administration has stated that it is unlawful to use confidentiality and non-disclosure provisions to impede oversight and enforcement-related regulatory obligations. See, e.g., Neal Boudette, Tesla Model S Suspension Failures Under Scrutiny by Safety Agency, N.Y. TIMES, June 9, 2016, https://www.nytimes.com/2016/06/10/business/tesla-model-s-nhtsa-suspension-failure.html; see also Fed. Aviation Admin., Impact of Non-Disclosure and Confidentiality Covenants on Agency Investigations, https://www.faa.gov/sites/faa.gov/files/about/office_org/headquarters_offices/agc/Non_Disclosure_Guidance.pdf; Complaint and Consent Decree, EEOC v. Baker & Taylor, Inc., No. 13-cv-03729 (N.D. Ill. May 20, 2013), ECF IV. Conclusion The FTC takes seriously its statutory obligation to enforce the FTC Act. Whether the contract includes a non-disparagement, non-disclosure, goodwill, or similar clause, the caselaw is clear that such clauses cannot operate to inhibit a franchisee from reporting potential law violations to the government. Clauses prohibiting franchisees from reporting potential law violations to the government are considered unfair and unenforceable. Further, the use of implicit or explicit threats to sue or otherwise retaliate against a franchisee who reports potential law violations to the government is also an unfair practice.
For purposes of this policy statement, it is immaterial when the contract containing the provision was entered, and it is immaterial whether the clause is in a binding contract or any other document. In addition, the principles set forth in this policy statement apply to any communications invoking or referencing the types of clauses described in this statement. Accordingly, any such communications must be consistent with this policy statement.
Staff Guidance on the Unlawfulness of Undisclosed Fees Imposed on Franchisees1 The Franchise Rule requires franchisors to disclose fees in a Franchise Disclosure Document (FDD) so that prospective franchisees are advised of their likely purchase obligations while operating the franchise.2 The issue of franchisors imposing and collecting fees from franchisees that were not disclosed in their FDDs recently has been raised with the FTC in various forums, including comments submitted in response to the FTC’s Request for Information Related to Franchisors’ Business Practices,3 at an event Chair Khan attended with franchisee associations,4 and elsewhere. We’ve heard that one way franchisors may impose previously undisclosed fees is by making changes to the Operating Manual. Within the past year, Washington’s Department of Financial Institutions5 and California’s Department of Financial Protection and Innovation6 have opined on whether franchisors may impose fees on franchisees that were not disclosed in the franchisor’s FDD. Given the recent interest in this issue, staff is releasing this guidance regarding the unlawful imposition of undisclosed fees.7 The Franchise Rule requires franchisors to disclose in the FDD certain fees.8 If a franchisor fails to disclose those fees in the FDD, such failure is a violation of the Franchise Rule and Section 5 of the FTC Act.9 Furthermore, if a franchisor imposes or collects a new fee, through its operating manual or otherwise, that was not disclosed in the FDD and included in the franchise agreement, the franchisor may be engaging in an unfair act or practice in violation of Section 5 of the FTC Act.10 Courts have upheld the FTC’s view that unilateral changes to contract terms are an unfair act or practice. For example, in FTC v. Orkin Exterminating Co., the 11th Circuit upheld the FTC’s finding that Orkin had engaged in an unfair act or practice by increasing the fee it charged customers above the amount provided in their contracts. The company had entered into agreements with consumers to provide lifetime termite protection services for a fixed annual 1 This document represents the views of FTC staff and is not binding on the Commission. 2 72 Fed. Reg. 15444 (Mar. 30, 2007).
3 E.g., Comment from Anonymous, FTC-2023-0026-0464; Comment from AAHOA, FTC-2023-0026-1938. 4 Is Franchising Fair? Franchisee Conversations and the Federal Trade Commission (May 2, 2023), https://register.gotowebinar.com/recording/recordingView?webinarKey=8052325513814056792®istrantEmail=l andscooter%40gmail.com.
5 Wash. State Dep’t of Fin. Insts., Franchise Act Interpretive Statement – FIS-09 (Nov. 1, 2023), https://dfi.wa.gov/industry/franchise-act-interpretive-statements/franchise-act-interpretive-statement-fis-09. 6 Franchises – Frequently Asked Questions and Answers, CAL. DEP’T OF FIN. PROT. & INNOVATION, https://dfpi.ca.gov/franchise-investment-law/franchises-frequently-asked-questions-and-answers/#b15 (last visited June 10, 2024).
7 Staff does not intend to provide legal advice to any franchisor or franchisee and advises anyone with concerns about liability regarding particular practices to consult an attorney. 8 E.g., 16 C.F.R. § 436.5(e) (initial fees); 16 C.F.R. § 436.5(f) (other fees). Also, Item 9 provides a Table to facilitate finding references to fees throughout the FDD. 16 C.F.R. § 436.5(i). 9 16 C.F.R. § 436.6(a).
10 An act or practice is unfair if it causes or is likely to cause substantial consumer injury, which consumers cannot reasonably avoid, and which is not outweighed by benefits to consumers or competition. 15 U.S.C. § 45(n); see also Federal Trade Commission Policy Statement on Unfairness, appended to Int’l. Harvester Co., 104 F.T.C. 949, 1070- 76 (1984). We also note that state law may offer additional protections for franchisees against the imposition of undisclosed fees. E.g., Wash. Rev. Code § 19.100.170(2). fee.11 Years after entering the contracts, Orkin unilaterally modified the contracts and raised the amount of the annual fee.12 The Commission found that although there was no deception in the formation of the contracts, the practice was unfair because it caused substantial, unavoidable consumer injury that was not outweighed by benefits to consumers or competition.13 Any determination of whether a franchisor is engaged in violations of the Franchise Rule or the FTC Act will be fact specific, and staff is not taking a position on whether any particular company is currently violating the Franchise Rule or Section 5. Nevertheless, franchisors should review their practices to ensure compliance with the law. 11 108 F.T.C. 263 (1986), aff’d, Orkin Exterminating Co. v. FTC, 849 F.2d 1354 (11th Cir. 1988). 12 Id.
13 Id.
Joint Statement on Competition in Generative AI Foundation Models and AI Products Margrethe Vestager, Executive Vice-President and Competition Commissioner, European Commission Sarah Cardell, Chief Executive Officer, U.K. Competition and Markets Authority Jonathan Kanter, Assistant Attorney General, U.S. Department of Justice Lina M. Khan, Chair, U.S. Federal Trade Commission Working in the interests of fair, open, and competitive markets As competition authorities for the European Union, the United Kingdom and the United States of America, we share a commitment to the interests of our people and economies. Guided by our respective laws, we will work to ensure effective competition and the fair and honest treatment of consumers and businesses. This is grounded in the knowledge that fair, open, and competitive markets will help unlock the opportunity, growth and innovation that these technologies could provide. Sovereign decision-making Our legal powers and jurisdictional contexts differ, and ultimately, our decisions will always remain sovereign and independent. However, if the risks described below materialize, they will likely do so in a way that does not respect international boundaries. As a result, we are working to share an understanding of the issues as appropriate and are committed to using our respective powers where appropriate.
A technological inflection point We have all, in a variety of documents and fora, recognized the transformational potential of artificial intelligence, including foundation models. At their best, these technologies could materially benefit our citizens, boost innovation and drive economic growth. Although there are many unknowns about the precise trajectory these tools will take, generative AI has rapidly evolved in recent years, potentially becoming one of the most significant technological developments of the past couple of decades. Technological inflection points can introduce new means of competing, catalyzing opportunity, innovation, and growth. Accordingly, we must work to ensure the public reaps the full benefits of these moments. This requires being vigilant and safeguarding against tactics that could undermine fair competition. For example, there are risks that firms may attempt to restrict key inputs for the development of AI technologies; that firms with existing market power in digital markets could entrench or extend that power in adjacent AI markets or across ecosystems, taking advantage of feedback and network effects to increase barriers to entry and harm competition; that lack of choice for content creators among buyers could enable the exercise of monopsony power; and that AI may be developed or wielded in ways that harm consumers, entrepreneurs, or other market participants. Given the speed and dynamism of AI developments, and learning from our experience with digital markets, we are committed to using our available powers to address any such risks before they become entrenched or irreversible harms.
Risks to competition While we recognise the great potential benefits from the new services that AI is helping bring to market, we also see risks requiring ongoing vigilance. Key to assessing these risks will be focusing on how the emerging AI business models drive incentives, and ultimately behaviour.
Principles for protecting competition in the AI ecosystem Our experience in related markets suggests that, while competition questions in AI will be fact-specific, several common principles will generally serve to enable competition and foster innovation:
In light of these risks, we are committed to monitoring and addressing any specific risks that may arise in connection with other developments and applications of AI, beyond generative AI. Consumer risks associated with AI AI can turbocharge deceptive and unfair practices that harm consumers. The CMA, DOJ and the FTC, which have consumer protection authority, will also be vigilant of any consumer protection threats that may derive from the use and application of AI.
Firms that deceptively or unfairly use consumer data to train their models can undermine people’s privacy, security, and autonomy. Firms that use business customers’ data to train their models could also expose competitively sensitive information. Furthermore, it is important that consumers are informed, where relevant, about when and how an AI application is employed in the products and services they purchase or use.
Federal Trade Commission Enforcement Policy Statement on Exemption of Protected Labor Activity by Workers from Antitrust Liability1 0F
5 Senator Ashurst specifically noted the “Danbury Hat” case as one of many “strained and harsh” judicial interpretations of the Sherman Act that militated for the adoption of explicit exemptions in the Clayton Act to protect laborers from antitrust enforcement. 51 Cong. Rec. 13663 (1914) (statement of Sen. Henry Ashurst). Senator Hollis similarly remarked that the Sherman Act had been “tortured into a meaning” that transformed a law “intended for the relief of the plain people . . . into an instrument for their oppression.” Id. at 13967 (statement of Sen. Henry Hollis). See generally Alvaro M. Bedoya & Bryce Tuttle, “Aiming at Dollars, Not Men”: Recovering the Congressional Intent Behind the Labor Exemption to Antitrust Law, 85 ANTITRUST L.J. 805, 809-13 (2024). 6 15 U.S.C. § 17 (1914).
7 29 U.S.C. § 52 (1914). Section 20 generally prohibits restraining orders or injunctions in cases “growing out of, a dispute concerning terms or conditions of employment, unless necessary to prevent irreparable injury” to specific property interests. The statute also enumerates a number of protected activities for which restraining orders or injunctions may not issue.
8 Id.
9 51 Cong. Rec. 13663 (1914) (statement of Sen. Henry Ashurst). organizing and collective bargaining activity.10 In response, Congress passed the Norris- LaGuardia Act in 1932, which expanded the l 9F abor exemption.11 As the Supreme Court has 10F explained, “[t]he underlying aim of the Norris-LaGuardia Act was to restore the broad purpose which Congress thought it had formulated in the Clayton Act but which was frustrated, so Congress believed, by unduly restrictive judicial construction.”12 11F The Norris-LaGuardia Act states that “the individual unorganized worker is commonly helpless to exercise actual liberty of contract and to protect his freedom of labor, and thereby to obtain acceptable terms and conditions of employment.”13 Specifically, Section 2 of the Norris- 12F LaGuardia Act declares “the public policy of the United States” as follows: Whereas under prevailing economic conditions, developed with the aid of governmental authority for owners of property to organize in the corporate and other forms of ownership association, the individual unorganized worker is commonly helpless to exercise actual liberty of contract and to protect his freedom of labor, and thereby to obtain acceptable terms and conditions of employment, wherefore, though he should be free to decline to associate with his fellows, it is necessary that he have full freedom of association, self-organization, and designation of representatives of his own choosing, to negotiate the terms and conditions of his employment, and that he shall be free from the interference, restraint, or coercion of employers of labor, or their agents, in the designation of such representatives or in self-organization or in other concerted activities for the purpose of collective bargaining or other mutual aid or protection[.]14 13F Section 1 of the Norris-LaGuardia Act strips federal courts of jurisdiction “to issue any restraining order or temporary or permanent injunction in a case involving or growing out of a labor dispute” except in limited cases where necessary to prevent “substantial and irreparable injury to complainant’s property” flowing from “unlawful acts.”15 It further provides that “nor 14F 10 See, e.g., 3 Julian O. von Kalinowinski, ANTITRUST LAWS AND TRADE REGULATION § 54.02(1) (collecting cases) (“[D]espite the statutes’ broad terminology and the intent of Congress to exempt labor organizations from the antitrust laws, the courts strictly construed Sections 6 and 20 of the Clayton Act and continued to hold labor unions and their members liable under the Sherman Act,” thus “weaken[ing]” Section 20 of the Clayton Act and “virtually nullify[ing]” Section 6 of the Act); Jacksonville Bulk Terminals, Inc. v. Int’l Longshoremen’s Ass’n, 457 U.S. 702, 712 (1982) (noting that the Supreme Court “unduly restricted the Clayton Act’s labor exemption” after it was created).
11 See United States v. Hutcheson, 312 U.S. 219, 231 (1941) (“whether trade union conduct constitutes a violation of the Sherman Law is to be determined only by reading the Sherman Law and § 20 of the Clayton Act and the Norris- LaGuardia Act as a harmonizing text of outlawry of labor conduct”); 15 U.S.C. § 17 (1914); 29 U.S.C. §§ 101–14 (1932).
12 Hutcheson, 312 U.S. at 235-36. Congressman LaGuardia himself explained that judicial opinions following enactment of the Clayton Act had “willfully disobeyed the law,” “emasculated it,” “took out its meaning as intended by Congress,” and “made the law absolutely destructive of the very intent of Congress.” 75 Cong. Rec. 5478 (1932) (Statement of Rep. Fiorello LaGuardia).
13 29 U.S.C. § 102 (1932).
14 Id.
15 Id. §§ 101, 107.
shall any such restraining order or temporary or permanent injunction be issued contrary to the public policy” quoted above.16 Section 113(c) of the Act then defines “labor dispute” to include: 15F any controversy concerning terms or conditions of employment, or concerning the association or representation of persons in negotiating, fixing, maintaining, changing, or seeking to arrange terms or conditions of employment, regardless of whether or not the disputants stand in the proximate relation of employer and employee.17 16F The Norris-LaGuardia Act further explains that in addition to encompassing disputes involving “employees of the same employer” and other scenarios, “[a] case shall be held to involve or to grow out of a labor dispute when the case involves persons who are engaged in the same industry, trade, craft or occupation; or have direct or indirect interests therein.”18 17F Although the Norris-LaGuardia Act is phrased as a bar on judicial injunctions, the Supreme Court has long read it in conjunction with the Clayton Act provisions as establishing a labor exemption that operates as a general shield from antitrust liability.19 18F B. The Rise in Independent Contracting and Gig Work and Confusion Regarding the Labor Exemption’s Application Across the U.S. economy, firms are turning to independent contracting models to accomplish work previously performed under traditional direct hire employment models.20 In 19F particular, online gig platforms often seek to categorize their workers as independent contractors, even though in practice these firms may tightly prescribe their workers’ tasks and compensation in ways that run counter to the promise of independence.21 Additionally, many gig workers have lower incomes and may earn less than the minimum wag 2 e 0F .22 More than half of American gig 21F 16 Id. § 101.
17 Id. § 113(c); see, e.g., Jacksonville Bulk Terminals, Inc. v. Int’l Longshoremen’s Ass’n, 457 U.S. 702, 709 (1982) (observing that the term “labor dispute” is defined “broadly” in Section 113(c)). 18 29 U.S.C. § 113(a) (1932); see also id. § 113(b).
19 United States v. Hutcheson, 312 U.S. 219, 235 (1941) (“[I]t would be strange indeed” if Congress’s “elaborate efforts to permit [activities related to labor disputes] failed to prevent criminal liability punishable with imprisonment and heavy fines. That is not the way to read the will of Congress, particularly when expressed by a statute which, as we have already indicated, is practically and historically one of a series of enactments touching one of the most sensitive national problems. Such legislation must not be read in a spirit of mutilating narrowness.”); see also id. at 231 (noting that “whether trade union conduct constitutes a violation of the Sherman Law is to be determined only by reading the Sherman Law and § 20 of the Clayton Act and the Norris-LaGuardia Act as a harmonizing text”).
20 See, e.g., David Weil, Preparing for the Future of Work Through Understanding the Present of Work: A Fissured Workplace Perspective, Testimony before the U.S. House of Representatives Committee on Education and Labor Subcommittee on Workforce Protections and Subcommittee on Health, Employment, Labor, and Pensions, at 2 (Oct. 23, 2019).
21 See FTC Policy Statement on Enforcement Related to Gig Work, at 4 (Sept. 15, 2022), https://www.ftc.gov/legal- library/browse/policy-statement-enforcement-related-gig-work. 22 See Ben Zipperer, Celine McNicholas, Margaret Poydock, Daniel Schneider, and Kristen Harknett, Econ. Pol’y Inst., National Survey of Gig Workers Paints a Picture of Poor Working Conditions, at 1 (June 1, 2022) (“[A] survey of gig workers reveals that these workers often are paid low wages, in some instances less than the minimum wage [and] they face economic insecurity at high rates . . . .”); see also Monica Anderson, Colleen McClain, Michelle workers report that the money they earn through the gig economy is essential or important for meeting their basic needs.23 22F Against this backdrop, some gig workers have begun contemplating forming unions to bargain with online gig platforms, giving rise to questions about the protections afforded to such activity under federal law. To date, courts have not addressed whether organizing and bargaining activities of gig workers are shielded from antitrust liability by the labor exemption, and there is a patchwork of cases addressing whether independent contractors are excluded from the exemption’s protections against antitrust liability. The Commission accordingly seeks to clarify its enforcement policy relating to the labor exemption from antitrust liability. The Commission notes that while this enforcement policy statement reflects its view of the correct application of the labor exemption, it does not bind other potential antitrust litigants, such as private plaintiffs or other enforcement agencies. Accordingly, the Commission’s policy not to challenge labor organizing or bargaining activity by independent contractors that the Commission believes to be properly protected under the labor exemption does not provide workers any guarantee against antitrust claims by others. Additionally, the Commission notes that this enforcement policy statement addresses only the labor exemption from antitrust liability. This policy statement thus does not address the legal status of organizing, bargaining, or other labor activity by independent contractors under the National Labor Relations Act or any other statute.
28 New Prime Inc. v. Oliveira, 586 U.S. 105, 116 (2019). 29 See NLRB v. Hearst Publications, Inc., 322 U.S. 111, 120 (1944). 30 See Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947) (holding that definitions of “employee,” “employer,” and “employ” in the FLSA were “comprehensive enough to require its application to many persons and working relationships, which prior to this Act, were not deemed to fall within an employer-employee category”); Hearst Publications, 322 U.S. at 126 (holding that “[t]he mischief at which the [National Labor Relations] Act is aimed and the remedies it offers are not confined exclusively to ‘employees’ within the traditional legal distinctions separating them from ‘independent contractors’”).
31 Hearst Publications, 322 U.S. at 120-26.
32 Id. at 128.
33 Labor Management Relations Act (Taft-Hartley Act) § 2(3), 29 U.S.C. § 152(3) (1947). 34 Social Security Act of 1948, ch. 468, § 1(a), 62 Stat. 438 (1948). 35 29 U.S.C. § 113(c) (1932).
“labor dispute” thus “establishe[s] that the allowable area of union activity was not to be restricted to an immediate employer-employee relation.”36 35F The Supreme Court has accordingly held exempt from antitrust liability the labor organizing activities of persons who were not employees of the firm whose labor practices they sought to change. For example, in New Negro Alliance v. Sanitary Grocery Co., the Court found that alliance members who picketed a grocery store to press the store to hire Black workers were “persons interested” in a “labor dispute” despite the fact that they were not employees of the store.37 And in Milk Wagon Drivers’ Union v. Lake Valley Farm Products, Inc., the Court held 36F that the labor exemption protected members of a drivers’ union who picketed dairies that did not use union labor, because the drivers were “engaged in the same industry, trade, craft, or occupation” as the dairies, “namely the milk industry.”38 37F Third, the labor exemption’s use of the phrase “terms or conditions of employment” to define covered labor disputes further indicates that its protections do not categorically exclude independent contractors, because the original meaning of “employment” in the early 20th century did not categorically exclude independent contracting arrangements. In New Prime Inc. v. Oliveira, the Supreme Court considered whether the Federal Arbitration Act (“FAA”) applied and required arbitration of a dispute over alleged failure to pay the minimum wage to a driver labeled by the parties’ contracts as an independent contractor.39 38F The Court analyzed the original meaning of the phrase “contracts of employment” in an exception to the FAA—which Congress enacted in 1925, just seven years before the Norris- LaGuardia Act. The Court explained that although “[t]o many lawyerly ears today, the term ‘contracts of employment’ might call to mind only agreements between employers and employees (or what the common law sometimes called masters and servants)[,] . . . this modern intuition isn’t easily squared with evidence of the term’s meaning at the time of the Act’s adoption in 1925.”40 Rather, examining dictionaries spanning from 1891 and 1933, the Court 39F held that the original meaning of “contracts of employment” referred to “agreements to perform work,” and was not limited to “agreements between employers and employees (or what the common law sometimes called masters and servants).”41 Accordingly, the Court held that the 40F exception to the FAA for certain “contracts of employment” applied to exempt the wage dispute from arbitration, even though the parties assumed that the relevant contract “establish[ed] only an independent contractor relationship.”42 41F By the same reasoning, the original meaning of “terms or conditions of employment” in the labor exemption encompasses disputes over wages or job conditions, irrespective of whether the worker is classified (or misclassified) as an independent contractor. Nothing in the legislative history of the Clayton and Norris-LaGuardia Acts suggests Congress intended the phrase to have anything other than its ordinary meaning at the time and, as elaborated above, several other 36 Am. Fed’n of Musicians v. Carroll, 391 U.S. 99, 106 (1968). 37 303 U.S. 552, 560-61 (1938).
38 311 U.S. 91, 97 (1940).
39 586 U.S. 105, 108-09 (2019).
40 Id. at 114.
41 Id.
42 Id. at 113-14, 121.
aspects of the labor exemption’s plain text also indicate that the exemption is not limited to disputes involving formal, direct employer-employee relationships. The First Circuit recently reached a similar conclusion and held that the labor exemption does not categorically exclude independent contractors from its protections.43 In Confederación 42F Hípica de Puerto Rico, Inc. v. Confederación de Jinetes Puertorriqueños, Inc., the First Circuit considered claims by horse owners alleging that thirty-seven horse jockeys’ refusal to race constituted a group boycott in violation of federal antitrust laws.44 Examining the text and 43F history of the labor exemption, the First Circuit held that “[t]he district court erred when it concluded that the jockeys’ alleged independent-contractor status categorically meant they were ineligible for the [labor] exemption,” reasoning that “by the express text of the Norris-LaGuardia Act, a labor dispute may exist ‘regardless of whether or not the disputants stand in the proximate relation of employer and employee.’”45 The First Circuit further noted Supreme Court cases rejecting “interpretation of the exemp 4 t 4F ion limited to employees alone.”46 The court concluded 45F that, notwithstanding that the jockeys were independent contractors, they “sought higher wages and safer working conditions, making this a core labor dispute [to which] the labor-dispute exemption applies.”47 46F The Commission agrees with the First Circuit. The Commission acknowledges that some cases have held particular independent contractors or other third-parties are unprotected by the labor exemption. However, such cases do not hold that all independent contractors are categorically beyond the scope of the labor exemption due to their formal status as independent contractors. Rather, they examine the specific facts of a given dispute and the trade relationships involved and reject application of the exemption where the core of the dispute does not involve the wages or working conditions of a worker who provides labor services. For example, in Columbia River Packers Assoc. v. Hinton, the Supreme Court rejected application of the exemption to a group of independent contractor fishermen who were “an association of commodity sellers,” holding that the Norris-LaGuardia Act “was not intended to have application to disputes over the sales of commodities.”48 Courts have similarly rejected application of the labor exemption to disputes regarding the 47F sale of other commodities,49 or regarding the terms of sale of a finished product.50 48F 49F 43 Confederación Hípica de Puerto Rico, Inc. v. Confederación de Jinetes Puertorriqueños, Inc., 30 F.4th 306, 314 (1st Cir. 2022), cert. denied, 143 S. Ct. 631 (2023).
44 Id. at 311.
45 Id. at 314.
46 Id. (citing New Negro Alliance v. Sanitary Grocery Co., 303 U.S. 522, 560-61 (1938); Am. Fed’n of Musicians v. Carroll, 391 U.S. 99, 111-14 (1968); H.A. Artists & Assocs. v. Actors’ Equity Ass’n, 451 U.S. 704, 718, 721-22 (1981)).
47 Id.
48 315 U.S. 143, 145 & n.3 (1942).
49 L.A. Meat & Provision Drivers Union, Loc. 626 v. United States, 371 U.S. 94, 101-02 (1962) (“as in Columbia River Assn., the grease peddlers were sellers of commodities”; they were businessmen who attempted to “immunize themselves from [the antitrust laws] by the simple expedient of calling themselves . . . a labor union”). 50 Ring v. Spina, 148 F.2d 647, 652 (2d Cir. 1945) (dispute concerned “the terms at which a finished product or certain rights therein may be sold. And no wages or working conditions of any group of employees are directly dependent on these terms.”).
Courts have also rejected application of the exemption where the party seeking the exemption was best characterized as an independent business pursuing its business interests, rather than as a worker who provides labor services seeking to improve his or her compensation or labor conditions. For example, courts have rejected application to disputes involving “an entrepreneur, not a laborer,”51 to “a businessman organization” seeking a better “return on capital investment,”52 and to “an as 50F sociation of individual practitioners each exercising his calling as an independent 51 u F nit.”53 These cases are all consistent with the First Circuit’s holding that the core 52F question is “whether what is at issue is compensation for [a worker’s] labor” or working conditions.54 As such, owners of independent businesses that sell finished products or are 53F primarily concerned with a return on capital investments are often appropriately characterized as independent contractors and will generally be outside the labor exemption’s protections. For example, highly paid professionals who operate their own businesses would often be more appropriately characterized as entrepreneurs pursuing business interests as opposed to workers who provide labor services. However, that does not mean that the labor exemption’s application stands or falls with whether a worker is formally classified (or misclassified) as an independent contractor.
To further dispel confusion, two other cases bear mention. In H.A. Artists & Associates, Inc. v. Actors’ Equity Assoc., the Supreme Court held that the Equity actors’ union was protected by the labor exemption when it sought to regulate the conduct of independent contractor agents in order to protect actors’ compensation.55 In a footnote, the Court stated, “[o]f course, a party 54F seeking refuge in the statutory exemption must be a bona fide labor organization, and not an independent contractor or entrepreneur.”56 However, this statement was mere dicta because, as 55F the Court explained, there was “no dispute” that the Equity union seeking the labor exemption’s protections was a bona fide labor group.57 In any event, the Commission does not read this dicta 56F as opining on whether workers who provide labor services would be unprotected by the labor exemption if classified (or misclassified) as independent contractors. Rather, in referring to “independent contractor or entrepreneur[s],” the Commission believes the Court was referring to the types of business entities and interests discussed above that would indeed be beyond the scope of the labor exemption because they do not reflect a worker who provides labor services seeking better compensation or working conditions (e.g., businesses negotiating over finished 51 United States v. Women’s Sportswear Mfg. Ass’n, 336 U.S. 460, 463-464 (1949) (holding labor exemption inapplicable to stitching contractors who turned fabric supplied by jobbers into completed garments and shipped them directly to the customer, because “although he furnishes chiefly labor, [he] also utilizes the labor through machines and has his rentals, capital costs, overhead, and profits”); see also United States v. Nat’l Ass’n of Real Est. Bds., 339 U.S. 485, 490 (1950) (real estate board members were “entrepreneurs . . . each is in business on his own”). 52 U.S. Steel Corp. v. Fraternal Ass’n of Steelhaulers, 431 F.2d 1046, 1049 (3d Cir. 1970) (holding labor exemption inapplicable to truck owner-operators who were “demand[ing] . . . a more profitable operation of [their] equipment” rather than “a raise [that] goes to the driver”).
53 Am. Med. Ass’n v. United States, 317 U.S. 519, 536 (1943) (holding that independent physician practices who operated on a fee-for-service model not protected by labor exemption where they objected to a nonprofit hospital’s “method of doing business” using a risk-sharing prepayment model; independent physician practices “were interested in the terms and conditions of the employment only in the sense that they desired wholly to prevent Group Health from functioning by having employes”).
54 Confederación Hípica de Puerto Rico v. Confederación de Jinetes Puertorriqueños, Inc., 30 F.4th 306, 314 (1st Cir. 2022), cert. denied, 143 S. Ct. 631 (2023).
55 451 U.S. 704, 720 (1981).
56 Id. at 717 n.20.
57 Id.
products or highly paid professionals who operate their own businesses furthering other non- labor interests).
In another case, Taylor v. Local No. 7, International Union of Journeymen Horseshoers of the United States & Canada (AFL-CIO), the Fourth Circuit held the labor exemption did not protect the conduct of “independent businessmen” horseshoers who charged an agreed-upon fixed price for shoeing a horse (for both the horseshoe and the service) and who boycotted those who did not use union horseshoers.58 The Fourth Circuit reversed the district court’s holding that 57F the horseshoers were protected by the labor exemption because they were employees. In rejecting the district court’s reasoning, the Fourth Circuit applied the NLRA’s test for independent contractor status—i.e., the test Congress adopted when it enacted an express exemption to the NLRA for independent contractor status.59 The Fourth Circuit found the 58F horseshoers to be independent contractors because, among other things, they controlled when and how much to work, controlled their own horseshoeing process, chose and owned their own tools, controlled their own prices and the risk of profit and loss, did not work regular hours for one employer, chose whether to hire their own employees, and regarded themselves as independent contractors.60 59F The Fourth Circuit did not, however, find the horseshoers’ independent contractor status under the NLRA test dispositive of the labor exemption’s application, acknowledging that the exemption can apply to disputes in which the parties to the dispute do not themselves stand in the relationship of employer and employee.61 Instead, the court went on to reject application of the 60F exemption to the horseshoers’ conduct because it found that there was no employer-employee relationship involved in the dispute—whether extant or prospective.62 The Fourth Circuit 61F explained, “the horseshoers are not attempting to force the owners and trainers to use any of them as employees, nor are the unions attempting to organize any employees of the trainers or owners.”63 Rather, “[t]he only interests [they] sought to . . . advance[]” through their boycott and 62F price-fixing were “of those independent horseshoers who render services to trainers and owners for a certain fee, unilaterally fixed, per horse.”64 63F Accordingly, Taylor did not confront a scenario, like that in Confederación Hípica de Puerto Rico, in which independent contractors who provide labor services engage in a dispute over their compensation and job conditions. Nor did Taylor hold that the conduct of a worker currently classified (or misclassified) as an independent contractor can never be protected by the labor exemption. To the contrary, the Fourth Circuit’s decision implied that it would have found the horseshoers’ conduct protected were they organizing for the purpose of becoming directly hired union employees.65 Moreover, although Taylor applies the NLRA test for independent 64F contractor status in the course of rejecting the district court’s reasoning, it never addressed the fact that the Clayton and Norris-LaGuardia Acts lack the express independent contractor 58 353 F.2d 593, 595-606 (4th Cir. 1965).
59 See id. at 595-601 (applying test from NLRB v. A.S. Abell Co., 327 F.2d 1 (4th Cir. 1964)). 60 Id. at 599-600.
61 Id. at 605-06.
62 Id.
63 Id. at 606.
64 Id.
65 Id. (“[T]he horseshoers are not attempting to force the owners and trainers to use any of them as employees . . . .”). exemption present in the NLRA.
For the forgoing reasons, the Commission believes that the First Circuit’s decision in Confederación Hípica de Puerto Rico is correct and that workers who provide labor services and that are engaged in protected labor activities can be shielded by the labor exemption, even if formally classified (or misclassified) as independent contractors. As the First Circuit explained, this understanding is consistent with the plain text and original meaning of the Clayton and Norris-LaGuardia Acts, as well as with judicial decisions applying the labor exemption.66 65F B. Proper Application of the Labor Exemption As explained above, the labor exemption’s application does not turn on how a worker is classified (or misclassified) under other laws. Rather, applying Supreme Court precedents, the Commission assesses whether the exemption applies based on “whether this is a ‘case involving or growing out of any labor dispute,’” which is “broadly defin[ed] . . . to include ‘any controversy concerning terms or conditions of employment.’”67 A dispute concerning “the hours, 66F wages, job security, and working conditions” of workers who provide labor services qualifies as “concerning terms or conditions of employment.”68 In contrast, disputes concerning the price of commodities or other finished products are not pro 67F tected.69 Accordingly, with respect to 68F organizing or bargaining by workers who provide labor services classified (or misclassified) as independent contractors, “the key question” is generally “whether what is at issue is compensation for their labor” or their working conditions.70 69F Note that for a labor organization such as a union to be protected under the labor exemption, it must be acting in its self-interest and not in combination with non-labor groups.71 70F Formal recognition as a union is not necessary for a labor group to be considered a bona fide labor organization.72 Moreover, the protected conduct of a labor organization such as a union 71F does not lose its protected status merely because the labor organization seeks to work with independent contractors. Independent contractors can constitute “labor groups” such that when a union works in concert with them on legitimate labor interests (such as compensation and/or job 66 For this reason, the Commission would exercise its enforcement discretion not to pursue actions inconsistent with this policy statement even if another circuit court (or district court) were in the future to disagree with the First Circuit.
67 Jacksonville Bulk Terminals, Inc. v. Int’l Longshoremen’s Ass’n, 457 U.S. 702, 709 (1982) (quoting 29 U.S.C. § 113(c)).
68 Am. Fed’n of Musicians v. Carroll, 391 U.S. 99, 106 (1968). 69 See, e.g., Columbia River Packers Ass’n v. Hinton, 315 U.S. 143, 145, 147 (1942) (explaining that the Norris- LaGuardia Act “was not intended to have application to disputes over the sale of commodities” and that a dispute “relating solely to the sale of fish,” did not qualify for protection because it “does not place in controversy the wages or hours or other terms and conditions of employment”). 70 Confederación Hípica de Puerto Rico v. Confederación de Jinetes Puertorriqueños, Inc., 30 F.4th 306, 314 (1st Cir. 2022), cert. denied, 143 S. Ct. 631 (2023).
71 United States v. Hutcheson, 312 U.S. 219, 232 (1941). 72 See, e.g., New Negro Alliance v. Sanitary Grocery Co., 303 U.S. 522, 555(1938) (applying labor exemption to actions by a non-union organization founded for the “mutual improvement of its members and the promotion of civic, educational, benevolent, and charitable enterprises”); Brady v. NFL, 644 F.3d 661, 670-73 (8th Cir. 2011) (rejecting argument that the labor exemption applies only to disputes involving recognized labor organizations); see also NLRB v. Wash. Aluminum Co., 370 U.S. 9, 14-15 (1962) (finding a walkout by unorganized workers who lacked a formal bargaining representative to be protected activity related to a “labor dispute” under the National Labor Relations Act).
conditions), the union’s activity can still be protected by the labor exemption.73 The test for 72F whether the “independent contractors [are] a ‘labor group’ and party to a labor dispute” is “the presence of a job or wage competition or some other economic interrelationship affecting legitimate union interests between the union members and the independent contractors.”74 In 73F contrast, “antitrust immunity is forfeited when a union combines with one or more employers in an effort to restraint trade.”75 74F
76 29 U.S.C. § 102 (1914).
77 See FTC Policy Statement on Enforcement Related to Gig Work, at 5-6 (Sept. 15, 2022), https://www.ftc.gov/legal-library/browse/policy-statement-enforcement-related-gig-work. 78 Alvaro Bedoya & Max M. Miller, “Overawed”: Worker Misclassification as a Potential Unfair Method of Competition, 44 YALE L. & POL’Y REV. 333, 345-348 (Fall 2024 forthcoming). Antitrust Guidelines for Business Activities Affecting Workers U.S. Department of Justice and the Federal Trade Commission Revised: January 2025 Overview1 These Guidelines explain how the U.S. Department of Justice’s Antitrust Division (“DOJ”) and the Federal Trade Commission (“FTC”) (collectively, the “Agencies”) assess whether business practices affecting workers violate the antitrust laws. The Agencies enforce the nation’s antitrust laws, which include the Sherman Act, Clayton Act, and Federal Trade Commission Act. These laws provide “a central safeguard for the Nation’s free market structures” by promoting open and fair competition.2 The antitrust laws protect competition for labor, just as they protect competition for goods and services that companies provide.3 They protect the freedom of working people to choose the best job for them and their families. Just as vibrant competition for goods and services benefits consumers, competition among employers benefits workers through better wages, benefits, and other terms and conditions for working people. Business practices may violate the antitrust laws when they harm the competitive process, especially if they deprive labor markets of independent centers of decisionmaking4 or they create or abuse employers’ monopsony power.5 By interfering with free and fair competition for workers, such practices can lead to fewer job opportunities, lower wages, and worse working conditions.6 Similarly, businesses should be free to hire the right person for a job. Vibrant, open markets to recruit and retain workers create market opportunities that are conducive to new business formation, innovation, and productivity. Conversely, when companies act in ways that harm competition for workers, that behavior might lead to fewer job opportunities for workers, lower wages, and worse job quality. That is why the antitrust laws prohibit certain practices that harm competition for workers. How to Use These Guidelines: These Guidelines are intended to promote clarity and transparency for the public about how the Agencies identify and assess business practices affecting workers that may violate the antitrust laws.7 The following sections explain how the Agencies approach 1 This document replaces the Antitrust Guidance for Human Resource Professionals (2016). It should not be construed as legal advice, and it has no force or effect of law. It is not intended to create any substantive or procedural rights enforceable at law by any party. Nothing in this statement should be construed as mandating a particular outcome in any specific case, and nothing in this statement limits the discretion of any U.S. government agency to take any action, or not to take action, with respect to matters under its jurisdiction.
2 N. Carolina State Bd. of Dental Examiners v. FTC, 574 U.S. 494, 502 (2015). 3 See generally Nat’l Collegiate Athletic Ass’n v. Alston, 594 U.S. 69 (2021); Mandeville Island Farms v. Am. Crystal Sugar Co., 334 U.S. 219 (1948); Anderson v. Shipowners’ Ass’n of Pac. Coast, 272 U.S. 359 (1926). 4 Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 190 (2010) (“[C]oncerted activity inherently is fraught with anticompetitive risk insofar as it deprives the marketplace of independent centers of decisionmaking that competition assumes and demands.” (internal quotation marks and citations omitted)). 5 Alston, 594 U.S. at 90 (concluding that the NCAA used its monopsony power to impose restraints that “can (and in fact do) harm competition” for student-athletes’ labor).
6 See Alston, 594 U.S. at 110 (Kavanaugh, J., concurring) (“Price-fixing labor is price-fixing labor. And price-fixing labor is ordinarily a textbook antitrust problem because it extinguishes the free market in which individuals can otherwise obtain fair compensation for their work.”).
7 The 2023 Merger Guidelines provide guidance to the public about how agencies consider the effects of business transactions such as mergers and acquisitions on workers. See U.S. Dep’t of Just. & Fed. Trade Comm’n, Merger Guidelines (2023), https://www.justice.gov/d9/2023-12/2023%20Merger%20Guidelines.pdf. particular antitrust issues affecting labor. Sections 1–5 discuss specific types of agreements or business practices that may violate the antitrust laws. Certain agreements and other activities may give rise to criminal liability. Other types of agreements may be subject to civil liability rather than criminal prosecution. Section 6 explains that the antitrust laws apply to relationships between businesses and independent contractors. For example, an agreement between businesses to fix the compensation that each pays to independent contractors may violate the antitrust laws, just as an agreement between businesses to fix the wages each pays to workers may violate the antitrust laws. Section 7 explains that false claims about workers’ potential earnings may violate federal laws against unfair, deceptive, or abusive practices. Section 8 provides information about reporting potential antitrust violations to the Agencies.
This list is not exhaustive. Listed activities may or may not be an antitrust violation. The Agencies encourage anyone with information about these activities or other potential antitrust violations to report them to the Agencies. See Section 8 below for further information. General Principles for Analyzing Agreements that Impact Workers: In many of these circumstances, the Agencies will focus on whether there is an agreement between businesses that harms competition for workers. An agreement need not be explicit or written down in order to violate the antitrust laws. Agreements—sometimes called conspiracies, gentleman’s agreements, handshake agreements, or shared or mutual understandings—that violate the antitrust laws can be formal or informal; express or implicit; and need not be written down or talked about at all. Such agreements are illegal even if they are never carried out. In assessing whether businesses have entered into an illegal agreement, the Agencies consider direct and circumstantial evidence. For example, they may consider whether a business has discussed with another company wages or other potential terms of employment; engaged in parallel behavior that demonstrates a shared understanding; invited another company to participate in a plan to restrict competition for workers followed by action consistent with that plan; or used a common intermediary to obtain competitively sensitive information. If the Agencies identify an agreement between companies relating to workers, they assess its impact on competition and the competitive process. Some types of agreements are illegal regardless of their effects. In other cases, the Agencies perform a deeper analysis, examining the impact of the agreement on workers by impairing the competitive process, suppressing competition, or the actual or likely effects of the conduct in the affected labor market.8 The Agencies also focus on whether the participants in a potential agreement compete for workers. Businesses can compete to hire or retain workers even if they make different products or offer different services. Accordingly, when assessing agreements that affect workers, the Agencies will focus on whether the businesses compete in the same labor markets even if they do not compete as sellers of products or services.
Companies can be labor market competitors even if they have some other collaborative or cooperative relationship, such as a joint venture that produces a good or provides a service. Companies can also be competitors in a labor market even if they are not competitors in downstream markets to produce a good or service. For example, airplane manufacturers and their part suppliers may both hire from the same market for engineers.
8 United States v. Am. Airlines Grp. Inc., 121 F.4th 209, 220 (1st Cir. 2024).
14 See Final Judgment, United States v. Ariz. Hosp. and Healthcare Ass’n, No. CV07-1030-PHX (D. Ariz. Sept. 12, 2007), available at https://www.justice.gov/atr/case-document/file/487106/dl (entering consent decree to resolve allegations that association of hospitals violated the antitrust laws by setting a uniform bill rate schedule that member hospitals would pay for temporary and per diem nurses).
15 Such agreements may require a fuller analysis of their effects, however, when the restraint is subordinate and collateral to a broader business collaboration, such as a joint venture, and is reasonably necessary to achieve the procompetitive potential of that collaboration. See Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102, 1109 (9th Cir. 2021); see also, e.g., In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 345–46 (3d Cir. 2010); Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 224 (D.C. Cir. 1986); United States v. Addyston Pipe & Steel Co., 85 F. 271, 281 (6th Cir. 1898). 16 See Plymouth Dealers’ Ass’n, 279 F.2d at 132–34 (holding that an agreement between car dealers to fix list prices was price fixing, although the dealers often used the list price as a starting point). 17 See 15 U.S.C. § 7a-3.
18 See, e.g., Arrington v. Burger King Worldwide, Inc., 47 F.4th 1247, 1250 (11th Cir. 2022) (noting that Burger King “compete[s] . . . for employees” against “its separate and independent franchise restaurants”). se illegal under the antitrust laws.19 In other words, the agreement itself may be illegal regardless of whether it actually harms workers.
25 See Duffy v. Yardi Sys., Inc., No. 2:23-CV-01391-RSL, 2024 WL 4980771, at *5 (W.D. Wash. Dec. 4, 2024). to use shared wage recommendations, lists, calculations, or algorithms can also still be unlawful even where co-conspirators retain some discretion or cheat on the agreement. Companies can sometimes work together as part of a transaction or collaboration (like a joint venture) in ways that are not illegal. Even if companies are parties to a legitimate transaction or are otherwise involved in a joint venture or other collaborative activity, an agreement between the companies to share information about wages or other terms of employment, including company data regarding worker compensation, may violate the antitrust laws.
28 Decision and Order, In re Ardagh Group S.A., et al., No. C-4785 (F.T.C. Feb. 21, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/2110182-c4785-ardagh-decision-and-order.pdf; Decision, In re: O-I Glass, Inc., No. C-4786 (F.T.C. Feb. 21, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/2110182_c4786-o-i-glass-inc- taken action against non-competes when reviewing mergers. In multiple final orders settling charges that certain mergers violated federal antitrust laws, the FTC has required the parties to cease using, enforcing, and/or entering into non-compete clauses.29 In April 2024, the FTC issued a final rule banning most non-compete agreements, including provisions that function as non-competes.30 That rule was scheduled to take effect on September 4, 2024. However, on August 20, 2024, the District Court for the Northern District of Texas issued an order setting aside the rule.31 The order is currently on appeal.32 The latest information regarding the status of the non-compete final rule is available at ftc.gov/noncompetes. Regardless, the FTC retains the legal authority to address non-competes through case-by-case enforcement actions under the FTC Act, as it has done in the past.
30 Non-Compete Clause Rule, 89 Fed. Reg. 38342 (May 7, 2024). 31 Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 WL 3879954 (N.D. Tex. Aug. 20, 2024). 32 See Notice of Appeal, Ryan LLC et al. v. FTC, No. 3:24-CV-00986-E (N.D. Tex. Oct. 18, 2024), available at https://www.uschamber.com/assets/documents/FTC-Notice-of-Appeal-Ryan-LLC-v.-FTC-Fifth-Circuit.pdf. 33See Nat’l Lab. Rels. Bd., Filing an Unfair Labor Practice Charge with the National Labor Relations Board (2024), https://www.nlrb.gov/sites/default/files/attachments/pages/node-184/info-for-workers-subject-to-noncompetes-or-stay-or- pay-provisions.pdf.
34 Final Judgment, United States v. Koch Foods Inc., No. 1:23-CV-15813 (N.D. Ill. Feb. 12, 2024), available at https://www.justice.gov/atr/media/1377131/dl; Press Release, U.S. Dep’t of Just., Justice Department Files Lawsuit and Proposed Consent Decree to Prohibit Koch Foods from Imposing Unfair and Anticompetitive Termination Penalties in Contracts with Chicken Growers (Nov. 9, 2023), https://www.justice.gov/opa/pr/justice-department-files-lawsuit-and- proposed-consent-decree-prohibit-koch-foods-imposing.
35 For example, non-competes have been void in California and North Dakota for over a century. See Cal. Bus. & Prof. Code § 16600 et seq.; N.D. Cent. Code § 9-08-06.
36 See Brown v. TGS Mgmt., 57 Cal. App. 5th 303, 316–19 (2020). 37 See, e.g., EEOC v. Astra USA, 94 F.3d 738, 744–45 (1st Cir. 1996); FTC v. AMG Services, Inc., No. 2:12-CV-00536- GMN-VCF, 2013 WL 12320929, at *4 (D. Nev. Aug. 20, 2013); Sparks v. Seltzer, No. 05-CV-1061 (NG) (KAM), 2006 WL 2358157, at *4 (E.D.N.Y. Aug. 14, 2006); EEOC v. Int’l Profit Assocs., No. 01 C 4427 (N.D. Ill. Apr. 23, 2003) (unpublished); Hoffman v. Sbarro, Inc., No. 97 CIV. 4484(SS), 1997 WL 736703, at *1 (S.D.N.Y. Nov. 26, 1997). 38 See Statement of Interest of the United States of America at 20, Mizell v. Univ. of Pittsburgh Med. Ctr., No. 1:24-CV- 00016-SPB (W.D. Penn. Sept. 30, 2024), ECF No. 50 [hereinafter Mizell Statement of Interest], available at https://www.justice.gov/atr/media/1371576/dl.
39 See Final Judgment, United States v. Koch Foods Inc., No. 1:23-CV-15813 (N.D. Ill. Feb. 12, 2024), available at https://www.justice.gov/atr/media/1377131/dl (consent decree resolving allegations that termination payment provisions in poultry grower contracts violated Section 1 of the Sherman Act and Section 202(a) of the Packers and Stockyards Act in which the defendant poultry processor agreed to repay all termination payments it had received from farmers and to refrain from including termination payment obligations in future poultry grower contracts). These types of restrictions can harm labor market competition by preventing workers from seeking better, higher-paying jobs. When firms hold monopsony power in a labor market, they may exploit their bargaining power to impose restrictive, exclusionary, or predatory employment terms that deprive workers of fair competitive pay and of the ability to bargain for better working conditions.40 These restrictions can also harm competition for goods and services by raising entry barriers for new businesses, and by depriving existing businesses of the opportunity to hire the talent necessary to compete. Such provisions raise many of the same antitrust concerns as non-competes, and the Agencies may investigate if there are indications that such a restrictive condition on workers is harming competition.
40 See Mizell Statement of Interest at 1.
41 See, e.g., 7 U.S.C. § 192 (U.S. Department of Agriculture’s Section 202 authority under the Packers and Stockyards Act); 29 U.S.C. §§ 157, 158 (National Labor Relation Board’s Section 7 and 8(a)(1) authorities under the National Labor Relations Act); 49 U.S.C. § 41712 (U.S. Department of Transportation’s authority under the Federal Aviation Act). 42 See, e.g., Consumer Fin. Prot. Bureau Office for Consumer Populations, Issue Spotlight: Consumer Risks Posed by Employer-Driven Debt (July 20, 2023), https://www.consumerfinance.gov/data-research/research-reports/issue-spotlight- consumer-risks-posed-by-employer-driven-debt/full-report; Nat’l Lab. Rels. Bd., Region 9-Cincinnati Secures Settlement Requiring Juvly Aesthetics to Rescind Unlawful Non-Compete and Training Repayment Agreement Provisions (TRAPs) and Pay Over $25,000 to Employees (Feb. 6, 2024), https://www.nlrb.gov/news-outreach/region-09-cincinnati/region-9- cincinnati-secures-settlement-requiring-juvly; Su v. Advanced Care Staffing, LLC, 23-CV-2119 (E.D.N.Y. March 20, 2023) (suing to enjoin enforcement of a training repayment agreement as a violation of the Fair Labor Standards Act). 43 See, e.g., Colo. Rev. Stat. § 8-2-113(3)(a)-(b).
44 Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 89 Fed. Reg. 1638, 1639 (Jan. 10, 2024) (codified at 29 C.F.R. 780).
45 Complaint, Fed. Trade Comm’n, In the Matter of Amazon.com, Inc. and Amazon Logistics, Inc., No. 1923123 (Feb. 2021), available at https://www.ftc.gov/system/files/documents/cases/amazon_flex_complaint.pdf. 46 Complaint, FTC v. Uber Technologies, Inc., No. 3:17-CV-00261 (N.D. Cal. Jan. 19, 2017), available at https://www.ftc.gov/system/files/documents/cases/1523082ubercmplt.pdf. 47 Complaint, FTC v. Arise Virtual Solutions, Inc., No. 0:24-CV-61152 (S.D. Fla. July 2, 2024), available at https://www.ftc.gov/system/files/ftc_gov/pdf/arise_complaint.pdf. 48 Complaint, FTC v. Grubhub Inc., No. 1:24-CV-12923 (N.D. Ill. Dec. 17, 2024), available at https://www.ftc.gov/system/files/ftc_gov/pdf/2024-12-17-GrubhubComplaint.pdf.
16 C.F.R. § 433.2(a). Where the seller is not the creditor, but receives payment from the proceeds of a loan by a creditor that has a referral or business relationship with the seller (defined in the Rule as a “Purchase Money Loan”), the consumer credit contract must have the same provision, except the words “PURSUANT HERETO OR” are omitted. Id. § 433.2(b). A creditor or assignee of credit contracts with the Holder Rule Notice is thus subject to any claims or defenses that the consumer could assert against the seller. Analysis. The Holder Rule does not eliminate any rights the consumer may have as a matter of separate state, local, or federal law. Consequently, whether costs and attorneys’ fees may be awarded against the holder of the credit contract is determined by the relevant law governing costs and fees.5 Nothing in the Holder Rule states that application of such laws to holders is inconsistent with Section 5 of the FTC Act or that holders should be wholly or partially exempt from these laws.
third party) (1975); see also FTC, Statement of Enforcement Policy, 41 Fed. Reg. 34,594, 34,596 (1976). (explaining affiliation and referral standards applicable to “transactions in which a seller accepts the proceeds of a loan extended directly from a lender to a purchaser.”). 4 40 Fed. Reg. at 53,523.
5 States have passed varying laws regarding recovery of attorneys’ fees and costs under which responsibility to pay fees may depend a variety of factors. Compare ALASKA R. CIV. P. 82(a) (2021) (“Except as otherwise agreed to by the parties, the prevailing party in a civil case shall be awarded attorney’s fees calculated under this rule”); WASH. REV. CODE § 4.84.330 (2021) (if a contract provides for fees to one party, the prevailing party is entitled to fees); KY. REV. STAT.
Some courts have read the Commission’s statements in a 2019 Rule Confirmation notice regarding the Holder Rule as mandating a different result.6 Insofar as these decisions conclude that the Holder Rule precludes state law from providing for costs or attorneys’ fees against the holder, they misconstrue the Commission’s statements. Neither the Rule itself nor the 2019 Rule Confirmation notice say that the Holder Rule invalidates state law or that there is a federal interest in limiting state remedies. To the contrary, the 2019 Rule Confirmation says that nothing in the Holder Rule limits recovery of attorneys’ fees if a federal or state law separately 6 Supra note 2.
Statement on the Holder Rule and Attorneys’ Fees Page 3 provides for recovery of attorneys’ fees independent of claims or defenses arising from the seller’s misconduct.7 By direction of the Commission.
April J. Tabor Secretary 7 We have previously observed that the Holder Rule Notice does not limit the availability of injunctive relief against a holder: “The final sentence of the Holder Rule Notice does not restrict the types of remedies available when a claim or defense is preserved; it simply states that the money that a consumer may obtain from a holder based on the Notice may not exceed amounts paid. The Commission affirms that the plain language of the Rule does not limit the types of relief a court may award against a holder.” 84 Fed. Reg. at 18,713 n.32. Statement on the Holder Rule and Attorneys’ Fees Page 4 37022 Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations information directly to the manager of the FEDERAL TRADE COMMISSION The Commission published a new certification office, send it to the attention of rule in the NPRM pursuant to its the person identified in Related Information. 16 CFR Part 323 authority under 15 U.S.C. 45a (‘‘Section Information may be emailed to: 9-ANM- 45a’’). Section 45a declares: ‘‘[t]o the [3084–AB64] Seattle-ACO-AMOC-Requests@faa.gov. extent any person introduces, delivers (2)Before using any approved AMOC, Made in USA Labeling Rule for introduction, sells, advertises, or notify your appropriate principal inspector, offers for sale in commerce a product or lacking a principal inspector, the manager AGENCY: Federal Trade Commission. with a ’Made in the U.S.A.’ or ‘Made in of the responsible Flight Standards Office. ACTION: Final rule. America’ label, or the equivalent thereof, in order to represent that such (j)Related Information SUMMARY: The Federal Trade product was in whole or substantial part (1)Refer to Mandatory Continuing Commission (‘‘FTC’’ or ‘‘Commission’’) of domestic origin, such label shall be Airworthiness Information (MCAI) Civil issues a final rule related to ‘‘Made in consistent with decisions and orders of Aviation Authority of Israel (CAAI) Israeli USA’’ and other unqualified U.S.-origin the Federal Trade Commission.’’ The AD ISR–I–24–2021–6–6R1, dated June 27, claims on product labels. statute authorizes the agency to issue 2021, for related information. This MCAI DATES: This final rule is effective August rules to effectuate this mandate and may be found in the AD docket on the 13, 2021. prevent unfair or deceptive acts or internet at https://www.regulations.gov by searching for and locating Docket No. FAA– FORFURTHERINFORMATIONCONTACT: Julia practices relating to MUSA labeling.3 Solomon Ensor (202–326–2377) or Specifically, under the statute, the 2021–0566.
(2)For more information about this AD, Hampton Newsome (202–326–2889), Commission ‘‘may from time to time contact Brian Hernandez, Aerospace Attorneys, Division of Enforcement, issue rules pursuant to section 553 of title 5, United States Code’’ requiring Engineer, Systems and Equipment Section, Bureau of Consumer Protection, Federal MUSA labeling to ‘‘be consistent with FAA, Seattle ACO Branch, 2200 South 216th Trade Commission, Room CC–9528, 600 decisions and orders of the Federal St., Des Moines, WA 98198; phone and fax: Pennsylvania Avenue NW, Washington, Trade Commission issued pursuant to 206–231–3535; email: Brian.Hernandez@ DC 20580.
(IBR) of the service information listed in this Rulemaking (‘‘NPRM’’) (85 FR 43162) unqualified U.S.-origin claims.
paragraph under 5 U.S.C. 552(a) and 1 CFR seeking comments on a new rule Consistent with the Commission’s part 51. regarding unqualified U.S.-origin claims MUSA Decisions and Orders since the (2)You must use this service information (‘‘MUSA claims’’) on product labels. 1940s,5the NPRM proposed to codify as applicable to do the actions required by The NPRM was preceded by a review of the established principle that this AD, unless this AD specifies otherwise.
Ltd., Ben Gurion Airport, Israel 70100;
In response to the NPRM, the 45a’s grant of rulemaking authority, and Commission received hundreds of Members of the beef and shrimp the proposed rule appropriately covered comments, discussed infra Section II. industries requested specific guidance labels in mail order (electronic)
Although some raised concerns or for their industries. A few stakeholders advertising.18For example, TINA.org recommended changes to the proposed changes outside the scope of argued the Commission properly Commission’s proposal, the majority the FTC’s Section 45a rulemaking interpreted Section 45a as authorizing supported finalizing the rule as drafted. authority. For example, some coverage of electronic labels because Accordingly, the Commission adopts commenters proposed making country- Section 45a does not limit the term the proposed rule with limited of-origin labeling mandatory in all ‘‘labels’’ to physical labels, and physical modifications as discussed below.8The instances. Finally, some raised and digital labels are ‘‘functionally rule will take effect August 13, 2021. miscellaneous concerns about particular equivalent’’ in terms of providing II. Response to Comments businesses’ practices or claims.15As product information to discussed below, these comments do consumers.19TINA.org further noted The Commission received more than not provide a compelling basis to ‘‘[w]hen Congress seeks to limit ‘labels’ 700 comments9in response to the change the substantive requirements of to the physical, it knows how . . . [and the rule proposed in the NPRM. here] the statute makes no attempt to (Dec. 2, 1997). The Commission first used the ‘‘all restrict the definition or distinguish or virtually all’’ language in Hyde Athletic Industries, File No. 922–3236 (consent agreement than long docket number (e.g., ‘‘FTC–2020–0056– physical labels from digital labels.’’20 accepted subject to public comment Sept. 20, 1994) 0001’’). Moreover, TINA.org explained, limiting and New Balance Athletic Shoes, Inc., Docket 9268 10See, e.g., Senators Sherrod Brown, Tammy the proposed rule to physical labels (complaint issued Sept. 20, 1994). In the 1997 Baldwin, Christopher Murphy, and Richard without addressing electronic labels Federal Register Notice requesting public comment Blumenthal (‘‘Senators’’) (373); North American on Proposed Guides for the Use of U.S. Origin Insulation Manufacturers (631); see also Letter from Claims, the Commission explained the ‘‘all or Representative Frank Pallone, Jr., Chairman, and 16UIUC Accounting Group A13 (5); UIUC Group virtually all’’ standard merely rearticulated A06 Anonymous (22); Truth in Advertising, Inc. Representative Jan Schakowsky, Chair, longstanding principles governing MUSA claims. (‘‘TINA.org’’) (369); Senators (373); Southern Subcommittee on Consumer Protection and FTC, Request for Public Comment on Proposed Shrimp Alliance (380); Council for Responsible Commerce, U.S. House of Representatives (Oct. 15, Guides for the use of U.S. Origin Claims, 62 FR Nutrition (‘‘CRN’’) (569); Personal Care Products 2020). But see Retail Industry Leaders Association 25020 (May 7, 1997). The Commission has routinely Council (‘‘PCPC’’) (587); Anonymous Anonymous (‘‘RILA’’) (570) (arguing low levels of enforcement applied this standard in its MUSA Decisions and (592); Alliance for AAM (611); National Association activity suggest codifying the guidance into a rule Orders since 1997. See Compilation of cases at of Manufacturers (‘‘NAM’’) (623); Coalition for a https://www.ftc.gov/tips-advice/business-center/ is unnecessary). Prosperous America (625). legal-resources?type=case&field_consumer_ 11UIUC Accounting Group A13 (5); Delphine 1715 U.S.C. 45a.
protection_topics_tid=234. MUREKATETE, iMSA Program, University of 18UIUC Accounting Group A13 (50); UIUC Group 7See, e.g., Textile Fiber Products Identification Illinois at Urbana Champaign (21); Anonymous A06 (22); TINA.org (369); Senators (373); Southern Act (15 U.S.C. 70b); Wool Products Labeling Act (15 Anonymous (24); UIUC–BADM 403–A02 (25); Shrimp Alliance (380); AAM (611); Coalition for a U.S.C. 68); American Automobile Labeling Act (49 Nirma Ramirez (26); Jaymee Westover (358); Joy Prosperous America (625). U.S.C. 32304); Agricultural Marketing Act (7 U.S.C. Winzerling (419); United Steelworkers (526); 19TINA.org (369) (emphasis in original) (also 1638a); Buy American Act (41 U.S.C. 10a–10c); and Anonymous Anonymous (533); R–CALF USA (588). arguing the Commission may draw support from the implementing rules. 12Chris Jay Hoofnagle (613) (advocating use of dictionary definition of ‘‘labels,’’ which includes 8As discussed in Section III of this Notice, the civil penalties to deter MUSA fraud). digital labels). Commission has added a provision (section 323.6) 13UIUC Accounting Group A13 (5); Chris Posey 20Id. at 2. TINA.org also suggested ‘‘courts in the final Rule related to petitions for exemption. (7); Family Farm Action Alliance (543). regularly interpret laws expansively in the face of 9Comments appear on FTC Docket FTC–2020– 14See, e.g., United Steelworkers (526); Alliance technological innovation,’’ and the ‘‘possibility that 0056 and are available at www.regulations.gov. For for American Manufacturing (‘‘AAM’’) (611). Congress may not have anticipated the application purposes of this Notice, all comments are referred 15Honey Boynton (32); Holly Mastromatto (33); of the term label to apply online does not change to by their short docket number (e.g., ‘‘1’’), rather Doug Thompson (123); Lucilla Rinehimer (702). [the] outcome.’’ VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol 37024 Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations would ‘‘leave American consumers possible.’’29Given these concerns over interpretation of Section 5’s unprotected.’’21Accordingly, TINA.org the scope of the Commission’s requirements governing substantiation concluded, ‘‘[a]s a matter of statutory rulemaking authority, Shirley Boyd of unqualified MUSA claims. This interpretation, the Commission can stated the Commission should proceed interpretation was first articulated in regulate digital MUSA labels. As a pursuant to the Magnuson Moss Commission cases dating back to the matter of consumer protection, the Warranty-Federal Trade Commission 1940s33and was formalized in the 1997 Commission ought to regulate digital Improvements Act to issue a broader Policy Statement. Specifically, the MUSA labels.’’22 rule covering MUSA advertising NPRM proposed to prohibit unqualified The Southern Shrimp Alliance generally.30 MUSA claims on labels unless: (1) Final (‘‘SSA’’) and AAM agreed, arguing assembly or processing of the product
the proposed rule exceeds the scope of whole or substantial part of domestic After analyzing these comments, as the Commission’s rulemaking authority origin, such label shall be consistent discussed below in Section II.B.3., the under Section 45a.26CRN and PCPC with decisions and orders of the Federal Commission has determined it has a argued Section 45a’s consistent use of Trade Commission.’’ The Commission is reasonable basis to adopt the the term ‘‘label’’ demonstrates empowered to ensure such labels are longstanding ‘‘all or virtually all’’ Congress’s intent to authorize a rule consistent with decisions and orders of standard, and the rule provides limited to labels on products, not one the Federal Trade Commission defining appropriate and clear guidance to that would cover advertising unfair or deceptive acts or practices marketers.
generally.27An anonymous commenter under Section 5. The Commission argued Section 45a does not provide agrees with SSA and AAM that 1. Consumer Perception Testing authority to regulate claims in mail Congress’s removal of a definition of Six commenters argued the FTC order advertising materials as proposed ‘‘label’’ from Section 45a before its should conduct new consumer in Section 323.3, so the proposed rule passage strongly suggests Congress perception testing before codifying the ‘‘should be revised to only cover labels deliberately chose to defer to the FTC’s ‘‘all or virtually all’’ guidance into a on products.’’28Should the FTC finalize interpretation of the term in the context rule.34They noted the Commission has a rule that purports to cover more than of MUSA claims.31Moreover, the not conducted comprehensive testing labels on products, NAM warned, the Commission agrees with TINA.org that since the 1990s. CRN explained result could be ‘‘lengthy litigation digital and physical labels are ‘‘codifying a standard for unqualified [, which would leave] manufacturers functionally equivalent, especially with U.S.-origin claims that is based on and consumers alike . . . without clear the growth of e-commerce, and a failure consumer perception data that has not guidance at a time when manufacturers to cover labels in print or electronic been reanalyzed by the Commission in need as much regulatory certainty as mail order catalogs or promotional over 20 years’’ is potentially materials would leave consumers problematic because ‘‘[g]iven significant 21Id. at 5. without much-needed protection.32 changes to the global economy, 22Id. at 3 (emphasis in original). The final rule does not cover MUSA consumer perceptions of U.S.-origin 23Southern Shrimp Alliance (380); AAM (611). claims in all advertising. Instead, as 24AAM (611). Coalition for a Prosperous America Section 323.3 explains, the rule covers claims are very likely to have changed (625) agreed Section 45a’s plain language permits over time and consumer perception in labels appearing in all contexts, coverage of electronic claims (arguing coverage is 1997, and even 2013, could be very authorized where a ‘‘substantial part’’ of the whether, for example, they appear on different from how consumers perceive product is of domestic origin) (citing Section 45a product packaging or online. With this (‘‘To the extent any person introduces, delivers for clarification, the Commission adopts U.S.-origin claims today.’’35CTA agreed introduction, sells, advertises, or offers for sale in and asserted that proposing to codify Section 323.3 as proposed.
commerce a product with a ‘Made in the U.S.A.’ or the ‘‘all or virtually standard’’ without ‘Made in America’ label, or the equivalent thereof, B. ‘‘All or Virtually All’’ Standard conducting new consumer perception in order to represent that such product was in whole or substantial part of domestic origin, such As described in Section I above, the label shall be consistent with decisions and orders NPRM proposed to codify the 33See, e.g., In re Vulcan Lamp Works, Inc., 32 of the Federal Trade Commission issued pursuant Commission’s longstanding F.T.C. 7 (1940). to section 45 of this title (emphasis added).’’)). 34CRN (569); Consumer Technology Association 25AAM (611). (‘‘CTA’’) (579); Global Organization for EPA and 26CRN (569); PCPC (587); Anonymous 29NAM (623) at 5. DHA Omega-3s (604); American Association of Anonymous (592); NAM (623). 30Shirley Boyd (6). Exporters and Importers (‘‘AAEI’’) (605); NAM 27PCPC (587); CRN (569). 31Southern Shrimp Alliance (380); AAM (611). (623); Pharmavite LLC (695). 28Anonymous Anonymous (56). 32See TINA.org (369). 35CRN (569). VerDate Sep<11>2014 17:31 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations 37025 testing ‘‘put the cart before the horse.’’36 products with up to 5% of the final content that cannot be sourced in the NAM also encouraged the FTC to wholesale value of the product United States, but argued this undertake a comprehensive review attributable to articles, units, or parts of exemption should be capped at a certain similar to the Commission’s process in the merchandise obtained from outside percentage of manufacturing costs. In the 1990s before promulgating any the USA.41 NAM’s view, a rule permitting rule.37 RILA agreed a rule providing a bright- marketers to incorporate an appropriate line percentage would help marketers percentage of imported components or 2. Alternative Standards comply, and suggested the FTC consider labor, not otherwise unavailable In addition to requesting the FTC ‘‘analogous federal regulations that domestically, ‘‘would give conduct new perception testing, incentivize U.S. manufacturing,’’ and manufacturers clear and predictable numerous commenters proposed incorporate a 70% threshold for rules and play a significant role in alternatives to the ‘‘all or virtually all’’ unqualified claims.42Alternatively, one helping to encourage manufacturers to standard. These proposals, which were commenter suggested a rule that would increase domestic investments in order based on policy arguments and were not permit an unqualified claim for a to meet an attainable standard.’’47 accompanied by supporting consumer product assembled in the United States perception evidence, fell into two where more than 50% of its value is iii. Substantial Transformation Analysis groups. On one hand, more than twenty based on components of U.S.-origin.43 Several commenters suggested the commenters, mostly individual Two representatives of the dietary FTC adopt a ‘‘substantial consumers, suggested unqualified supplement industry, the Global transformation’’ standard for MUSA claims should be limited to Organization for EPA and DHA Omega- unqualified claims.48Three commenters products 100% made in the United 3s (‘‘GOED’’) and Pharmavite LLC, made from U.S. trade associations49 States. On the other hand, other an alternative percentage-based explained harmonizing the FTC’s rule commenters, mostly manufacturers, proposal with different standards for with the CBP standard for determining argued ‘‘all or virtually all’’ is too strict, active and inactive ingredients. foreign country of origin pursuant to the and by incorporating it into a rule, the Specifically, they argued consumers Tariff Act, 19 U.S.C. 1304, would FTC could chill unqualified claims, likely interpret an unqualified MUSA provide clarity and alleviate the burden discourage innovation, and harm claim to mean 100% of a dietary on U.S. companies that ‘‘must navigate industries where parts or ingredients are supplement’s active ingredients are a number of different country of origin not available in the United States.38To made and sourced in the United States. requirements.’’50AAFA explained address these concerns, this second They claimed, however, consumers care adopting the ‘‘substantial group of commenters suggested less about the origin of inactive transformation’’ standard would result alternatives: (1) Introducing a ingredients. Accordingly, they in a ‘‘clear, simple, and easy-to- percentage-of-costs standard; (2) contended the rule should incorporate a understand rule.’’51The People’s adopting a standard that makes 10% tolerance for foreign-made or Republic of China (‘‘China’’) also allowances for imported parts or sourced inactive ingredients.44 argued, to avoid uncertainties and bias, materials not available in the United
(4) adding a safe harbor for ‘‘good faith’’ unqualified MUSA claims for products Agreement on Rules of Origin.52 efforts to comply. that include imported content only if the imported components are not iv. Good Faith Efforts To Comply i. Percentage-Based Standards available in the United States.45Some PCPC and RILA recommended the Several commenters argued the argued there should be a blanket Commission provide safe harbors for Commission should provide marketers exemption for such content. For two types of good-faith efforts to greater certainty by promulgating a example, Bradford White Corporation comply. PCPC, a trade association ‘‘bright line’’ rule outlining a specific (‘‘BWC’’) suggested the rule broadly percentage of manufacturing costs that allow marketers to exclude foreign parts 47NAM (623). See also Glenda Smith (612)
must be attributable to U.S. costs to from the analysis if those parts cannot (requesting more detail on how to handle raw substantiate an unqualified claim.39For be ‘‘reasonably sourced’’ from a materials not capable of being sourced in the USA). example, NFI suggested the FTC could domestic manufacturer.46Others agreed 48CBP defines ‘‘substantial transformation’’ as a align the rule with California state the rule should permit unqualified manufacturing process that results in a new and law,40which permits manufacturers to claims for products that contain foreign different product with a new name, character, and use different from that which existed before. This make unqualified MUSA claims for standard does not take into account the origin of 41See Cal. Bus. & Prof. Code §17533.7 (as revised materials or parts. See 19 CFR part 134; Energizer 36CTA (579). in 2015). Battery, Inc. v. United States, 190 F. Supp. 3d 1308 37NAM (623). 42RILA (570). (Ct. Int’l Tr. 2016) (holding a substantial 38See, e.g., CTA (579) (arguing the ‘‘all or 43TRAVIS HEDSTROM (660). transformation occurs when a product emerges from virtually all’’ guidance deters innovation because 44GOED (604); Pharmavite LLC (695). a manufacturing process with a new name, many electronic product components are only made 45The California law makes such an allowance, character, and use, and the ‘‘simple assembly’’ of internationally); Personal Care Products Council although it is not unlimited. Specifically, California a limited number of components does not constitute (587) (guidance deters manufacturers from using permits up to 10% (instead of 5%) of costs to be a substantial transformation). maximum levels of U.S. parts and materials); AAEI attributable to imported content if that content 49International Precious Metals Institute, Inc.
(605) (guidance negatively impacts U.S. companies cannot be made or obtained in the USA for reasons (‘‘IPMI’’) (520); AAEI (605); American Apparel and that will not risk making the claim). other than cost. Cal. Bus. & Prof. Code §17533.7. Footwear Association (‘‘AAFA’’) (675). 39National Fisheries Institute (‘‘NFI’’) (628); RILA 46BWC (622). Indeed, BWC argued, given 50AAEI (605). See also BWC (622) (raising (570); TRAVIS HEDSTROM (600); Acuity Brands consumer expectations and current supply chains, concerns about increased regulatory burden). (609); NAM (623); American Coatings Association rather than analyzing the percentage of costs 51AAFA (675) (also suggesting the FTC (‘‘ACA’’) (666) (stating marketers need guidance on attributable to U.S. versus foreign costs, it might be ‘‘eliminate’’ qualified claims for any products that percentage values or other guidance on how to deal more appropriate to analyze the proportion of an do not meet the ‘‘substantial transformation’’ with trace components of foreign/unknown origin). entity’s overall manufacturing workforce in the U.S. threshold). 40NFI (628). Id. 52China (699).
VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol 37026 Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations representing manufacturers, States.56Additionally, the survey found or (4) provide a safe harbor for good- distributors, and suppliers of personal 33 percent of consumers thought 100 faith efforts to comply. care products, suggested incorporating a percent of a product must originate in First, percentage-based, bright-line safe harbor for ‘‘good actors who are a country for that product to be labeled rules could allow deceptive unqualified trying to overcome the difficulties in as ‘‘Made’’ in that country.57These claims in circumstances where the low sourcing domestic components and findings are consistent with the FTC’s cost of the foreign input does not materials.’’53PCPC explained, ‘‘[a] safe 1995 survey, which found roughly 30 correlate to the importance of that input harbor provision for unqualified claims percent of consumers would be to consumers. For example, the would not dilute the purpose of the deceived by an unqualified MUSA Commission’s enforcement experience FTC’s goal with this proposed rule—to claim for a product where 70 percent of has established unqualified U.S.-origin deter bad actors from making false the cost was incurred in the United claims for watches that incorporate claims. Rather, such a provision would States.58As Hanna explained during the imported movements may mislead provide businesses who in good faith workshop, ‘‘at least 25% of the consumers because, although the cost of make every reasonable effort to make as consumers were skeptical that if there’s an imported movement is often low much of their product as possible in the something introduced to that finished relative to the overall cost to U.S. the flexibility to comply with any product other than something that manufacture a watch, consumers may new regulations.’’54 originated in the US now, they didn’t place a premium on the origin and Alternatively, RILA suggested that to think it should be made in the USA.’’59 quality of a watch movement and avoid deterring retailers and Accordingly, the Commission has a consider the failure to disclose the marketplaces from offering products reasonable basis to conclude the ‘‘all or foreign origin of this component to be with MUSA labels the final rule should virtually all’’ standard accurately material to their purchasing decision. ‘‘include an express statement . . . that represents current consumer perception Under those circumstances, the foreign allows retailers and marketplaces that regarding unqualified MUSA claims. movement likely is not a de minimis have exercised reasonable due diligence Should future consumer research clearly consideration for consumers, and an to rely on documented supplier and establish the ‘‘all or virtually all’’ unqualified U.S.-origin claim for a vendor certifications to substantiate standard is inapplicable to a specific watch containing an imported MUSA labeling claims.’’55 class of products, entities may petition movement would likely deceive 3. Analysis the Commission for an exemption from consumers.60The Policy Statement has The Commission has concluded it is the Rule’s requirements, as discussed in instructed marketers since the 1990s not necessary to undertake additional Section III of this document. that the cost of foreign versus U.S. parts and labor is only one factor to consider consumer perception testing before While commenters proposed in determining how material a part may adopting the proposed Rule. alternative standards that might be to consumers.61Accordingly, the Accordingly, the Commission adopts promote certain policy goals, the Commission declines to adopt a the ‘‘all or virtually all standard’’ to Commission declines to adopt these percentage-based standard because the govern unqualified claims as proposed alternative proposals for the reasons ‘‘all or virtually all’’ standard is better in the NPRM. Although some discussed below. Section 45a authorizes tailored to prevent unqualified U.S.- commenters speculated consumer the Commission to issue rules to ensure origin claims that will mislead perception may have shifted over time, products labeled as ‘‘Made in the consumers in making purchasing or argued the Commission should adopt U.S.A.,’’ or the equivalent thereof, decisions. By maintaining this a new standard for unqualified claims, comport with the requirements of precedent, the rule accounts for the there is no evidence on the record Section 5 of the FTC Act that prohibit likelihood consumers interpret MUSA disputing the Commission’s past unfairness or deception. The ‘‘all or claims somewhat differently for findings that at least a significant virtually all’’ standard is designed to different product categories.
minority of consumers expect a MUSA- prevent consumer deception and, Second, the record similarly does not advertised product to be ‘‘all or virtually therefore, the Commission declines to: support excluding foreign content all’’ made in the United States. Nor is (1) Adopt a bright-line, percentage- unavailable in the United States from there evidence suggesting new based standard; (2) include a broad the ‘‘all or virtually all’’ analysis.
perception testing would find carve-out for inputs not available in the Specifically, as described above, otherwise. United States; (3) incorporate CBP’s Indeed, the limited survey evidence consumer perception testing has ‘‘substantial transformation’’ standard;
submitted in conjunction with the 2019 consistently shown consumers expect workshop on MUSA claims suggested products labeled as MUSA to contain no consumer perception has remained 56Commission staff considered this study more than a de minimis amount of previously as part of a request for a staff advisory stable since the 1990s. Specifically, one opinion on unqualified MUSA claims for recycled foreign content. There is no evidence panelist, Mark Hanna of Richline Group, gold jewelry products. See Response to Request for this takeaway varies in scenarios where Inc. submitted a survey, conducted in FTC Staff Advisory Opinion (Sept. 9, 2014), https:// some parts or inputs are not available in 2013, which found almost 3 in 5 www.ftc.gov/system/files/documents/closing_ the United States. Indeed, the Policy letters/made-usa/140909madeisusajvc.pdf Americans (57%) agree ‘‘Made in (declining to provide an opinion stating MUSA Statement explains unqualified claims America’’ means all parts of a product, claims for recycled jewelry do not deceive for such products could be deceptive, including any natural resources it consumers based on perception evidence provided for example, ‘‘if the [nonindigenous] contains, originated in the United by Richline Group). imported material constitutes the whole 57See also Hanna, Transcript of Made in USA: An or essence of the finished product (e.g., FTC Workshop (Sept. 26, 2019) (hereinafter, the rubber in a rubber ball or the coffee 53PCPC (587). Although not specifically ‘‘MUSA Tr.’’) at 14 (study showed ‘‘25% or 30% of advocating for a good-faith claim safe harbor, the [American consumers] really did feel that Family Farm Action Alliance similarly argued the everything, including the natural resource, 60See, e.g., FTC Staff Closing Letter to Niall FTC should continue its practice of counseling including the gold, had to be part of the final Luxury Goods, LLC (Nov. 20, 2015), available at inadvertent offenders into compliance (543). product in order to say it was made in the USA’’). https://www.ftc.gov/system/files/documents/ 54PCPC (587) at 3. 5862 FR 25020, 25036. closing_letters/nid/151120niall_letter.pdf. 55RILA (570). 59Hanna, MUSA Tr. at 15. 61See Policy Statement, 62 FR 63756, 63768. VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations 37027 beans in ground coffee).’’62However, marketers can rely on information from more certainty to marketers about the the flexibility inherent in the ‘‘all or suppliers about the domestic content in standard for making unqualified claims virtually all’’ analysis accounts for the the parts, components, and other on product labels.’ Yet, the proposed ‘all possibility a marketer could substantiate elements they produce;65(2) generally or virtually all’ standard does not an unqualified claim for a product conserve enforcement resources for provide that certainty . . . It simply containing nonindigenous raw materials intentional, repeated, or egregious codifies the FTC’s already existing if the manufacturer has evidence offenders; and (3) provide informal staff ambiguous standards.’’69Two demonstrating the specific claim in counseling where appropriate. commenters specifically asked the context does not deceive consumers.63 Commission to incorporate information
would be labeled as originating from the 1. Definitions explained, ‘‘inappropriate practices by country where those materials were More than twenty commenters some restaurants in offering menu items ultimately transformed into a final recommended adding definitions or that falsely indicate to customers that product. Marketers would not need to providing more information to clarify imported shrimp is domestic, such as disclose the origin of the inputs other the rule. Without definitions, the ‘Gulf Shrimp’. . . not only confuse than labor (information highly material commenters feared marketers would consumers, but fatally undermine the to many consumers). Thus, employing ‘‘lack clear guidance for verifying marketing efforts of restaurants that do such a standard would in some cases MUSA claims’’ and thus ‘‘may be carry domestic shrimp.’’73To solve this conflict with the Rule’s purpose of deterred from’’ making them problem, SSA urged the Commission to ensuring consumers have the material altogether.66Some of these commenters ‘‘exercise jurisdiction over ‘Made in information necessary to make informed offered clarifying edits or proposed U.S.A.’ statements on restaurant menus, purchasing decisions. definitions, often as fallback positions to as a form of ‘Mail order promotional Finally, the rule does not include an their main arguments advocating material’ or ‘mail order catalog.’’’74 explicit carve-out for businesses that act alternative standards entirely.67 in good faith. Courts have long held In particular, in addition to 2. Covered Claims good faith is not a defense for a commenters who recommended Several commenters suggested the violation of Section 5 of the FTC Act,64 specifying percentage thresholds for ‘‘all Rule was not sufficiently clear about and the Commission intends to enforce or virtually all,’’ several commenters which U.S.-origin claims it covers. In the rule consistent with this precedent.
product], consumers are likely to understand that language/bus03-complying-made-usa-standard.pdf 70Deontae Lafayette (20); Jaymee Westover (358). a ‘Made in USA’ claim on a product that (also providing an example of a certification a 71Shirley Boyd (6); Pacific Coast Producers (27); incorporates such materials (e.g., vanilla ice cream marketer could request from a supplier that RILA (570). that uses vanilla beans, which, the Commission generally would constitute an acceptable basis for 72Pacific Coast Producers (27). understands, are not grown in the United States) determining the appropriate country-of-origin 73LSA (404). means that all or virtually all of the product, except designation for a product). 74SSA (380) (further explaining menus should for those materials not available here, originated in 66RILA (570). fall under this definition because they are used in the United States.’’ Id. The Policy Statement 67E.g., AAEI (605) (advocating adoption of the the direct sale or offer for sale of a product, are provides that this guidance applies only to raw ‘‘substantial transformation’’ standard). disseminated in print or can be delivered by materials, not manufactured inputs. 68See, e.g., Shirley Boyd (6); Pacific Coast electronic means, and are solely disseminated to 64See, e.g., FTC v. World Travel Vacation Producers (27); RILA (570); Vietnam (577); AAEI solicit the purchase of a product). Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988). (605); NFI (628); ACA (666); AAFA (675). 75Frost Brown Todd LLC (522). VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol 37028 Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations proposed ‘‘processed,’’ ‘‘fabricated,’’ other words, where a product is labeled not reviewed perception evidence and ‘‘packaged.’’76Finally, one or otherwise advertised with an regarding consumer understanding of commenter suggested, to deter unqualified claim, it should contain MUSA claims on restaurant menus, and unscrupulous marketers effectively, the only a de minimis, or negligible, amount therefore declines to define such claims list should include claims that products of foreign content. Although there is no as covered ‘‘labels’’ for purposes of are ‘‘Distributed by:’’ a company name single ‘‘bright line’’ to establish when a Section 45a. followed by a U.S. address.77 product is or is not ‘‘all or virtually all’’
3. Effective Date manufacturing costs attributable to U.S. component thereof, is of U.S. origin, parts and processing; how far removed including, but not limited to, a Finally, two commenters requested from the finished product any foreign representation that such product or the FTC provide an extended content is; and the importance of the service is ‘made,’ ’manufactured,’ ’built,’ compliance period before the rule’s foreign content to the form or function ’produced,’ ’created,’ or ’crafted’ in the effective date. Specifically, ACA and of the product. Accordingly, the United States or in America, or any McKenna Walsh argued companies Commission’s existing guidance and other unqualified U.S.-origin claim’’ would need time to come into enforcement documents, including the (emphasis added).83 compliance with the Rule. In their view, Policy Statement, decisions and orders The list of equivalents to ‘‘Made in the FTC should delay implementation to enforcing the ‘‘all or virtually all’’ USA’’ set forth in Section 323.1 is not give companies the opportunity to standard, and staff closing letters, exhaustive because the means of generate new marketing materials and together provide ample guidance to communicating U.S. origin are too run out old stock.80 marketers.
4. Analysis believes the non-exhaustive list of ‘‘all or virtually all’’ and ‘‘significant After analyzing the comments, the examples given provide sufficient processing’’ intentionally incorporate Commission finds the rule and its guidance on the scope of covered flexibility to allow marketers to coverage clear on its face, with express and implied claims. These substantiate their claims consistent with sufficient flexibility to address a examples are based on the consumer perception of their particular changing marketplace. Therefore, as Commission’s decades of enforcement products. The Commission’s discussed further below, the experience addressing MUSA claims. enforcement program has long Commission issues the rule without For other claims, the Commission will recognized the need for such flexibility additional definitions or clarifications, analyze them in context, including the as described in the Policy Statement, or a delayed effective date.81 terms used, their prominence, and their which was based on the Commission’s proximity to images and other text.
i. Definitions decisions and orders. The Commission has continued to follow this flexible iii. Effective Date The Commission declines to adopt approach, and incorporated it into its definitions of ‘‘all or virtually all’’ and Lastly, the Commission declines to post-Policy Statement decisions and ‘‘significant processing,’’ or to expand delay the rule’s effective date. As orders. Adding specific definitions for the existing definition of ‘‘mail order discussed above in Section I, the rule these terms may increase clarity for catalog’’ or ‘‘mail order promotional codifies the FTC’s longstanding marketers in the short term because the material.’’ The Commission has issued guidance on MUSA claims. The FTC has rule covers so many product categories extensive guidance to help marketers incorporated the ‘‘all or virtually all’’ across a range of circumstances, but the understand the ‘‘all or virtually all’’ standard into decisions and orders and Commission has determined adding standard. As the Policy Statement guidance for industry and the public further specificity also increases the risk explains, ‘‘A product that is all or since the 1990s.84Because the rule the rule would chill certain non- virtually all made in the United States merely codifies these longstanding deceptive claims. Marketers seeking will ordinarily be one in which all enforcement principles and imposes no additional guidance may look to the significant parts and processing that go new requirements on marketers, the Policy Statement, decisions and orders, into the product are of U.S. origin.’’ In Commission concludes a delayed and other Commission guidance to effective date is unnecessary.
D. Guidance for Specific Industries commenters’ concerns ‘‘are misplaced breaded or marinated shrimp.94In because they fail to recognize that the addition, as described above in Section Some commenters requested tailored [USDA’s FSIS] has primary jurisdiction II.C.1., these commenters noted that guidance for specific industries.
1. Beef defined as born, raised, harvested, and void in federal labeling accountability The Commission received more than processed in the USA . . . [its members] and providing certainty to the seafood 450 comments urging the Commission think the [USDA] should be the lead market during this time of widespread to clarify that the rule applies to beef agency to address enforcement of labels economic instability.’’96 products. These stakeholders, primarily that include all meat products.’’89
because they are not able to differentiate Act, 21 U.S.C. 451 et seq.; or the Egg regulations91have primary authority in their domestically produced meat and Products Inspection Act, 21 U.S.C. 1031 this space. The COOL regulations meat products from foreign produced et seq.
Importers’ Council of America (‘‘remind[ing] FTC that the Federal Meat Inspection Accordingly, the USDA announced submitted a joint comment stating beef Act of 1906 (21 U.S.C. 601 et seq.) grants the U.S. plans to initiate a rulemaking to Department of Agriculture (USDA) primary alleviate any potential confusion in the jurisdiction over all meat food product oversight 85North Dakota Farmers Union (412).
VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol 37030 Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations marketplace.101As that proceeding include language specifically correlating statute does not explicitly address unfolds, the Commission remains penalties to firm sizes.108The general advertising claims beyond the committed to engaging with the USDA Commission declines to adopt these context of labeling. Accordingly, in to ensure American consumers receive changes, which are inconsistent with its enacting this rule, the Commission has truthful and accurate information about rulemaking mandate under Section 45a. not focused on advertising more the beef products they buy. As discussed above, Section 45a grants generally, but retains the proposed Under its COOL regulations, USDA’s the Commission authority to issue rules rule’s focus on MUSA claims on labels AMS has primary authority over to prevent unfair or deceptive acts or or in mail order or catalog advertising, country-of-origin labels for most fish practices relating to MUSA labeling. including in online marketplaces, that and shellfish products.102Because Specifically, Section 45a authorizes the depict a product label. However, the Section 45a’s general grant of Commission to issue rules to require FTC’s general authority under Sections rulemaking authority does not authorize MUSA labeling to ‘‘be consistent with 5 and 12 of the FTC Act covers the Commission to issue regulations that decisions and orders of the Federal advertising, including advertising of would preclude the application of Trade Commission issued pursuant to qualified and unqualified MUSA existing statutes and regulations [Section 5 of the FTC Act].’’ The FTC claims.112 addressing agricultural product labeling, may seek civil penalties for violations of
Section 323.5 makes clear the rule does 1. Preemption Other commenters recommended the not supersede, alter, or affect any other The Commission intends to preempt Commission make country-of-origin federal statute or regulation relating to state statutes or regulations that are labeling mandatory. For example, the country-of-origin labeling requirements. inconsistent with the Commission’s Made in USA Foundation proposed that However, to the extent certain, limited rules only to the extent of the the Rule should require that all categories of agricultural products fall inconsistency.109When it enacted advertisements for specified categories outside USDA’s jurisdiction, the Section 45a, Congress declined to of products, including all products Commission will analyze claims on a expressly preempt state regulation or advertised for sale on the internet, case-by-case basis and consult with otherwise demonstrate a clear intent for disclose the country of origin of the other agencies as appropriate.103 federal law to occupy the field of products in a clear and prominent regulation in question.110Accordingly, manner.113While the Commission E. Other Proposals Section 323.5 of the Rule preempts a acknowledges that many consumers Some commenters proposed a series state statute, regulation, order, or may find such information to be of other amendments, arguing variously interpretation ‘‘to the extent that such valuable in many circumstances, that the Rule should preempt state law statute, regulation, order, or Section 45a does not authorize the entirely;104cover MUSA advertising interpretation is inconsistent with the Commission to establish a mandatory generally;105make country-of-origin provisions of this part, and then only to country-of-origin labeling scheme. The labeling mandatory for all products;106 the extent of the inconsistency.’’ statute grants the Commission authority incorporate provisions relating to Moreover, the rule makes clear that a to issue rules to ensure that Made in qualified U.S.-origin claims;107and state statute, regulation, order, or USA claims are not deceptive and are interpretation is not inconsistent with consistent with the Commission’s 101Id. the rule if the protection such statute, decisions and orders defining unfair or 1027 U.S.C. 1638(1); 7 CFR 60.128. regulation, order, or interpretation deceptive acts or practices under 103The FTC notes deceptive claims on restaurant menus appear to be largely a regional issue, and affords any consumer is greater than the Section 5. Accordingly, the Commission therefore are being addressed through state protection provided by the rule. lacks authority under Section 45a to legislation. See, e.g., La. R.S. §40:5.5.4 (requiring enact this proposal. food service establishments to provide notice to 2. MUSA Advertising Generally consumers if crawfish or shrimp is imported); La. 4. Qualified U.S.-Origin Claims Some commenters encouraged the R.S. §56:578.14 (‘‘No owner or manager of a restaurant that sells imported crawfish or shrimp Commission to expand the proposed Some commenters also argued that shall misrepresent to the public, either verbally, on rule to cover all advertising that the rule should also address qualified a menu, or on signs displayed on the premises, that includes any U.S.-origin claim, rather U.S.-origin claims. The United the crawfish or shrimp is domestic.’’). FTC staff will continue to monitor this issue. than focusing as proposed on MUSA Steelworkers asserted that, ‘‘[a]s firms 104BWC (622); AAFA (675). Additionally, PCPC labeling.111Section 45a, however, is with global supply chains seek to (589) argued the Rule should specifically preempt directed at labels on products declaring benefit from the value consumers place a private right of action. However, two commenters that a product is ‘‘in whole or in products with American content, we agreed with the section as drafted as a means to ‘‘ensure regulatory certainty and consistency of substantial part of domestic origin’’ and must ensure that qualified claims product U.S. origin labels nationwide.’’ RILA (570). thus may be labeled ‘‘Made in the accurately represent the level of value See also NAM (623) (recognizing the ‘‘value of U.S.A.,’’ or the equivalent thereof. The creation in the United States.’’114 utilizing preemption to create a uniform MUSA Section 45a, however, is directed to standard’’).
5. Civil Penalties of-origin labels, except to the extent that new burdens on law-abiding businesses. Some commenters argued that larger a state country-of-origin statute, Accordingly, the Commission certifies businesses may not be sufficiently regulation, order, or interpretation is that the final rule will not have a deterred by the current maximum civil inconsistent with the rule. significant economic impact on a penalty amounts for violations of Finally, the Commission has adopted substantial number of small businesses. Commission rules and recommended a new Section, 323.6, to address Although the Commission certifies that civil penalties should be increased commenter concerns about the under the RFA that the amendment will for larger firms.116The Commission applicability of the ‘‘all or virtually all’’ not have a significant impact on a lacks authority, however, to establish standard across product categories. This substantial number of small entities, the civil penalty maximums that depart provision allows marketers and other Commission has determined, from the levels provided by statute. covered persons to seek full or partial nonetheless, that it is appropriate to Civil penalty amounts for violations of exemptions if they can demonstrate publish a Final Regulatory Flexibility the Commission’s rules are established application of the rule’s requirements to Analysis in order to explain the impact by the FTC Act.117Nonetheless, the a particular product or class of product of the amendments on small entities as Commission believes that its civil is not necessary to prevent the acts or follows: penalty authority generally provides an practices to which the rule relates. The effective deterrent against rule Commission’s rules of practice A. Description of the Need for and violations, and notes that civil penalties governing petitions for rulemaking Objectives of the Rule for violations of a rule are assessed per provide the procedures for submitting The Commission proposed the MUSA violation. Moreover, the FTC Act such petitions.119Pursuant to this Labeling Rule for two primary reasons: establishes a series of factors for courts process, interested persons may file To strengthen its enforcement program to consider in assessing appropriate relevant consumer perception evidence and make it easier for businesses to civil penalty amounts in individual and data with the Commission. If the understand and comply with the law. enforcement matters, including ‘‘the Commission deems the petition Specifically, by codifying the existing degree of culpability, any history of sufficient to warrant further standards applicable to MUSA claims in prior such conduct, ability to pay, effect consideration, it will follow the a rule as authorized by Congress, the on ability to continue to do business, procedures outlined in Section 1.25 of FTC will be able to provide more and such other matters as justice may its rules. certainty to marketers about the require.’’118To the extent firm size is an standard for making unqualified claims appropriate consideration within one or IV. Paperwork Reduction Act on product labels, without imposing any more of these factors, the Commission The Paperwork Reduction Act new obligations on market participants. will take that factor into account in (‘‘PRA’’), 44 U.S.C. 3501 et seq., requires In addition, enactment of the Rule will seeking civil penalties. federal agencies to seek and obtain enhance deterrence by authorizing civil III. Final Rule Office of Management and Budget penalties against those making unlawful (‘‘OMB’’) approval before undertaking a MUSA claims on product labels. For the reasons described above, the collection of information directed to ten Commission has determined to adopt or more persons. The Commission has B. Issues Raised by Comments in the substantive provisions of the rule as determined that there are no new Response to the IRFA initially proposed. Specifically, the rule requirements for information collection The Commission received six covers labels on products that make associated with this final rule. comments specifically related to the unqualified MUSA claims. It codifies impact of the Rule on small the Commission’s previous MUSA V. Regulatory Flexibility Act businesses.121Of those six, all Decisions and Orders and prohibits The Regulatory Flexibility Act marketers from making unqualified (‘‘RFA’’), as amended by the Small 1205 U.S.C. 603–605.
MUSA claims on labels unless: (1) Final Business Regulatory Enforcement 121Anonymous (24) (commenter is unaware of assembly or processing of the product Fairness Act of 1996, requires that the small entities affected by the NPRM); UIUC—BADM occurs in the United States, (2) all Commission provide an Initial 403—A02 (25) (commenter is unaware of small entities affected by the NPRM); Family Farm Action Regulatory Flexibility Analysis with a Alliance (543) (anticipating positive economic 11515 U.S.C. 45(a). proposed rule, and a Final Regulatory outcomes for small business entities as a result of 116Chris Posey (7). Flexibility Analysis with the final Rule, the rule); Leo McDonnell (578) (anticipating 117See 15 U.S.C. 45(m)(1)(A) (establishing civil unless the Commission certifies that the benefits for small businesses, including ranchers penalties for violations of Commission rules); see and feeders); McKenna Walsh (581) (stating the proposed Rule will not have a also 16 CFR 1.98 (stating currently applicable Rule will be helpful for small businesses lacking maximum civil penalty amounts). resources to engage in MUSA litigation); Natural 11815 U.S.C. 45(m)(1)(C). 119See 16 CFR 1.25. Continued VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol 37032 Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations anticipated the rule would benefit small E. Description of Steps Taken To not necessary to prevent the acts or businesses, with the exception of the Minimize Significant Economic Impact, practices to which the rule relates. Natural Products Association, which if Any, on Small Entities, Including
C. Estimate of Number of Small Entities Code of Federal Regulations as follows: substantial transformation standard; or to Which the Rule Will Apply
million small businesses in the United for a delayed effective date to allow
States. The rule will apply to small businesses additional time to comply. 323.3 Applicability to mail order businesses that make MUSA claims on As discussed above, the Commission advertising. product labels. The Commission has declined to adopt these alternatives 323.4 Enforcement. estimates the rule will not have a because it believes they would 323.5 Relation to Federal and State laws. undermine the effectiveness of the rule. 323.6 Exemptions. significant impact on these small businesses because it does not impose In addition, the Natural Products Authority: 15 U.S.C. 45a. Association recommended the FTC any new obligations on law-abiding incorporate an example specific to §323.1 Definitions.
businesses; rather, it merely codifies dietary supplements.123The As used in this part:
standards established in FTC Commission has declined to include (a) The term Made in the United enforcement Decisions and Orders for examples specific to any particular States means any unqualified decades. industry in the Rule. The rule codifies representation, express or implied, that D. Projected Reporting, Recordkeeping, the standards articulated in Commission a product or service, or a specified and Other Compliance Requirements, enforcement decisions that have been component thereof, is of U.S. origin, applicable to MUSA claims for decades. including, but not limited to, a Including Classes of Covered Small FTC guidance and enforcement representation that such product or Entities and Professional Skills Needed decisions provide numerous examples service is ‘‘made,’’ ‘‘manufactured,’’ To Comply demonstrating how to apply the ‘‘all or ‘‘built,’’ ‘‘produced,’’ ‘‘created,’’ or The rule imposes no affirmative virtually all’’ standard in a variety of ‘‘crafted’’ in the United States or in reporting or recordkeeping industries. Accordingly, the America, or any other unqualified U.S.- requirements. The rule’s compliance Commission has concluded that it is origin claim. requirements, consistent with the Policy unnecessary to provide industry- (b) The terms mail order catalog and Statement and longstanding specific examples in the Rule. mail order promotional material mean any materials, used in the direct sale or Commission case law, require that As described previously, the rule direct offering for sale of any product or marketers may not make unqualified merely codifies standards already service, that are disseminated in print or U.S.-origin claims on product labels established in FTC enforcement by electronic means, and that solicit the unless final assembly or processing of Decisions and Orders. It does not purchase of such product or service by the product occurs in the United States, impose new substantive obligations on mail, telephone, electronic mail, or all significant processing that goes into businesses that have already been some other method without examining the product occurs in the United States, complying with their obligations to the actual product purchased. and all or virtually all ingredients or avoid deceptive claims under Section 5 components of the product are made of the FTC Act. Under these §323.2 Prohibited acts. and sourced in the United States. The circumstances, the Commission does In connection with promoting or small entities potentially covered by the not believe a special exemption for offering for sale any good or service, in small entities or significant compliance or affecting commerce as ‘‘commerce’’ is rule will include all such entities that alternatives are necessary or appropriate defined in section 4 of the Federal Trade make MUSA claims on product labels.
partnership with the USDA and closely coordinate on any enforcement proceeding many potential variations (or ‘‘equivalents’’) it shall be unlawful to make any false or of ‘‘Made in the U.S.A.’’ or ‘‘Made in deceptive representation that a product or its with respect to retail sales of meat and other America’’ claims that may be found on labels, parts or processing are of United States origin products.
enforcement action recommended to the Commission sought comment on this The Commission, for more than 80 years, Commission by staff since joining the Commission.
See In the Matter of Gennex Media, LLC No. C–4741 built a comprehensive program to ensure 2Conf. Rep. on H.R. 3355 (filed in House (Apr. 2021), https://www.ftc.gov/system/files/ (8/21/1994)).
documents/cases/2023122gennexmediafinalorder. 7Statement of Commissioner Christine S. Wilson pdf; In the Matter of Chemence, Inc., et al., No. 4738 3Several commenters echoed the concerns I Concurring in Part, Dissenting in Part, Notice of raised in my statement when the Commission (Feb. 2021), https://www.ftc.gov/system/files/ Proposed Rulemaking related to Made in USA documents/cases/2021-02-10_chemence_admin_ sought comment on this proposed Rule and those Claims (June 22, 2020), https://www.ftc.gov/system/ order.pdf; In the Matter of Williams-Sonoma, Inc., raised by Commissioner Phillips. See Council for files/documents/public_statements/1577099/ Responsible Nutrition Comment; Personal Care No. C–4724 (July 2020), https://www.ftc.gov/ p074204musawilsonstatementrev.pdf. Products Council Comment; National Association of system/files/documents/cases/2023025c4724 8Report: Americans Going Online . . . Explosive Manufacturers Comment; Anonymous Comment williamssonomaorder.pdf; U.S. v. iSpring Water Growth, Uncertain Destinations, Pew Research 592.
Systems, LLC, et al., No. 1:16–cv–1620–AT (N.D. Center (Oct. 16, 1995) (noting ‘‘most consumers are Ga. 2019); https://www.ftc.gov/system/files/ 4See Part 323.1(b). still feeling their way through cyberspace . . . [and] documents/cases/172_3033_ispring_water_systems_ 5See Part 323.3. have yet to begin purchasing goods and services -_stipulated_order.pdf; In the Matter of Sandpiper 6Guidance on the definition of ‘‘label’’ can be online’’), available at: https://www.people- Gear of California, Inc. et al., No. 182–3095, https:// found in analogous FTC rules and guides in a press.org/1995/10/16/americans-going-online- www.ftc.gov/enforcement/cases-proceedings/182- variety of contexts. There, ‘‘labels’’ repeatedly have explosive-growth-uncertain-destinations/. 3095/sandpiper-california-inc-et-al-matter; been defined as a distinct subcategory of advertising 9U.S. Innovation and Competition Act, S. 1260, Underground Sports d/b/a Patriot Puck, et al., No. (in other words, not coterminous with advertising)1 Section 2510, 117th Cong. (June 8, 2021), https:// 182–3113 (April 2019), https://www.ftc.gov/ and have been described as objects attached to a www.democrats.senate.gov/imo/media/doc/ enforcement/cases-proceedings/182-3113/ product or its packaging.1 Given both the statutory DAV21A48.pdf. underground-sports-inc-doing-business-patriot- guidance Congress provided when it drafted this 10See UIUC Accounting Group Comment; Shirley puck-et-al; In the Matter of Nectar Sleep, LLC, statute, and precedent concerning the term ‘‘label’’ Boyd Comment; UIUC—BADM Comment; Senators No.182–3038 (Sept. 2018), https://www.ftc.gov/ in FTC rules and guides, the Commission has ample Comment; United Steelworkers Comment; Women enforcement/cases-proceedings/182-3038/nectar- landmarks to draft a Rule that falls within its Involved in Farm Economics/Pam Potthoff Beef brand-llc. jurisdictional boundaries. Chairman Comment. VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol Federal Register/Vol. 86, No. 132/Wednesday, July 14, 2021/Rules and Regulations 37035 consumers can trust ‘‘Made in the USA’’ rulemaking authority will not engender hearing on the final rule by August 13, claims.11My colleagues believe the confidence among members of Congress who 2021. Commission’s 80 year MUSA enforcement have in the past expressed qualms about the ADDRESSES: You may submit objections program was a failure and only a rule and the FTC’s history of frolics and detours.15 and requests for a hearing as follows.
imposition of penalties will deter false [FR Doc. 2021–14610 Filed 7–13–21; 8:45 am] Please note that late, untimely filed MUSA claims. I believe administrative consents, which were an integral part of this BILLING CODE 6750–01–P objections will not be considered. program, can be an appropriate remedy to Electronic objections must be submitted address deceptive MUSA claims, consistent on or before August 13, 2021. The with the views of bipartisan Commissions DEPARTMENT OF HEALTH AND https://www.regulations.gov electronic during the last 25 years. I support seeking HUMAN SERVICES filing system will accept objections until monetary relief where appropriate but cannot 11:59 p.m. Eastern Time at the end of support acting outside the constraints of our Food and Drug Administration August 13, 2021. Objections received by legislative authority.12 mail/hand delivery/courier (for written/ I fear as well this Commission’s desire to 21 CFR Part 573 paper submissions) will be considered promulgate or utilize our regulatory authority in ways that exceed the boundaries of [Docket No. FDA–2020–F–1289] timely if they are postmarked or the underlying statutes and corresponding delivery service acceptance receipt is on Congressional intent will continue. The Food Additives Permitted in Feed and or before that date. Supreme Court’s recent decision in AMG13 Drinking Water of Animals; has eliminated the FTC’s ability to seek Selenomethionine Hydroxy Analogue Electronic Submissions equitable monetary relief under Section 13(b) Submit electronic objections in the of the FTC Act to compensate consumers. AGENCY: Food and Drug Administration, following way: Thus, the temptation to test the limits of our HHS. • Federal eRulemaking Portal: remaining sources of authority is strong. I ACTION: Final rule. https://www.regulations.gov. Follow the urge my colleagues to pause. Previous FTC instructions for submitting objections.
forays into areas outside its jurisdictional SUMMARY: The Food and Drug Objections submitted electronically, authority have resulted in swift condemnation from the courts and Administration (FDA, we, or the including attachments, to https:// Congress.14Expansive interpretations of our Agency) is amending the regulations for www.regulations.gov will be posted to food additives permitted in feed and the docket unchanged. Because your 11The FTC has issued over 150 closing letters to drinking water of animals to provide for objection will be made public, you are companies making misleading U.S.-origin claims. the safe use of selenomethionine solely responsible for ensuring that your Made in USA Workshop Report at 3 (June 2020). hydroxy analogue as a source of objection does not include any Companies only receive closing letters if they selenium in feed for beef and dairy confidential information that you or a demonstrate to staff they will come into compliance with the FTC’s Enforcement Policy Statement on cattle. This action is in response to a third party may not wish to be posted, ‘‘Made in the USA.’’ The staff’s workshop report food additive petition filed by Adisseo such as medical information, your or explains ‘‘companies often produce substantiation France S.A.S. anyone else’s Social Security number, or for updated claims to the FTC staff, and then present a plan that includes training staff, updating DATES: This rule is effective July 14, confidential business information, such online marketing materials (e.g., company websites 2021. See section V of this document for as a manufacturing process. Please note and social media platforms), updating hardcopy further information on the filing of that if you include your name, contact marketing materials (e.g., product packaging, objections. Submit either electronic or information, or other information that advertisements, tradeshow materials), and working with dealers, distributors, and third-party retailers written objections and requests for a identifies you in the body of your to ensure downstream claims are in compliance.’’ objection, that information will be Id. at 3 n.7. The FTC has also settled over 25 regulatory overreach and quoting Jean Carper, The posted on https://www.regulations.gov. enforcement actions, charging that companies Backlash at the FTC, Wash. Post, C1 (Feb. 6, 1977) • If you want to submit an objection refused to come into compliance or engaged in (describing the backlash from Congress at the FTC, with confidential information that you outright fraud. Id. after a period of intense rulemaking activity do not wish to be made available to the 12I would note as well that seeking civil penalties culminating in the agency’s being dubbed the for deceptive MUSA claims, as defined under the ‘‘National Nanny’’)); see also Alex Propes, Privacy public, submit the objection as a Commission’s Rule, could have adverse market and FTC Rulemaking: A Historical Context, IAB written/paper submission and in the effects. Excessive penalties, divorced from harm, (Nov. 6, 2018) (discussing how the FTC’s manner detailed (see ‘‘Written/Paper can result in over-deterrence. Importantly, the costs rulemaking history could be influencing Submissions’’ and ‘‘Instructions’’).
associated with over-deterrence are likely to Congressional comfort with vesting the FTC with increase with the expansiveness of the definition of additional privacy authority), https://www.iab.com/ Written/Paper Submissions labelling. news/privacy-ftc-rulemaking-authority-a-historical- 13AMG v. FTC, slip op No. 19–508 (Apr. 22, context/. Submit written/paper submissions as 2021), https://www.supremecourt.gov/opinions/ 15See Transcript: Oversight of the Federal Trade follows: 20pdf/19-508_l6gn.pdf. Commission: Strengthening Protections for • Mail/Hand delivery/Courier (for 14See Federal Trade Commission Improvements Americans’ Privacy and Data Security (May 8, written/paper submissions): Dockets Act of 1980, Public Law 96–252, 94 Stat. 374 (1980) 2019), available at: https://docs.house.gov/ (reforming the ability of the FTC to promulgate meetings/IF/IF17/20190508/109415/HHRG-116- Management Staff (HFA–305), Food and rules by requiring a multi-step process with public IF17-Transcript-20190508.pdf. At this Hearing, Rep. Drug Administration, 5630 Fishers comment and subject to Congressional review). This McMorris Rogers stated: ‘‘In various proposals, Lane, Rm. 1061, Rockville, MD 20852. Act also authorized $255 million in funding for the some groups have called for the FTC to have • For written/paper objections Commission and was the first time since 1977 the additional resources and authorities. I remain agency was funded through the traditional funding skeptical of Congress delegating broad authority to submitted to the Dockets Management process after the backlash from Congress over its the FTC or any agency. However, we must be Staff, FDA will post your objection, as rulemaking activities. See Kintner, Earl, et al., ‘‘The mindful of the complexities of this issue as well as well as any attachments, except for Effect of the Federal Trade Commission the lessons learned from previous grants of information submitted, marked and Improvements Act of 1980 on the FTC’s rulemaking authority to the Commission.’’ Rulemaking and Enforcement Authority,’’ 58 Wash. Transcript at 8–9. Rep. Walden similarly stated: ‘‘it identified, as confidential, if submitted U. Law Rev. 847 (1980); see also J. Howard Beagles has been a few decades, but there was a time when as detailed in ‘‘Instructions.’’ III and Timothy J. Muris, FTC Consumer Protection the FTC, as we heard, was given broad rulemaking Instructions: All submissions received at 100: 1970s Redux or Protecting Markets to Protect authority but stepped past the bounds of what must include the Docket No. FDA– Consumers?, 83 Geo. Wash. L. Rev. 2157 (2015) Congress and the public supported. This required 2020–F–1289 for ‘‘Food Additives (describing the ‘‘disastrous failures’’ of the FTC in further congressional action and new restrictions on the 1970s and the 1980s from enforcement and the Commission.’’ Transcript at 62. Permitted in Feed and Drinking Water VerDate Sep<11>2014 16:14 Jul 13, 2021 Jkt 253001 PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 E:\FR\FM\14JYR1.SGM 14JYR1 1SELUR DORP32NQX11KSD rettol 70272 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations FEDERAL TRADE COMMISSION The GLBA provides a framework for assessment, and must regularly test or regulating the privacy and data security otherwise monitor the effectiveness of 16 CFR Part 314 practices of a broad range of financial the safeguards’ key controls, systems, institutions. Among other things, the and procedures.8The Rule also requires RIN 3084–AB35 GLBA requires financial institutions to the financial institution to evaluate and Standards for Safeguarding Customer provide customers with information adjust its information security program Information about the institutions’ privacy practices in light of the results of this testing and and about their opt-out rights, and to monitoring, any material changes in its AGENCY: Federal Trade Commission.
(comment 39, NPRM); National Automobile Dealers Association (Comment 40, NPRM); Data &
I. Background 2See 15 U.S.C. 6801(b), 15 U.S.C. 6805(b)(2). Marketing Association (comment 38, NPRM); 316 CFR 314.2(c). Congress enacted the Gramm Leach Electronic Transactions Association (comment 24, 416 CFR 314.3(a). NPRM); State Privacy & Security Coalition Bliley Act (‘‘GLB’’ or ‘‘GLBA’’) in 1999.1 516 CFR 314.3(a), (b). (comment 26, NPRM). 616 CFR 314.3(a), (b). 15FTC Notice of Proposed Rulemaking, 84 FR 1Pubic Law 106–102, 113 Stat. 1338 (1999). 716 CFR 314.4(b). 13158 (April 4, 2019). VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70273 including industry groups, consumer institutions the flexibility to design an IV. Section-by-Section Analysis groups, and individual consumers.16On information security program General Comments July 13, 2020, the Commission held a appropriate to the size and complexity workshop concerning the proposed of the financial institution, the nature The Commission received 49 changes and conducted panels with and scope of its activities, and the comments in response to the NPRM for information security experts discussing sensitivity of any customer information the Proposed Rule, from a diverse set of subjects related to the Proposed Rule.17 at issue. stakeholders, including industry groups, The Commission received 11 comments Second, the Final Rule adds individual businesses, consumer following the workshop.18After requirements designed to improve advocacy groups, academics, reviewing the initial comments to the Proposed Rule, conducting the accountability of financial institutions’ information security experts, workshop, and then reviewing the information security programs. For government agencies, and individual comments received following the example, while the current Rule allows consumers. It also hosted a workshop on workshop, the Commission now issues a financial institution to designate one the Proposed Rule, which included final amendments to the Safeguards or more employees to be responsible for approximately 20 security experts. Rule. the information security program, the Some of the comments simply Final Rule requires the designation of a expressed general support19or general III. Overview of Final Rule single Qualified Individual. The Final disapproval20of the Proposed Rule. As noted above, the Final Rule Rule also requires periodic reports to Many, however, offered detailed modifies the current Rule in five boards of directors or governing bodies, responses to specific proposals in the primary ways. First, the Final Rule which will provide senior management NPRM. In general, industry groups were amends the current Rule to include with better awareness of their financial opposed to most or all of the Proposed more detailed requirements for the institutions’ information security Rule, and consumer advocacy groups, development and establishment of the programs, making it more likely the academics, and security experts were information security program required programs will receive the required generally in favor of the amendments. under the Rule. For example, while the resources and be able to protect The comments and workshop record are current Rule requires financial consumer information. discussed in the following Section-by- institutions to undertake a risk assessment and develop and implement Third, recognizing the impact of the Section analysis. safeguards to address the identified additional requirements on small Sec. 314.1: Purpose and Scope risks, the Final Rule sets forth specific businesses, the Final Rule exempts criteria for what the risk assessment financial institutions that collect The Purpose and Scope section of the must include, and requires the risk information on fewer than 5,000 current Rule generally states the Rule assessment be set forth in writing. As to consumers from the requirements of a implements the Gramm-Leach-Bliley particular safeguards, the Final Rule written risk assessment, incident Act and applies to the handling of requires that they address access response plan, and annual reporting to customer information by financial controls, data inventory and the Board of Directors. institutions over which the FTC has classification, encryption, secure Fourth, the Final Rule expands the jurisdiction. In its NPRM, the development practices, authentication, definition of ‘‘financial institution’’ to Commission proposed adding a information disposal procedures, include entities engaged in activities the definition of ‘‘financial institution’’ change management, testing, and incident response. And while the Final Federal Reserve Board determines to be modeled on the definition included in Rule retains the requirement from the incidental to financial activities. This the Commission’s Privacy Rule (16 CFR current Rule that financial institutions change brings ‘‘finders’’—companies part 313) and a series of examples provide employee training and that bring together buyers and sellers of providing guidance on what constitutes appropriate oversight of service a product or service—within the scope a financial institution under the providers, it adds mechanisms designed of the Rule. Finders often collect and Commission’s jurisdiction. Other than to ensure such training and oversight maintain very sensitive consumer expanding the definition of ‘‘financial are effective. Although the Final Rule financial information, and this change institution’’ as discussed below, the new has more specific requirements than the will require them to comply with the language was not meant to reflect a current Rule, it still provides financial Safeguards Rule’s requirements to substantive change to the Safeguards protect that information. This change Rule; rather, it was meant to allow the 16The 49 relevant public comments received on will also bring the Rule into harmony Rule to be read on its own, without or after March 15, 2019, can be found at with other Federal agencies’ Safeguards reference to the Privacy Rule.21The Regulations.gov. See FTC Seeks Comment on Proposed Amendments to Safeguards and Privacy Rules, which include activities Commission received no comments that Rules, 16 CFR part 314, Project No. P145407, incidental to financial activities in their addressed this section specifically, and https://www.regulations.gov/docket/FTC-2019- definition of financial institution. 0019/document. 19See Encore Capital Group (comment 25, 17See FTC, Information Security and Financial Finally, the Final Rule includes NPRM); Justine Bykowski (comment 12, NPRM); Institutions: An FTC Workshop to Examine several definitions and related ‘‘Peggy from Bloomington, MN’’ (comment 13, S w a w fe w g . u ft a c r . d go s v R / u sy le st T em r. / ( f J i u le ly s/ 1 d 3 o , c 2 u 0 m 2 e 0 n ), t s h / t p tp u s b : l / i / c_events/ examples, including of ‘‘financial NPRM); ‘‘Anonymous’’ (comment 20, NPRM). 1567141/transcript-glb-safeguards-workshop- institution,’’ in the Rule itself rather 20‘‘Jane Q. Citizen’’ (comment 14, NPRM). full.pdf [hereinafter Safeguards Workshop Tr.]. than incorporate them from a related 21In a separate final rule, published elsewhere in 18The 11 relevant public comments relating to FTC rule, the Privacy of Consumer this issue of the Federal Register, the Commission the subject matter of the July 13, 2020, workshop is amending the Privacy Rule to reflect changes can be found at https://www.regulations.gov/ Financial Information Rule, 16 CFR part made by the Dodd-Frank Act, limiting that rule to document/FTC-2020-0038-0001. This document 313. This will make the rule more self- certain auto dealers. Through that proceeding, the cites comments using the last name of the contained and will allow readers to Commission is also removing examples of financial individual submitter or the name of the institutions from the Privacy Rule that are no longer understand its requirements without organization, followed by the number based on the covered under the rule in the wake of these last two digits of the comment ID number. referencing the Privacy Rule. changes. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70274 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations the Commission adopts the language of The Commission received one definition of authorized user should the Proposed Rule in the Final Rule.22 comment on this proposed definition include users who can access both from the National Automobile Dealers ‘‘information systems and data’’ and Sec. 314.2: Definitions Association (NADA), which suggested users authorized to access either The Proposed Rule added a number of the term ‘‘authorized user’’ was used information systems or data. definitions to §314.2. The Proposed inconsistently and was too vague.25 Accordingly, for clarification purposes, Rule also retained paragraph (a), which NADA pointed out while ‘‘authorized the Commission modifies the definition states terms used in the Safeguards Rule user’’ is a defined term, the term of authorized user in the Final Rule as have the same meaning as set forth in ‘‘authorized individual’’ was used in any employee, contractor, agent, the Privacy Rule. proposed §313.4(c)(1) (addressing customer or other person that is The American Council on Education access controls for information systems) authorized to access any of your (ACE) suggested all terms from the and (c)(3) (addressing access controls for information systems or data. Privacy Rule, such as ‘‘consumer,’’ physical data). NADA also argued the Security Event ‘‘customer,’’ and ‘‘customer inclusion of ‘‘other person that information,’’ be included in the Final participates in the business operations In proposed paragraph (c), the Rule in order to make the Final Rule of an entity’’ within the definition of Commission defined security event as easier for regulated entities to ‘‘authorized user’’ was unclear and an event resulting in unauthorized understand.23On the other hand, created ambiguity in its application.26 access to, or disruption or misuse of, an HITRUST recommended no definitions The Commission agrees with NADA’s information system or information from the Privacy Rule be duplicated in points, and, in response, modifies the stored on such information system. This the Safeguards Rule, reasoning that in Final Rule in two ways. First, the Final term was used in provisions requiring the event of a need to amend the terms, Rule replaces the term ‘‘authorized financial institutions to establish a it would require the amendment of two individual’’ with ‘‘authorized user’’ in written incident response plan designed rules rather than one.24 §313.4(c)(1). As described further to respond to security events. It also The Commission is persuaded below, because the Final Rule combines appeared in the provision requiring the including all terms from the Privacy §313.4(c)(3) with §313.4(c)(1), there is coordinator of a financial institution’s Rule within the Safeguards Rule will no need to make a corresponding information security program to provide improve clarity and ease of use. change to that section. an annual report to the financial Accordingly, the Commission has Second, because the Commission institution’s governing body; the determined to delete paragraph (a), agrees the ambiguities in the definition required report must identify all since it is no longer necessary to state of ‘‘authorized user’’ from the Proposed security events that took place that year. Rule could create confusion, it makes Commenters expressed three main all terms in the Safeguards Rule have several changes to the definition. It concerns with this definition. The first the same meaning as in the Privacy deletes the phrase ‘‘other person that relates to whether the term ‘‘security Rule. It also adds the Privacy Rule participates in the business operations event’’ should be expanded to instances definitions of ‘‘consumer,’’ ‘‘customer,’’ of an entity.’’ The Commission agrees in which there is unauthorized access ‘‘customer relationship,’’ ‘‘financial this phrase was vague. The Commission to, or disruption or misuse of, product or service,’’ ‘‘nonpublic had intended it to cover any person the information in physical form, as personal information,’’ ‘‘personally financial institution allows to access opposed to electronic form. The identifiable financial information,’’ information systems or data, including, Proposed Rule used the term ‘‘security ‘‘publicly available information,’’ and for example, ‘‘customers’’ of the event’’ instead of ‘‘cybersecurity event’’ ‘‘you’’ to the definitions in the Final financial institutions. For the purpose of to clarify that an information security Rule. No substantive change to these controlling authorized access and program encompasses information in definitions is intended.
Mortgage Bankers Association (comment 26, current cryptographic standards and and sellers of any product or service for NPRM), at 4–5; Consumer Data Industry accompanied by appropriate safeguards transactions that the parties themselves Association (comment 36, NPRM), at 3–4; National for cryptographic key material.’’34 negotiate and consummate.’’ This Automobile Dealers Association (comment 46, example used the language set forth in NPRM), at 12–13; National Independent Automobile Dealers Association (comment 48, 32National Automobile Dealers Association 12 CFR 225.86(d)(1), which defines NPRM), at 4. (comment 46, NPRM), at 13. ‘‘finding’’ as an activity incidental to a 31Mortgage Bankers Association (comment 48, 33American Council on Education (comment 24, financial activity under the Bank NPRM), at 4–5; National Automobile Dealers NPRM), at 7; Princeton University Center for Holding Company Act. The Commission Association (comment 46, NPRM), at 12–13; Information Technology Policy (comment 54, National Independent Automobile Dealers NPRM), at 4.
Association (comment 48, NPRM) at 4; American 34Princeton University Center for Information 35American Council on Education (comment 24, Council on Education (comment 24, NPRM), at 7. Technology Policy (comment 54, NPRM), at 4. NPRM), at 7. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70276 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations adopts this proposal without a role in connecting buyers and Electronic Privacy Information Center modification. sellers.43 (EPIC) argued the definition should be In response, the Commission notes expanded by treating more activities as The change to the definition of the Federal Reserve Board describes financial activities.49EPIC pointed out ‘‘financial institution’’ brings it into acting as a finder as ‘‘bringing together information shared with social media harmony with other agencies’ GLB one or more buyers and sellers of any companies, retailers, apps, and devices rules.36The change is supported by the product or service for transactions that generally is not covered under the language of the Gramm-Leach-Bliley the parties themselves negotiate and Safeguards Rule. The Commission Act.37The Act defines a ‘‘financial consummate.’’44The Board sets forth understands the concern that many institution’’ as any institution ‘‘the several activities within the scope of businesses fall outside the coverage of business of which is engaging in acting as a finder, such as ‘‘[i]dentifying the Safeguards Rule, despite handling financial activities as described in potential parties, making inquiries as to sensitive consumer information, but the section 1843(k) of title 12.’’38That interest, introducing and referring Commission’s authority to regulate section, in turn, describes activities that potential parties to each other, [] activity under the Safeguards and are financial in nature as those the arranging contacts between and Privacy Rules is established by the Board has determined ‘‘to be financial meetings of interested parties’’ and GLBA. The Rule’s application is limited in nature or incidental to such financial ‘‘[c]onveying between interested parties to financial institutions as defined by activity.’’39The Final Rule’s definition expressions of interest, bids, offers, that statute and cannot be extended mirrors this language. The change will orders and confirmations relating to a beyond that definition.50The not lead to a significant expansion of the transaction.’’45 institutions discussed by EPIC, Although this language is somewhat Rule coverage as it expands the however, are still covered by the FTC broad, its scope is significantly limited definition only to include entities Act’s prohibition against deceptive or in the context of the Safeguards Rule.
engaged in activity incidental to unfair conduct, including with respect First, the Safeguards Rule applies only financial activity, as determined by the to their use and protection of consumer to transactions ‘‘for personal, family, or Federal Reserve Board. The Board has information.51 household purposes.’’46Therefore, only determined only one activity to be The National Federation of finding services involving consumer incidental to financial activity—‘‘acting Independent Business (NFIB) argued transactions will be covered. Second, as a finder.’’40 individuals and sole proprietors should the Safeguards Rule applies only to the be excluded from the definition of Several commenters who addressed information of customers, which are ‘‘financial institution’’ because an this issue supported the inclusion of consumers with which a financial individual cannot be an ‘‘institution.’’52 activities incidental to financial institution has a continuing When the Privacy Rule was activities.41Other commenters relationship.47Therefore, it will not promulgated in 2000, commenters also expressed concern the proposed change apply to finders that have only isolated suggested the definition should exclude in the definition would expand the interactions with consumers and do not sole proprietors.53The Commission Rule’s coverage to businesses that receive information from other financial noted there was no basis to exclude sole should not be considered financial institutions about those institutions’ proprietors and ‘‘[w]hether or not a institutions.42They argued the customers. This significantly narrows definition of the term ‘‘finder’’ is too the types of finders that will have National Consumer Law Center and others broad and companies that connect obligations under the Rule, excluding, (comment 58, NPRM), at 5 (arguing that consumer buyers and sellers in non-financial the Commission believes, most reporting agencies be included explicitly in the contexts would be swept advertising agencies and similar d (c e o f m in m iti e o n n t ) , ; W se o e r k a s ls h o o p A ) m , a e t r i 2 c – a 3 n ( E re s q c u ro e w st i A ng ss t o h c a i t a t t i h o e n inappropriately into the definition of businesses that generally do not have Rule specifically set out the duties of real estate ‘‘financial institution.’’ The Association continuing relationships with settlement operations and other businesses that consumers who are using their services handle but do not maintain sensitive information); of National Advertisers argued for personal or household purposes. Beverly Enterprises, LLC (comment 3, NPRM), at 3– advertising agencies could be 4 (requesting that the Rule specifically set out The Commission believes entities that considered ‘‘finders’’ because they play duties related to online notarizations); Yangxue Li perform finding services for consumers (comment 5, NPRM) (asking whether Rule would with whom they have an ongoing set forth specific guidelines for different industries); 36See 12 CFR 1016.3(l) (defining ‘‘financial relationship are properly considered Slobadon Raybolka (comment 17, NPRM) institution’’ for entities regulated by agencies other (suggesting that companies that perform online ‘‘financial institutions’’ for purposes of than the FTC). See also 17 CFR 248.3(n) (defining background checks be covered by the rule); The ‘‘financial institution’’ to include ‘‘any institution the Rule. Accordingly, the Commission Clearing House (comment 49, NPRM) (suggesting a the business of which is . . . incidental to . . . adopts the changes to the definition of separate set of more stringent rules for fintech financial activities’’ for Security and Exchange ‘‘financial institution’’ as proposed. companies). Commission’s rule implementing GLBA’s safeguard 49Electronic Privacy Information Center provisions.). Other Changes to Definition of (comment 55, NPRM), at 9. 3715 U.S.C. 6801 et seq. ‘‘Financial Institutions’’ 50See 15 U.S.C. 6801 (requiring agencies to 3815 U.S.C. 6809(3). promulgate Rule establishing standards for financial 3912 U.S.C. 1843(k). Other commenters suggested institutions); 15 U.S.C. 6809(3) (defining ‘‘financial 4012 CFR 225.86. modifying the definition of ‘‘financial institutions’’ as an ‘‘institution the business of 41Electronic Privacy Information Center institution’’48in different ways. The which is engaging in financial activities as (comment 55, NPRM), at 9; Independent described’’ in the Bank Holding Company Act). Community Bankers of America (comment 35, 51In the Matter of Facebook, Inc., Docket No. C– NPRM), at 3; National Automobile Dealers 43Association of National Advertisers (comment 4365 (Apr. 28, 2020); FTC v. Wyndham Worldwide 5, Workshop), at 5.
Association (comment 46, NPRM), at 13–16. Corporation, 799 F.3d 236 (3d Cir. 2015); FTC v. D- 42Association of National Advertisers (comment, 4412 CFR 225.86 (d). Link Systems, Inc., Case No. 3:17–cv–00039–JD Workshop), at 4–5; internet Association (comment, 4512 CFR 225.86 (d)(1)(i). (N.D. Cal. July 2, 2019); In the Matter of Twitter, Workshop), at 4–5; see also Anonymous (comment 46See Final Rule 16 CFR 314.2(b)(1). Inc., Docket No. C–4316 (Mar. 11, 2011). 15, NPRM) (questioning whether any governing 4716 CFR 314.1; Final Rule 16 CFR 314.2(c). 52National Federation of Independent Business body would oversee any future determinations by 48National Pawnbrokers Association (comment (comment 16, NPRM), at 2–3. the Federal Reserve Board that activities are 32, NPRM), at 5–6 (arguing that transaction- 53Privacy Rule, Final Rule, 65 FR 33645 (May 24, incidental to financial activity). reporting vendors be included in definition); 2000) at 33656. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70277 commercial enterprise is operated by a than just the system itself, does not Multi-Factor Authentication single individual is not determinative’’ exclude such tests from the definition of Proposed paragraph (i) defined multi- of whether the enterprise is a financial ‘‘penetration testing.’’ Attempted social factor authentication as authentication institution. The Commission has not engineering and phishing are important through verification of at least two of changed its position on this matter and parts of testing the security of the following types of authentication declines to make this change to the information systems and would not be factors: Knowledge factors, such as a definition of ‘‘financial institution.’’ excluded by this definition. password; possession factors, such as a The Final Rule adopts this definition The MSRT also argued the definition token; or inherence factors, such as as proposed without change.
‘‘information security program.’’ The customer information and would Several commenters argued the Commission received no comments on require financial institutions to include definition should explicitly include this definition, and accordingly, adopts all systems in their possession, SMS text messages as an acceptable the current definition in the Final Rule. regardless of their involvement with example of a possession factor or customer information. The Commission Information System otherwise to be explicitly allowed.61 agrees the definition should be limited The Proposed Rule did not include SMS Proposed paragraph (h) defined to those systems that either contain text messages as an example of a information system as a discrete set of customer information or are connected possession factor.62Most commenters electronic information resources to systems that contain customer who addressed this issue interpreted organized for the collection, processing, information, and adds that limitation to this exclusion from the examples as maintenance, use, sharing, the Final Rule. The Rule does not limit forbidding financial institutions from dissemination or disposition of the definition to only those systems that using SMS text messages as a possession electronic information, as well as any contain customer information, because a factor for multi-factor authentication. specialized system such as industrial/ common source of data breaches is a That is not the effect of this exclusion, process controls systems, telephone vulnerability in a connected system that however. The language of the definition switching and private branch exchange an attacker exploits to gain access to the neither prohibits nor recommends use systems, and environmental control company’s network and move within of SMS text messages. Indeed, SMS text systems. The term ‘‘information system’’ the network to obtain access to the messages are not addressed at all. In was used throughout the proposed system containing sensitive some cases, use of SMS text messages as amendments to designate the systems information.59Accordingly, the a factor may be the best solution that must be covered by the information definition of information system in the because of its low cost and easy use, if security program.
expanding the definition of ‘‘personally complexity of their organization and identifiable financial information’’ from General Comments information systems. The elements for the Privacy Rule to include ‘‘aggregate the information security programs set The Commission received many information or blind data that does not forth in this section are high-level comments addressing the new elements, contain personal identifiers such as principles that set forth basic issues the both in favor of the changes and account numbers, names, or opposed to them. The comments in addresses.’’64The Princeton Center 68See, e.g., HITRUST (comment 18, NPRM), at 1– favor of the changes generally argued further suggested clarifying that, for 2; American Council on Education (comment 24, these changes would protect consumers NPRM), at 2–4; Cristian Munarriz (comment 21, information to not be considered by improving the data security of NPRM); Electronic Transactions Association ‘‘personally identifiable financial institutions that hold their (comment 27, NPRM), at 1–2; National Pawnbrokers information,’’ the financial institution Association (comment 32, NPRM), at 3; CTIA information.67Most of the comments must be required to demonstrate the (comment 34, NPRM), at 5; Consumer Data Industry opposed to the proposed elements fell Association (comment 36, NPRM), at 2; Wisconsin information is not ‘‘reasonably linkable’’ into several categories, objecting: (1) Bankers Association (comment 37, NPRM), at 1–2; to individuals. The proposed changes were too Global Privacy Alliance (comment 38, NPRM), at 5– The Commission does not believe this 6; Bank Policy Institute (comment 39, NPRM), at 2; prescriptive and did not allow financial amendment is necessary. The definition American Financial Services Association (comment 41, NPRM), at 4; National Association of Dealer of ‘‘personally identifiable financial 6616 CFR 313.3(o)(2)(i)(F). Counsel (comment 44, NPRM), at 1; ACA information’’ is already a broad one.65It 67See, e.g., New York Department of Financial International, (comment 45, NPRM), at 4; National includes not just information associated Service (comment 40, NPRM), at 1 (arguing the Automobile Dealers Association (comment 46, with types of personal information such Proposed Rule would ‘‘further advance efforts to NPRM), at 11; National Independent Automobile as a name or address or account protect financial institutions and consumers from Dealers Association (comment 48, NPRM), at 2–3; cybercriminals.’’); Princeton University Center for Money Services Round Table (comment 53, NPRM), number, but also information linked to Information Technology Policy (comment 54, at 1–4; Software & Information Industry Association a persistent identifier (‘‘any information NPRM), at 1 (stating the Proposed Rule ‘‘would (comment 56, NPRM), at 1–3; Gusto and others you collect through an Internet ‘cookie’ significantly reduce data security risks for the (comment 11, Workshop), at 2; Association of (an information collecting device from a customers of financial institutions.’’); National National Advertisers (comment 5, Workshop), at 1– Consumer Law Center and others (comment 58, 3; internet Association (comment 9, Workshop), at NPRM), at 2 (stating requirements of Proposed Rule 2–3. 64Princeton University Center for Information are ‘‘reasonable and common-sense measures that 69Electronic Transactions Association (comment Technology Policy (comment 54, NPRM) at 9–10. any company dealing with large amounts of 27, NPRM), at 1–2. 65See 16 CFR 313.3(o)(1). consumer personal information should take.’’). 70CTIA (comment 34, NPRM), at 5. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70279 programs must address, and do not particularly concerned about the First, for almost 20 years, financial prescribe how they will be addressed. requirement that financial institutions institutions have been required under For example, the requirement that the designate a single qualified individual the current Safeguards Rule to have information security program be based to coordinate their information security information security programs in place. on a risk assessment sets forth only programs, arguing this would require The current Safeguards Rule requires three general items the assessment must hiring professionals that were both financial institutions to ‘‘develop, address: (1) Criteria for evaluating risks expensive, with salaries of more than implement, and maintain a faced by the financial institution; (2) $100,000 suggested by some, and in comprehensive [written] information criteria for assessing the security of its limited supply.73Overall, several security program . . . appropriate to information systems; and (3) how the commenters argued some financial [the financial institutions’] size and identified risks will be addressed. Other institutions would be unable to afford to complexity, the nature and scope of than meeting these basic requirements, bring themselves into compliance with [their] activities, and the sensitivity of financial institutions are free to perform the Proposed Rule.74 any customer information at issue.’’76 their risk assessments in whatever way The Commission recognizes properly This comprehensive program must be they choose, using whatever method or securing information systems can be an coordinated by one or more individuals approach works best for them, as long expensive and technically difficult task. and based on a risk assessment.77As as the method identifies reasonably However, the Commission believes the such, financial institutions complying foreseeable risks. The other elements are additional costs imposed by the with the current Rule will not be similarly flexible. The two elements that Proposed Rule are mitigated for several required to establish an information are more prescriptive, encryption and reasons and, ultimately, those costs are security program from scratch. Instead, multi-factor authentication, allow justified in order to protect customer they can compare their existing financial institutions to adopt information as required by the GLBA.75 programs to the revised Rule, and alternative solutions when necessary. address any gaps. The Commission Comments concerning individual each for smart cards; a CISO, either an in-house believes many of the requirements set elements are addressed separately in the CISO, $180,000, an in-house cybersecurity analyst, forth in the Final Rule are so more detailed analysis below. $76,000, or an outsourced cybersecurity contractor, fundamental to any information security between $120,000 and $240,000; penetration program that the information security Cost testing, average cost $4,800; and physical security, programs of many financial institutions $215,000 for construction, and $10,000 to $20,000 Another common theme among the for new or upgraded locks); see also Remarks of Lee will already include them if those comments from industry groups was the Waters, Safeguards Workshop Tr., supra note 17, at programs are in compliance with the proposed information security program 75–76. current Safeguards Rule. elements would be prohibitively 73See, e.g., Slides Accompanying Remarks of Lee Second, a number of commenters who Waters, ‘‘Estimated Costs of Proposed Changes,’’ expensive, especially for smaller raised concerns about the costs imposed Safeguards Workshop Slides, supra note 72, at 26 businesses.71Commenters argued the (estimating costs of an in-house CISO to be by the Rule believed the Proposed Rule Proposed Rule would have required $180,000 annually, and an in-house cybersecurity would have required the hiring of a financial institutions to implement analyst to be $76,000 annually; and estimating an highly-compensated expert to serve as a outsourced cybersecurity contractor would cost expensive changes to their systems and Chief Information Security Officer between $120,000 to $240,000 annually); see also hire highly-compensated professionals Remarks of Lee Waters, Safeguards Workshop Tr., (CISO).78It is correct the Proposed Rule to do so.72Industry groups were supra note 17, at 75–76; Remarks of Brian would have modified the current McManamon, Safeguards Workshop Tr., supra note requirement of designating an 17, at 78 (estimating that the average annual salary 71American Council on Education (comment 24, ‘‘employee or employees to coordinate of a CISO can range from $180,000 to upwards of NPRM), at 13–14; Wisconsin Bankers Association $400,000). your information security program’’ by (comment 37, NPRM), at 1–2; American Financial Services Association (comment 41, NPRM), at 4; 74See Remarks of Lee Waters, Safeguards requiring the designation of a single National Association of Dealer Counsel (comment Workshop Tr., supra note 17, at 119–20 (noting qualified individual responsible for 44, NPRM), at 1; National Automobile Dealers when small businesses have to spend money to hire Association (comment 46, NPRM), at 11; National third-party vendors and security experts to comply Independent Automobile Dealers Association, with regulations, that affects consumer prices and the Safeguards Rule, 85 FR 13082 (Mar. 6, 2020). (comment 48, NPRM), at 3; Gusto and others small business profit margins); Slides As detailed throughout this document, the (comment 11, Workshop), at 2–4; National Accompanying Remarks of James Crifasi, ‘‘NADA Commission believes there is a strong evidentiary Pawnbrokers Association (comment 3, NPRM), at 2; Cost Study: Average Cost Per U.S. Franchised basis for the issuance of the final Rule. see also Remarks of James Crifasi, Safeguards Dealership,’’ Safeguards Workshop Slides, supra 7616 CFR 314.3. Workshop Tr., supra note 17, at 72–74 (describing note 72, at 25; see also Remarks of James Crifasi, 7716 CFR 314.4. study that found compliance would be expensive supra note 17, at 73 (noting the requirements ‘‘start 78Several speakers at the Safeguards Workshop for automobile dealers). becoming a little bit unaffordable here.’’). also raised this concern. See, e.g., Slides 72See, e.g., Slides Accompanying Remarks of 75The Small Business Administration’s Office of Accompanying Remarks of James Crifasi, ‘‘NADA James Crifasi, FTC, ‘‘NADA Cost Study: Average Advocacy commented it was concerned the FTC Cost Study: Average Cost Per U.S. Franchised Cost Per U.S. Franchised Dealership,’’ Event had not gathered sufficient data as to either the Dealership,’’ in Safeguards Workshop Slides, supra Materials, Information Security and Financial costs or benefits of the proposed changes for small note 72, at 25 (estimating appointing a CISO to Institutions: An FTC Workshop to Examine financial institutions. Office of Advocacy, U.S. increase program accountability would be a one- Safeguards Rule (July 13, 2020) https://www.ftc.gov/ Small Business Administration (comment 28, time, up-front cost of $27,500, with a recurring system/files/documents/public_events/1567141/ NPRM), at 3–4. The FTC shares the Office of annual cost of $51,000); Remarks of James Crifasi, slides-glb-workshop.pdf (hereinafter Safeguards Advocacy’s interest in ensuring that regulatory Safeguards Workshop Tr., supra note 17, at 72–75; Workshop Slides), at 25 (estimating an upfront cost changes have an evidentiary basis. Many of the Slides Accompanying Remarks of Lee Waters, of $293,975 per dealership, and an recurring annual questions on which the FTC sought public ‘‘Estimated Costs of Proposed Changes,’’ in cost of $276,925); see also Remarks of James Crifasi, comment, both in the regulatory review and in the Safeguards Workshop Slides, supra note 72, at 26 Safeguards Workshop Tr., supra note 17, at 72–75; proposed Rule context, specifically related to the (estimating costs of an in-house CISO to be Remarks of Brian McManamon, Safeguards costs and benefits of existing and proposed Rule $180,000 annually, and an in-house cybersecurity Workshop Tr., supra note 17, at 78 (estimating the requirements. Following the initial round of analyst to be $76,000 annually; and estimating that average annual salary of a CISO can range from commenting, the Commission conducted the FTC an outsourced cybersecurity contractor would cost $180,000 to upwards of $400,000); Slides Safeguards Workshop and solicited additional between $120,000 to $240,000 annually); Remarks Accompanying Remarks of Lee Waters, ‘‘Estimated public comments with the explicit goal of gathering of Lee Waters, Safeguards Workshop Tr., supra note Costs of Proposed Changes,’’ Safeguards Workshop additional data relating to the costs and benefits of 17, at 75–76; Remarks of Brian McManamon, Slides, at 26 (estimating the annual costs of a the proposed changes. See Public Workshop Safeguards Workshop Tr., supra note 17, at 78 security program to include: Multi-factor Examining Information Security for Financial (estimating that the average annual salary of a CISO authentication, $50 for smart card readers, and $10 Institutions and Information Related to Changes to can range from $180,000 to upwards of $400,000). VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70280 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations overseeing and implementing the The importance, as well as the relationship between a consumer and a security program. This individual was difficulty, of protecting customer particular type of financial institution, referred to in the Proposed Rule as a information has only increased in the such as debt collectors or payday Chief Information Security Officer or more than twenty years since the lenders, may make those customers’ ‘‘CISO.’’ As discussed in detail below, passage of the GLBA. The Commission information more vulnerable to the Final Rule does not use this term, believes the amendments to the compromise by facilitating social though the concept is the same: The Safeguards Rule are necessary to ensure engineering or similar attacks. The person designated to coordinate the the purposes of the GLBA are satisfied, nature of the relationship between information security program need only and so consumers can have confidence customers and their financial be ‘‘qualified.’’ No particular level of financial institutions are providing institutions makes all nonpublic education, experience, or certification is reasonable safeguards to protect their information held by the financial prescribed by the Rule. Accordingly, information. institution inherently sensitive and financial institutions may designate any worthy of the level of protection set ‘‘Sensitive’’ Customer Information qualified individual who is appropriate forth in the Rule. for their business. Only if the Several industry groups also Although the Commission believes all complexity or size of their information suggested significant portions of the customer information should be systems require the services of an expert Proposed Rule should not apply to all safeguarded by financial institutions will the financial institution need to customer information, but rather only to and declines to exclude any portion of hire such an individual.79 some subset of particularly ‘‘sensitive’’ that information from protection under Finally, the Commission believes customer information, such as account any of the provisions of the Rule, it while large financial institutions may numbers or social security numbers.81 notes the Rule does contemplate well incur substantial costs to These commenters generally argued the financial institutions will consider the implement complex information definition of ‘‘customer information’’ is sensitivity of particular information in security programs, there are much more too broad, as it will include information designing their information security affordable solutions available for the commenters felt is not particularly programs and safeguards. The elements financial institutions with smaller and sensitive, such as name and address, required by this section are generally simpler information systems. For and does not justify extensive flexible enough to allow financial example, there are very low-cost or even safeguards.82 institutions to treat various pieces of free vulnerability assessment programs The Commission does not agree that information differently. For example, available: ‘‘virtual CISO’’ services some portion of customer information is paragraph (c)(1) requires information enable a third party to provide security not entitled to the protections required security programs to include safeguards support for many companies, splitting by the Final Rule. The Safeguards Rule that address access control of customer the cost of information security defines ‘‘customer information’’ as ‘‘any information. The paragraph requires professionals among them; many record containing nonpublic personal financial institutions to develop applications and hardware have built-in information’’ about a customer handled measures to ensure only authorized encryption requirements;80and there or maintained by or on behalf of a users access customer information, but are affordable multi-factor financial institution.83The Final Rule does not prescribe any particular authentication solutions aimed at defines ‘‘nonpublic personal measures that must be adopted. When businesses of various sizes. information’’ as ‘‘personally identifiable designing these measures, a financial Considering these points, although financial information,’’ but does not institution may design a system in there will undoubtedly be expenses include information that is ‘‘publicly which more sensitive information is involved for some, or even many, available.’’ Although this definition is protected by more stringent access financial institutions to update their broad, the Commission believes controls. Even in the more specific programs, the Commission believes information covered by it is rightfully provisions of the Rule, there is these expenses are justified because of considered sensitive and should be flexibility to address the relative the vital importance of protecting protected accordingly. The businesses sensitivity of information. For example, customer information collected, regulated by the Safeguards Rule are not in §313.4(c)(5)’s requirement that maintained, and processed by financial just any businesses, but are financial customer information be protected by institutions. Congress recognized the institutions and are responsible for multi-factor authentication, financial importance of securing consumers’ handling and maintaining financial institutions have flexibility to sensitive financial information when it information that is both important to implement the multi-factor passed the GLBA, which required the consumers and valuable to attackers authentication depending on the FTC to promulgate the Safeguards Rule. who try to obtain the information for sensitivity of the information. The financial gain. Even the fact that a financial institution may select factors 79See, e.g., Remarks of Brian McManamon, consumer is a customer of a particular such as SMS text messages to access less Safeguards Workshop Tr., supra note 17, at 89–90 financial institution is generally sensitive information, but determine (noting the size of a financial institution and the nonpublic and can be sensitive. For more sensitive information should be amount and nature of the information it holds factor example, the revelation of a customer protected by other, more secure, factors into an appropriate information security program);
see also Slides Accompanying Remarks of Rocio for authentication. Baeza, ‘‘Models for Complying to the Safeguards 81See, e.g., Electronic Transactions Association Rule Changes,’’ in Safeguards Workshop Slides, (comment 27, NPRM), at 2–4; CTIA (comment 34, Third-Party Standards and Frameworks supra note 72, at 27–28 (describing three different NPRM), at 10; Global Privacy Alliance (comment In addition, in the NPRM, the compliance models: In-house, outsource, and 38, NPRM), at 7–8; American Financial Services Commission asked whether the hybrid, with costs ranging from $199 per month to Association (comment 41, NPRM), at 5; ACA more than $15,000 per month); Remarks of Rocio International (comment 45, NPRM), at 13; Money Safeguards Rule should incorporate Baeza, Safeguards Workshop Tr., supra note 17, at Services Round Table (comment 53, NPRM), at 6– outside standards, such as the National 81–83 (describing three compliance models in more 7. Institute of Standards and Technology detail). 82See, e.g., Electronic Transactions Association (‘‘NIST’’) framework, either as required 80See Remarks of Brian McManamon, Safeguards (comment 27, NPRM), at 2; Global Privacy Alliance Workshop Tr., supra note 17, at 78 (describing (comment 38, NPRM), at 7. elements of an information security virtual CISO services). 8316 CFR 314.2(b). program or as a safe harbor that would VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70281 treat compliance with such a standard and industries. In addition, mandating information security field.93The as compliance with the Safeguards Rule. companies follow a particular security position of CISO is generally limited to Some commenters advocated for the standard or framework would reduce large companies with fairly complex adoption of an outside standard into the the flexibility built into the Rule. information security systems, so the Safeguards Rule.84Cisco Systems, Inc. Similarly, the Commission declines to salary of this position is often very suggested the Safeguards Rule should be make compliance with an outside high.94Accordingly, many commenters connected to NIST guidance, arguing standard a safe harbor for the Rule. In argued hiring a CISO would be this would allow the Rule to evolve as such a scenario, the use of safe harbors prohibitively expensive for many NIST’s guidance evolves.85An would not greatly enhance regulatory financial institutions.95Additionally, anonymous commenter suggested the stability or predictability for financial commenters argued the hiring of such Rule should comply with ‘‘international institutions because the Commission an in-demand professional would be standard ISO/IEC 27001.’’86The would be required to actively monitor difficult because of a general shortage of National Consumer Law Center argued whether those standards continued to such professionals available for hiring.96 certain financial institutions with provide equivalent protections for By using the term ‘‘CISO,’’ the particularly sensitive customer Safeguards compliance and modify the Commission did not intend to require information should be required to Rule if a standard became inadequate. In all financial institutions hire a highly comply with guidelines issued by NIST addition, in investigating possible qualified professional with an extremely and the Federal Financial Institutions violations of the Rule, the Commission high salary, regardless of the financial Examination Council (FFIEC).87Other would be required to independently institutions’ size or complexity. The commenters acknowledged the value of verify whether the financial institution Proposed Rule required only that outside standards but were opposed to had in fact complied with the outside financial institutions designate a the Rule requiring compliance with framework, which would require ‘‘qualified individual’’ to oversee and them.88 substantial effort and expense on the enforce their information security Some commenters suggested while part of the Commission and the target of program, without specifying any compliance with outside standards the investigation. particular level of experience, should not be required, compliance education, or compensation, or Specific Elements should serve as a ‘‘safe harbor’’ for requiring any particular duties outside compliance with the Rule.89On the In addition to these generally of overseeing the financial institution’s other hand, Consumer Reports noted applicable comments, commenters information security program and other while such standards can be helpful addressed many of the individual requirements specifically set forth in the guidance, they should not be a safe elements set forth by this section. These Rule.97The use of the term ‘‘CISO’’ in harbor for compliance with the Rule elements are discussed in more detail the Proposed Rule, however, caused because financial institutions must take below. confusion about the requirements of this steps to ensure they are responding to Paragraph (a)—Designation of a Single section. Accordingly, the Final Rule changing information security threats Qualified Individual replaces the term ‘‘CISO’’ with regardless of the requirements of an ‘‘Qualified Individual’’ to refer to the outside framework.90 Proposed paragraph (a) changed the individual designated under this section The Commission declines to change current requirement that institutions of the Rule.
the Rule to incorporate or reference a designate an ‘‘employee or employees to The use of the term ‘‘Qualified particular security standard or coordinate your information security Individual’’ is meant to clarify the only framework for a variety of reasons. First, program’’ to instead require the requirement for this designated it is not clear the more detailed financial institution to designate ‘‘a individual is that he or she be qualified frameworks would apply well to qualified individual responsible for to oversee and enforce the financial financial institutions of various sizes overseeing and implementing your institution’s information security information security program and program. What qualifications are 84Cisco Systems, Inc. (comment 51, NPRM), at 4; enforcing your information security necessary will depend upon the size National Consumer Law Center and others program.’’91This individual was (comment 58), at 2; Anonymous (comment 2, and complexity of a financial referenced in the Proposed Rule as a Workshop). institution’s information system and the Chief Information Security Officer or 85Cisco Systems, Inc. (Comment 51, NPRM), at 4. volume and sensitivity of the customer 86Anonymous (comment 2, Workshop). The ISO/ ‘‘CISO.’’ information the financial institution IEC 27001 standard is an information security The notice of proposed rulemaking for standard issued by the International Organization the Proposed Rule emphasized the use for Standardization. See ISO/IEC 27001 Information 93U.S. Chamber of Commerce (comment 33, of the term ‘‘CISO’’ was for clarity in the Security Management, ISO, https://www.iso.org/ NPRM), at 10; National Automobile Dealers isoiec-27001-information-security.html (last Proposed Rule.92Despite the use of the Association (comment 46), at 17–19; National accessed 15 Dec. 2020). term ‘‘CISO,’’ the Proposed Rule did not Independent Automobile Dealers Association 87National Consumer Law Center and others require financial institutions to actually (comment 48, NPRM), at 5; ACA International (comment 58, NPRM), at 2. grant that title to the designated (Comment 45, NPRM), at 8. 88HITRUST (comment 18, NPRM), at 2; see also 94See. e.g., Brian McManamon, Safeguards Consumer Reports (comment 52, NPRM), at 6–7 individual. Commenters that responded Workshop Tr., supra note 17, at 78 (estimating the (discouraging the adoption of outside standards as to this proposal, however, generally average annual salary of a CISO can range from a safe harbor for companies). assumed the person designated to $180,000 to upwards of $400,000). 89Mortgage Bankers Association (comment 26, coordinate and oversee a financial 95National Automobile Dealers Association NPRM), at 2 (suggesting Rule be modified so (comment 46, NPRM), at 17–19; National institution’s information security financial institutions that use the NIST Independent Automobile Dealers Association Cybersecurity Framework would be in de facto program would be required to have the (comment 48, NPRM), at 5; U.S. Chamber of compliance with the Rule); see also National qualifications, duties, responsibilities, Commerce (comment 33, NPRM), at 10; ACA Pawnbrokers Association (comment 32, NPRM), at and accompanying pay of a CISO as that International (comment 45, NPRM), at 8. 6–7 (advocating for the adoption of safe harbors for 96National Automobile Dealers Association position is generally understood in the small financial institutions without detailing what (comment 46, NPRM), at 18–19; U.S. Chamber of should be required to qualify for the safe harbor). Commerce (comment 33, NPRM), at 10; ACA 90Consumer Reports (comment 52, NPRM), at 6– 91Section 314.4(a). International (comment 45, NPRM), at 8.
7. 9284 FR 13165. 9784 FR 13175.
VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70282 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations possesses or processes. The Qualified organizing their information security security, and improve Individual of a financial institution with personnel.100For example, the communication.106 a very small and simple information Consumer Data Industry Association The Commission disagrees with the system will need less training and (‘‘CDIA’’) commented the designation of commenter who stated improved expertise than a Qualified Individual for a single coordinator would interfere accountability does not lead to a financial institution with a large, with financial institutions’ ability to improved security. The goal of complex information system. The exact organize their program ‘‘to share improving accountability is to ensure qualifications will depend on the nature responsibilities among different information security staff and financial of the financial institution’s information personnel with different strengths.’’101 institution management give the system. Each financial institution will Similarly, ACA International argued this necessary attention and resources to need to evaluate its own information requirement would prevent financial information security. In addition, an security needs and designate an institutions from having multiple staff individual that has clear responsibility individual with appropriate members share responsibilities for for the strength of a financial qualifications to meet those needs. information security programs.102 institution’s information security The Commission believes, in many Other commenters argued the program will be accountable to improve cases, financial institutions’ current designation of a single individual as the the program and ensure it protects coordinators, whether their own coordinator of the information security customer information.107 The major breach that occurred at employees or third-party contractors, program provides no proven benefits national consumer reporting agency may be qualified for this role.98Because over the use of multiple coordinators.103 Equifax in 2017 demonstrates the the current Safeguards Rule requires Similarly, NADA argued that, while the importance of clear lines of reporting financial institutions to designate an appointment of a single qualified and accountability in management of ‘‘employee or employees to coordinate individual might improve information security programs. The U.S.
your information security program,’’ accountability, improving House Committee on Oversight and financial institutions in compliance accountability does not improve Government Reform issued a report on with that Rule will already have one or security.104On the other hand, a group the breach that identified Equifax’s more information security coordinators. of consumer and advocacy groups organization as one of the major causes Although the current Rule does not including the National Consumer Law of the breach.108The report indicated expressly require that these coordinators Center (‘‘NCLC’’) argued appointing a Equifax’s division of responsibility for be qualified for that position, the single individual as the coordinator of information security between two current Rule requires a financial the information security program can individuals that reported to two institution to maintain ‘‘appropriate’’ increase security and prevent security different company officers contributed safeguards, regularly test those events based on lack of accountability to failures of communication, oversight, safeguards, and evaluate and adjust the and poor coordination.105 and enforcement that led to millions of information security program in light of The Commission retains the consumers’ data being compromised.109 that testing.99In order to effectively requirement to designate a single Increasing accountability for individuals comply with these ongoing qualified individual, because it believes and organizations can directly lead to requirements, a financial institution’s there are clear benefits to the improved security for customer coordinator must have some level of designation of a single coordinator. information. information security training and Designating a single coordinator to Finally, the Commission does not knowledge and, therefore, will likely be oversee an information security program believe the requirement to designate a an appropriate Qualified Individual clarifies lines of reporting in enforcing single Qualified Individual would under the Final Rule. Accordingly, in the program, can avoid gaps in many cases this amendment to the Rule responsibility in managing data 106Remarks of Adrienne Allen, Safeguards will not require any additional hiring Workshop Tr., supra note 17, at 182–84 (stating that expenses. without a single responsible individual, 100National Independent Automobile Dealers In addition to explicitly requiring that Association (comment 48, NPRM), at 5; Consumer information security staff ‘‘can fall into traps of each relying on someone else to make a hard call the information security program Data Industry Association (comment 36, NPRM), at . . . [In a program without a single coordinator] coordinator be qualified for the role, the 5; National Association of Dealer Counsel (comment issues can sometimes fall through the cracks.’’); 44, NPRM), at 2; ACA International (comment 45, Commission proposed to require the Remarks of Michele Norin, Safeguards Workshop NPRM), at 7–8; Money Services Round Table designation of a single employee, as (comment 53, NPRM), at 10; Gusto and others Tr., supra note 17, at 184–85 (‘‘I think it’s extremely important to have a person in front of the opposed to the multiple coordinators (Comment 11, Workshop), at 2; see also Remarks of information security program. I think that there are allowed by the existing Rule. Some James Crifasi, Safeguards Workshop TR, supra note so many components to understand, to manage, to 17, at 74 (stating ‘‘when we’re talking about a small commenters objected to this proposal on keep an eye on. I think it’s difficult to do that if and medium business [. . .] we really need to see the grounds that it would interfere with that ‘qualified individual’ be a mix of folks’’). i i t t ’ ’ s s p ex a t r r t e o m f e s l o y m h e e o l n p e fu e l l s to e ’ h s a jo v b e . a A p n e d rs s o o n I i f n o u ch n a d r g th e a o t f financial institutions’ flexibility in 101Consumer Data Industry Association that program just from a pure basic management (comment 36, NPRM), at 5. perspective and understanding perspective.’’). 98Remarks of James Crifasi, Safeguards Workshop 102ACA International (comment 45, NPRM), at 7– 107See, e.g., Federal Trade Commission Staff Tr., supra note 17, at 74 (stating car dealerships can 8. NPA raised similar concerns. National Comment on the Preliminary Draft for the NIST rely on existing staff for this role); Remarks of Lee Pawnbrokers Association (comment 3, Workshop), Privacy Framework: A Tool for Improving Privacy Waters, Safeguards Workshop Tr., supra note 17, at at 2. through Enterprise Risk Management (Oct. 24, 78–79 (stating any dealership with any IT staff at 103Consumer Data Industry Association 2019), at 12–14 (suggesting NIST clarify that one all would have someone who could assume the role (comment 36, NPRM), at 5; National Automobile person should be in charge of the program). https:// of ‘‘qualified individual,’’ perhaps requiring some Dealers Association (comment 46, NPRM), at 19; www.ftc.gov/system/files/documents/advocacy_ additional research or outside help); Remarks of ACA International (comment 45, NPRM), at 8. documents/ftc-staff-comment-preliminary-draft- Rocio Baeza, Safeguards Workshop Tr., supra note 104National Automobile Dealers Association nist-privacy-framework/p205400nistprivacy 17, at 81–82 (stating companies may use an existing (comment 46, NPRM), at 19. frameworkcomment.pdf. employee for the role and ‘‘for any areas where 105National Consumer Law Center and others 108U.S. House, Committee on Oversight and there may be skill gaps, that can be supplemented (comment 58, NPRM), at 3 (arguing that a clear line Government Reform, Majority Staff Report, The with either certifications or some type of of reporting with a single responsible individual Equifax Data Breach, at 55–62, 115th Congress (Dec. education.’’). could have prevented the Equifax consumer data 2018). 9916 CFR 314.4. breach). 109Id.
VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70283 prevent the approach of having multiple Individual.111The Rule, however, does identified security risks or threats the people responsible for different aspects not require individuals responsible for financial institution faces; (2) criteria for of the program, as some commenters overseeing third-party Qualified the assessment of the confidentiality, asserted. While the Qualified Individual Individuals to be information security integrity, and availability of the appointed as the coordinator of the experts themselves. The senior financial institution’s information information security program would personnel that oversees the third-party systems and customer information, have ultimate responsibility for Qualified Individual is charged with including the adequacy of the existing overseeing and managing the supervising and monitoring the third- controls in the context of the identified information security program, financial party so the financial institution is risks or threats to the financial institutions may still assign particular aware of its data security needs and the institution; and (3) requirements duties and responsibilities to other staff safeguards being used to protect its describing how identified risks will be members.110A financial institution may information systems. This person does mitigated or accepted based on the risk organize its personnel in teams or share not need to be qualified to coordinate assessment and how the information decision making between individuals. the information security program him or security program will address the Moreover, the Rule does not require this herself. Technical staff are frequently financial institution’s risks. Commenters be the Qualified Individual’s sole job— supervised by employees or officers raised several concerns about the he or she may have other duties. The with limited technical expertise.112The Proposed Rule’s provisions on risk Rule requires only that one individual Rule requires only the same assessment, none of which merit assume the ultimate responsibility for responsibilities a supervisor would have changes to the Proposed Rule. overseeing and enforcing the program. in overseeing an in-house information First, some commenters objected to Accordingly, the Final Rule requires security coordinator of a financial the level of specificity of the Proposed institution. Accordingly, the designation of a single Qualified Rule, with some arguing the Commission adopts the proposed Individual, as proposed, but no longer requirements were too specific, and paragraph without modification.
uses the term ‘‘CISO.’’ others arguing the requirements were Proposed Paragraph (b) not specific enough. With respect to the Third-Party Coordinators Proposed Rule being too specific, The NPRM proposed amending commenters such as ACA and U.S.
Retain responsibility for compliance In contrast, several other commenters with the Rule; (2) designate a senior Written Risk Assessment recommended the Rule set forth more member of its personnel to be Paragraph (b)(1) of the Proposed Rule specific criteria for risk assessments. responsible for direction and oversight required the risk assessment be written Inpher suggested the Commission add a of the Qualified Individual; and (3) and include: (1) Criteria for the requirement that risk assessments require the service provider or affiliate evaluation and categorization of require financial institutions to examine to maintain an information security ‘‘technologies that are deployed by program that protects the financial 111National Automobile Dealers Association [financial institutions’] information institution in accordance with the Rule. (comment 46, NPRM), at 18. security systems, and evaluate the 112See Remarks of James Crifasi, Safeguards feasibility’’ of adopting ‘‘privacy The Commission received one Workshop Tr., supra note 17, at 79–80 (stating that, enhancing technologies’’ that would comment on this aspect of the in his work as a third-party information security provision. NADA argued that, because a service provider, he is often overseen by executives better address vulnerabilities and thwart without technical backgrounds); see also Remarks threats.119Inpher also recommended the senior member of a financial of Rocio Baeza, Safeguards Workshop Tr., supra Rule require financial institutions to institution’s personnel must be note 17, at 105–06 (noting distinction in how conduct privacy impact assessments responsible for the oversight of a third- executives and technical staff may understand their party Qualified Individual, the organizations’ use of encryption); Remarks of with ‘‘specific guidelines to review Karthik Rangarajan, Safeguards Workshop Tr., internal data protection standards and supervising individual would need to be supra note 17, at 196 (discussing challenges adherence to fair information an expert in information security, and inherent in discussing technical issues with board the financial institution would still be members who lack a technical background)and at required to hire an expensive employee 211 (noting organizations can successfully manage 116ACA International (comment 45, NPRM), at their relationships with third-party service 12; U.S. Chamber of Commerce (comment 33, to supervise the third-party Qualified providers without ‘‘becom[ing] experts’’ in the NPRM), at 10. services provided). 117U.S. Chamber of Commerce (comment 33, 110See Remarks of Adrienne Allen, Safeguards 113Proposed 16 CFR 314.4(b). NPRM), at 10. Workshop Tr., supra note 17, at 189–90 (noting 114Proposed 16 CFR 314.4(b)(1), (2), and (3). 118Consumer Data Industry Association that, even where there is a single point person, 115See, e.g., Proposed 16 CFR 314.4(c)(2) and (10) (comment 36, NPRM), at 5. decision makers rarely operate ‘‘in a vacuum.’’). and (e). 119Inpher, Inc. (comment 50, NPRM), at 4. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70284 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations principles.’’120The Princeton Center believes a more flexible requirement While acknowledging there will be suggested the Rule require risk will better allow financial institutions to some cost to conducting a risk assessments to include threat modeling find the risk assessment method that assessment, the Commission believes a and adopt the concept of defense in best fits their organization and will properly conducted risk assessment is depth.121HALOCK Security Labs better accommodate changes in an essential part of a financial recommended the Rule specifically recommended approaches in the future. institution’s information security require ‘‘a) That risk assessments should In response to CDIA’s concern about program. The entire Safeguards Rule, evaluate the likelihood of magnitudes of the risk assessment providing a both as it currently exists and as harm that result from threats and errors, roadmap for bad actors, certainly, the amended, requires that the information b) That risk assessments should written risk assessment will include security program be based on a risk explicitly estimate foreseeable harm to details about a financial institution’s assessment. An information security consumers as well as to the covered systems that could assist an attacker if program cannot properly guard against financial institutions, c) That risk obtained by the attacker. Accordingly, risks to customer information if those mitigating controls are commensurate the risk assessment should be protected risks have not been identified and with the risks they address, [and] d) as any other sensitive information assessed.128The Commission believes That risk assessments estimate would be. The Commission does not this requirement properly emphasizes likelihoods and impacts using available view this concern as a reason not to the importance of robust risk data.’’122 create such a document. Indeed, the assessments, while providing financial The Commission believes the concern would apply to any written institutions sufficient flexibility in Proposed Rule’s provisions on risk document that provides information performing these assessments. Finally, assessment strike the right balance regarding a financial institution’s the Commission notes, because the between specificity and flexibility. The information security procedures, from a current Rule also requires that a risk amendments provide only a high-level network diagram to written security assessment be performed, financial list of criteria the risk assessment must code.
monitoring). These specific systems.135Second, several commenters Second, the Commission agrees with requirements represent elements of an suggested adding further safeguards to the commenters who advocated that the information security program that the the ‘‘access control’’ requirement. For Rule implement the principle of least Commission views as essential and example, the Princeton Center argued privilege. The Commission does not should be addressed by all financial the Rule should adopt the ‘‘Principle of believe it is appropriate, for example, institutions.133 Least Privilege,’’ a principle that no user for larger companies to give all As a preliminary matter, Global should have access greater than is Privacy Alliance (GPA) argued all of necessary for legitimate business 139American Council on Education (comment 24, these elements should be made optional purposes.136Reynolds and Reynolds NPRM), at 10. Company (Reynolds) suggested the Rule 140National Automobile Dealers Association 131Inpher, Inc. (comment 50, NPRM), at 3; Global clarify that financial institutions must (comment 46, NPRM), at 23; National Independent Privacy Alliance (comment 38, NPRM), at 11. Automobile Dealers Association (comment 48, ‘‘vet, control, and monitor user access to 132National Automobile Dealers Association NPRM), at 5; American Council on Education (comment 46, NPRM), at 20. sensitive information.’’137Consumer (comment 24, NPRM), at 10; 133NADA disagreed with the Commission’s Reports argued paragraph (c)(1) should 141National Independent Automobile Dealers statement in the NPRM for the Proposed Rule that be amended to control access not just to Association (comment 48, NPRM), at 5; American ‘‘most financial institutions already implement’’ the authorized users, but to further limit Council on Education (comment 24, NPRM), at 10. specific requirements in paragraph (c), stating that 142NIADA suggested instituting physical access access to when such access is many financial institutions ‘‘do not currently controls would cost a dealership $215,000 because implement some or all of these measures.’’ National reasonably necessary.138ACE argued each computer would need to have its own lockable Automobile Dealers Association (comment 46, that any requirement for physical access cubicle and there would need to be lockable offices NPRM), at 20. The Commission continues to believe control allow financial institutions to for all desks. See Remarks of Lee Waters, Safeguards most financial institutions institute some form of Workshop Tr., supra note 17, at 76. As originally determine which locations should have most of these measures, such as access control, promulgated, the Rule already requires financial secure disposal, and monitoring authorized users, restricted access, rather than limiting institutions implement ‘‘physical safeguards that based on its enforcement and business outreach physical access to every building and are appropriate to your size and complexity.’’ 16 experience. While NADA’s statement that some CFR 314.3. The Final Rule’s requirement is financial institutions implement none of the consistent with that longstanding requirement. If 134Global Privacy Alliance (comment 38, NPRM), measures may be true, this underlines the necessity computers have technical safeguards preventing at 6.
of making these elements explicit requirements unauthorized users from accessing customer under the Rule, as these elements are necessary for 135Global Privacy Alliance (comment 38, NPRM), information, they usually will not need to be in a at 9–10.
a reasonable information security program for all lockable area, particularly if they are not generally financial institutions. Indeed, a financial institution 136Princeton University Center for Information left unattended and are not likely to be stolen. that utilizes none of these elements and exercises Technology Policy (comment 54, NPRM), at 4–5. Similarly, desks would need to be in lockable no access control, no secure disposal procedures, 137Reynolds and Reynolds Company (comment 7, offices only if they contain accessible paper records. and does not monitor users of its systems is Workshop), at 7. A lockable file cabinet may be a more economical unlikely to be in compliance with the current Rule. 138Consumer Reports (comment 52, NPRM), at 7. solution. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70286 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations employees and service providers access case of customers, to access their own systems ‘‘directly related to the privacy to all customer information. Such information.144 and security of ‘customer overbroad access could create additional information.’’’148The Commission System Inventory harm in the event of an intruder gaining declines to make this change because access to a system by impersonating an In the NPRM, the Commission the purpose of this provision is to allow employee or service provider. proposed to require the financial financial institutions to obtain a clear Accordingly, the Commission clarifies institution to ‘‘[i]dentify and manage the picture of their systems and to identify this in the Final Rule by adding a data, personnel, devices, systems, and where customer information is kept and requirement that not only must a facilities that enable [the financial how it can be accessed. An inventory financial institution implement access institution] to achieve business must examine all systems in order to controls, but it should also restrict purposes in accordance with their identify all systems that contain access only to customer information relative importance to business customer information or are connected needed to perform a specific function. objectives and [the financial to systems that do. If a financial institution’s] risk strategy.’’145This institution does not first examine all As to the suggestion the Commission requirement was designed to ensure the systems and instead limits the inventory impose monitoring requirements for financial institution inventoried the to systems it considers to be directly access, that requirement exists in data in its possession, inventoried the related to security, it could give an paragraph (c)(8). And as to the systems on which that data is collected, incomplete picture of the financial suggestion the requirement is too vague stored, or transmitted, and had a full institution’s systems and could result in as to service providers, the Commission understanding of the relevant portions some customer information or ways to believes the Final Rule is clear: When a of its information systems and their connect to that information being vendor accesses the financial relative importance.146The Commission overlooked.149 institution’s data or information retains this provision in the Final Rule The Commission adopts paragraph systems, the financial institution must without modification. (c)(2) of the Proposed Rule as final, ensure appropriate access controls are Commenters raised two general without modifications.
in place. Separately, under paragraph objections to this provision. First, some (f), the financial institution must Access to Physical Location commenters argued it was too vague and reasonably oversee the vendor’s Proposed paragraph (c)(3) would have that it was not clear how such an safeguards, which would necessarily required that financial institutions inventory should be conducted or what include access controls for the vendor’s restrict access to physical locations systems should be included.147The system. containing customer information only to Commission believes the language Finally, as to the suggestion the provides effective guidance while still authorized individuals. The Final Rule provision is vague generally, as allowing a variety of approaches by combines this section with proposed discussed above, the Final Rule seeks to financial institutions in identifying paragraph (c)(1) in order to eliminate preserve flexibility in its provisions, systems involved in their businesses. redundancy and clarify that access both so that financial institutions can This provision requires a financial controls must consider both electronic design programs appropriate for their institution to identify all ‘‘data, and physical access. systems and so that changes in personnel, devices, systems, and Encryption technology or security practices will not facilities’’ that are a part of its business Proposed paragraph (c)(4) required render the Rule obsolete. The and to determine their importance to the financial institutions to encrypt all Commission believes maintaining less financial institution. This inventory of customer information, both in transit prescriptive requirements is the best systems must include all systems that over external networks and at rest. The way to achieve the goal of flexibility and are a part of the business so the Proposed Rule allowed financial protecting customer information.143 financial institution can locate all institutions to use alternative means to Accordingly, the Commission customer information it controls, the protect customer information, subject to combines paragraphs (c)(1) and (3) from systems connected to that information, review and approval by the financial the Proposed Rule into revised and how they are connected. This institution’s Qualified Individual. paragraph (c)(1) of the Final Rule, which inventory forms the basis of an Several commenters supported the requires implementing and periodically information security program because a inclusion of an encryption reviewing access controls on customer system cannot be protected if the requirement.150In fact, some suggested information, including technical and, as financial institution does not appropriate, physical controls to (1) understand its structure or know what 148American Council on Education (comment 24, authenticate and permit access only to data is stored in its systems. NPRM), at 10. authorized users to protect against the Second, ACE suggested the scope of 149Another commenter criticized proposed unauthorized acquisition of customer this provision should be limited to paragraph (c)(2) because some financial institutions ‘‘have no control’’ over which networks they information and (2) limit authorized transmit customer information. National users’ access only to customer 144As noted above, the Commission is also Pawnbrokers Association (comment 32, NPRM), at information that they need to perform changing the term ‘‘authorized individuals’’ to 7. Paragraph (c)(2) does not require a financial their duties and functions, or, in the ‘‘authorized users.’’ system to identify all networks over which it may 145Proposed 16 CFR 314.4(c)(2). transmit customer information. See also, infra, this 146See, e.g., Complaint at 11, FTC v. Wyndham document’s discussion of NPA’s comments on 143NPA expressed concern about the effect of the Worldwide Corp., No. CV 2:12–cv–01365–SPL (D. §314.4(f) of the Final Rule, noting financial Rule on pawnbrokers who the commenter stated are Ariz. June 26, 2012) (alleging company failed to institutions are generally not required to oversee required by law to allow law enforcement access to provide reasonable security by, among other things, other entities’ service providers over which they their physical records. National Pawnbrokers failing to inventory computers connected to its have no control. Association (comment 32, NPRM), at 7. Nothing in network). 150Inpher, Inc. (comment 50, NPRM), at 4; the Rule conflicts with any such requirements. Law 147National Automobile Dealers Association Princeton University Center for Information enforcement appropriately accessing customer (comment 46, NPRM), at 23–24; American Financial Technology Policy (comment 54, NPRM), at 3; information under a law that requires that access Services Association (comment 41, NPRM), at 5; Electronic Privacy Information Center (comment 55, would be considered authorized use under those American Council on Education (comment 24, NPRM), at 8; National Consumer Law Center and circumstances. NPRM), at 10. others (comment 58, NPRM), at 3. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70287 the Proposed Rule did not go far enough system.159Two commenters stated rest because FFIEC guidelines do not in requiring encryption. Inpher guidelines issued by the Federal require it, the Commission notes the suggested the Rule should require Financial Institutions Examination Safeguards Rule is very different from encryption of customer information Council (FFIEC) do not require most the guidelines issued by the FFIEC. The when in use, in addition to when in banks to encrypt data at rest, unless the depository financial institutions transit or at rest.151The Princeton institution’s risk assessment indicates regulated by the banking agencies are Center suggested requiring encryption of such encryption is necessary.160 subject to regular examinations by their data while in transit over internal The Commission declines to modify regulator. The guidelines created by the networks, in addition to requiring it for the encryption requirement from the FFIEC are designed to be used by the external networks, noting the blurring of Proposed Rule. As to the comments that examiner, as part of those examinations, the distinction between internal and suggest the requirement should be to evaluate the security of the financial external networks.152 relaxed, the Commission notes there are institution; the examiner thus has a In contrast, others argued encryption numerous free or low cost encryption direct role in regularly verifying the could be too expensive and technically solutions available to financial financial institution has taken challenging for some financial institutions, particularly for data in appropriate steps to protect its customer institutions and should not be required transit,161that make encryption a information. In contrast, the Safeguards in all cases.153Indeed, GPA argued the feasible solution in most situations. For Rule regulates covered financial Rule should not require encryption at data at rest, encryption is now cheaper, institutions directly and must be usable all, financial institutions should be free more flexible, and easier than ever by those entities to determine to adopt other protective measures for before.162In many cases, widely used appropriate information security customer information, and the Rule software and hardware have built-in without any interaction between the should allow financial institutions to encryption capabilities.163 financial institution and the ‘‘determine the controls that are most In response to the argument that the Commission. The Commission does not appropriate for protecting the sensitive Rule should not require encryption at have the ability to examine each information that they handle.’’154 financial institution and work with that Similarly, some commenters argued 159Mortgage Bankers Association (comment 26, institution to ensure their information financial institutions should be required NPRM), at 6. security is appropriate. Therefore, a to encrypt customer information only 160Wisconsin Bankers Association (comment 37, requirement that institutions encrypt NPRM), at 2 (discussing FFIEC Information when the risk to the customer Technology Booklet); American Financial Services information by default is appropriate for information justifies it.155Others Association (comment 41, NPRM), at 5 (discussing the Safeguards Rule, as the Commission suggested encryption in more limited FFIEC Cybersecurity Assessment Tool). believes encryption of customer circumstances, such as on systems ‘‘to 161See Remarks of Matthew Green, Safeguards information at rest is appropriate in Workshop Tr, supra note 17, at 225 (noting website which unauthorized individuals may usage of encryption is above 80 percent; ‘‘Let’s most cases. have access,’’156for sensitive data,157or Encrypt’’ provides free TLS certificates; and costs Finally, while some commenters for data in transit.158The Mortgage have gone down to the point that if a financial suggested eliminating the encryption institution is not using TLS encryption for data in Bankers Association argued encryption requirement for certain types of data motion, it is making an unusual decision outside at rest is unnecessary because customer the norm); Remarks of Rocio Baeza, Safeguards (e.g., non-sensitive) or certain categories information at rest in a financial Workshop Tr., supra note 17, at 106 (‘‘[T]he of data (e.g., data at rest), the institution’s system is sufficiently encryption of data in transit has been standard. Commission notes, as discussed in more There’s no pushback with that.’’); see also National protected by controlling access to the detail above, the fact that an individual Pawnbrokers Association (comment 3, Workshop), at 2 (‘‘[I]n states that allow us to use technology for is a customer of a financial institution 151Inpher, Inc. (comment 50, NPRM), at 4. the receipt of information from consumer customers alone may be sensitive. In any event, the 152Princeton University Center for Information and software to print our pawn tickets and store Rule provides financial institutions with Technology Policy (comment 54, NPRM), at 3. information, we believe our members have access flexibility to adopt alternatives to through their software providers to protections that 153National Pawnbrokers Association (comment comply with the Safeguards Rule.’’). encryption with the approval of the 32, NPRM), at 3; U.S. Chamber of Commerce (comment 33, NPRM), at 11; CTIA (comment 34, 162See Remarks of Wendy Nather, Safeguards Qualified Individual. NPRM) at 10; Wisconsin Bankers Association Workshop Tr., supra note 17, at 267 (‘‘we have a Similarly, the Commission declines to (comment 37, NPRM), at 2. lot more options, a lot more technologies today than extend the encryption requirement to we did before that are making both of these 154Global Privacy Alliance (comment 38, NPRM), solutions, both encryption and MFA, easier to use, data in use or to data transmitted over at 7–8.
14. encryption be used. I mean, years ago—I’ve been in widely enough at this time to justify 157U.S. Chamber of Commerce (comment 33, this field for 15, you know, 20 years now, I guess. NPRM), at 11; American Financial Services And, you know, encryption used to be this exotic mandating its use by all financial Association (comment 41, NPRM), at 5; ACA thing that was very, very difficult to use, very institutions under the FTC’s International (comment 45, NPRM), at 13; CTIA expensive and not really feasible for securing jurisdiction. As to encryption of data (comment 34, NPRM), at 10. information security systems. And we’ve reached transmitted over internal networks, the 158Mortgage Bankers Association (comment 26, the point where now it is something that’s come to NPRM), at 6; Wisconsin Bankers Association be and we can actually build well. So I’m really Commission acknowledges, due to (comment 37, NPRM), at 2; American Financial happy about that.’’). changes in network design and the Services Association (comment 41, NPRM), at 5; 163See Remarks of Randy Marchany, Safeguards growth of cloud and mobile computing, Ken Shaurette (comment 19, NPRM), (suggesting Workshop Tr., supra note 17, at 229–30 (noting the distinction between internal and the Commission consider whether ‘‘databases, encryption is already built into the Microsoft Office external networks is less clear than it applications and operating systems are prepared to environment and a number of Microsoft products, fully support full encryption without significant such as Spreadsheets, Excel, Docs, and PowerPoint, once was. However, the Commission performance impact or ability to continue to support that encryption feature). Other applications believes requiring all financial function.’’); National Automobile Dealers that have encryption built in include database institutions to encrypt all Association (comment 46, NPRM), at 25–26 applications; app platforms iOS and Android; and communications over internal networks (arguing the terms ‘‘at rest’’ and ‘‘in transit’’ are development frameworks for web applications on unclear). banking sites. would be unduly burdensome at this VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70288 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations time. There remain significant costs and without obtaining approval from the customer information remains secure technical hurdles to encrypting Qualified Individual.168The New York during these transmissions.172 transmissions on internal networks that Insurance Association expressed The Final Rule adopts this paragraph would not be reasonable to impose on concern financial institutions might feel as paragraph (c)(3) without revision. all financial institutions, especially they need to encrypt all customer Secure Development Practices smaller institutions with simpler information because of the risk that the systems that might realize less benefit alternative controls approved by the Proposed paragraph (c)(5) required from this approach. While the Qualified Individual would be ‘‘second financial institutions to ‘‘[a]dopt secure Commission encourages financial guessed’’ in the event unencrypted data development practices for in-house institutions to consider whether it is compromised.169The Commission, developed applications utilized’’ for would be appropriate for them to however, believes this concern is a core ‘‘transmitting, accessing, or storing encrypt the transmission of customer customer information.’’ In this element of information security based information over internal networks, it paragraph, the Commission proposed on risk assessment. Every aspect of an declines to require this for all financial requiring financial institutions to information security program is based institutions.164 address the security of software they on the judgment of the financial Commenters pointed to three develop to handle customer institution and its staff. The Qualified additional concerns about encryption, information, as distinct from the none of which the Commission finds Individual’s decision concerning security of their networks that contain persuasive. First, the Bank Policy alternate controls, like other decisions customer information.173In addition, Institute commented the encryption by the financial institution and its staff, the Proposed Rule required ‘‘procedures requirement would in fact weaken will be subject to review in any for evaluating, assessing, or testing the security by blocking surveillance of the enforcement action to determine security of externally developed information by the financial institution whether the decision was appropriate. If applications [financial institutions] and requiring the ‘‘broad distribution’’ the Qualified Individual is not required utilize to transmit, access, or store of encryption keys.165The Commission to make a formal decision, it is much customer information.’’ This provision does not believe an encryption more likely a decision not to encrypt required financial institutions to take requirement would weaken security. information will be made even if there steps to verify that applications they use Encryption is almost universally is no compensating control, or even to handle customer information are recommended by security experts and made without the Qualified Individual’s secure.174 included in most security standards.166 knowledge. Some commenters argued evaluating Further, new tools have been developed Third, the National Pawnbrokers the security of externally developed to address the issue the Bank Policy Association (‘‘NPA’’) expressed concern software would be too expensive or Institute has raised. Many financial impractical for some financial that if pawnbrokers are required to institutions have monitoring tools on institutions,175while others raised encrypt customer information they may the edge of their networks to monitor different concerns. The American fall out of compliance with state and data leaving the network. It used to be Council on Education suggested, in local regulations concerning transaction the case these network monitoring tools cases in which a financial institution reporting.170NPA stated pawnbrokers could not see the content of encrypted cannot obtain access to a software are often required by state or local law data as it left the corporate network and provider’s code or technical to report every pawn transaction, along was transmitted to the internet.
Nov. 2020). 171Id. at 2. Association (comment 46, NPRM), at 26–27. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70289 infrastructure, then evaluating the Final Rule,179others opposed such a controls on internal access that make security of its software is infeasible.176 requirement. For example, ACE argued multi-factor authentication NADA further suggested in order to a blanket requirement mandating multi- unnecessary.186Another commenter evaluate the security of software, factor authentication for all institutions stated requiring multi-factor financial institutions would need to hire of all sizes and complexities is not the authentication when a customer an expensive IT professional.177 best solution.180The National accesses their information from an The Commission does not agree with Independent Automobile Dealers external network could create problems these assertions. Evaluating the security Association (NIADA) commented the for some institutions.187Finally, the of software does not require access to costs of multi-factor authentication Princeton Center argued the Rule should the source code of that software or would be too high for some financial be amended to clarify that multi-factor access to the provider’s infrastructure. institutions because it would need to be authentication should be required for For example, a provider can supply the built into their information systems internal and external networks.188 steps it took to ensure the software was from scratch.181NIADA also argued Finally, CTIA took issue with the secure, whether it uses encryption to adopting multi-factor authentication proposed requirement that the Qualified transmit information, and the results of would disrupt a financial institution’s Individual be permitted to approve any testing it conducted. In addition, activities as employees had to ‘‘jump ‘‘reasonably equivalent or more secure’’ there are third party services that assess through multiple hoops to log in.’’182 controls if multi-factor authentication is software. An institution can also set up Cisco Systems, Inc. argued that while not feasible, suggesting instead that automated searches regarding multi-factor authentication is an Qualified Individuals be permitted to vulnerabilities, patches, and updates to effective safeguard, it should not be approve ‘‘effective alternative software listed on the financial specifically required by the Rule compensating controls.’’189 institution’s inventory. The exact nature because, while it is currently good of the evaluation required will depend security practice, in the future multi- The Commission disagrees with the on the size of the financial institution factor authentication may become commenters who stated the Rule should and the amount and sensitivity of outdated, and that allowing financial not include a multi-factor customer information associated with institutions to satisfy the Rule in this authentication requirement. As to costs, the software. If the software will be used way could result in inadequate many affordable multi-factor to handle large amounts of extremely protection.183 authentication solutions are available in sensitive information, then a more Other commenters did not dispute the the marketplace.190Most financial thorough evaluation will be warranted. benefits of multi-factor authentication institutions will be able to find a Likewise, the nature of the software generally, but argued the Rule should solution that is both affordable and used will also affect the evaluation. limit the multi-factor authentication workable for their organization. In the Software that has been thoroughly requirement. Some of these commenters cases when that it is not possible, the stated the Rule should only require tested by third parties may need little more than a review of the test results, multi-factor authentication when the Association (comment 46, NPRM), at 28; National financial institution’s risk assessment Independent Automobile Dealers Association while software that has not been widely justifies it.184Others argued there (comment 48, NPRM), at 6; New York Insurance used and tested will require closer Association (comment 31, NPRM), at 1. should be a distinction between internal examination. 186CTIA (comment 34, NPRM), at 11; Electronic access and external access. For example, The Commission adopts proposed Transactions Association (comment 27, NPRM), at paragraph (c)(5) as paragraph (c)(4) of some commenters argued the Rule 3 n.1; U.S. Chamber of Commerce (comment 33, should not require multi-factor NPRM), at 11.
the Final Rule.
id. at 239 (describing how because smart phones email] platforms. Losses from BEC scams overall National Institute of Standards and Technology, have modern secure hardware processors, biometric have increased every year since IC3 began tracking https://csrc.nist.gov/glossary/term/audit-trail (last sensors and readers built in, increasingly the scam in 2013 and have been reported in all 50 accessed Dec. 2, 2020). consumers can get the security they need through states and in 177 countries.’’). 202Princeton University Center for Information the devices they already have by storing 197Consumer Data Industry Association Technology Policy (comment 54, NPRM), at 8; cryptographic authentication keys on the devices (comment 36, NPRM), at 6–7; Cisco Systems, Inc. Electronic Privacy Information Center (comment 55, and then using the phone to activate them). (comment 51, NPRM), at 3–4. NPRM), at 8. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70291 that allow institutions to detect and customer information that is no longer baseline requirement for access and data respond to security incidents.’’203It necessary for their business operations management.218 also stated audit trails ‘‘help understand or other legitimate business purposes.211 Yet other commenters suggested who has accessed the system and what The Proposed Rule allowed the modifying the requirement. NADA activities the user has engaged in.’’204 retention of information when retaining argued that if there was to be a disposal Other commenters argued this the information is required by law or requirement, then it should be modeled requirement imposed unclear after the Disposal Rule, which requires where targeted disposal is not feasible.
obligations or would not improve businesses to properly dispose of Some commenters supported the security.205For example, GPA consumer reports, but does not have an inclusion of a disposal requirement as commented the Proposed Rule conflated explicit requirement to dispose of the use of logs to reconstruct past events proposed or suggested that the disposal information on any particular and the active use of logs to monitor requirements should be strengthened.212 schedule.219ACE suggested modifying user activity.206The American Financial Consumer Reports argued financial the Proposed Rule to require disposal of Services Association argued adding institutions should be required to information only where there is no logging capabilities to some legacy dispose of customer information when it longer any ‘‘legitimate purpose’’ rather systems would be expensive and is no longer needed for the business than any ‘‘legitimate business difficult.207Another commenter argued purpose for which it was gathered.213 purpose.’’220It argued in some cases a the increased use of cloud storage The Princeton Center suggested the Rule financial institution may have legitimate would mean that financial institutions require disposal after a set period unless purposes for retaining information that might not have access to any audit the company can demonstrate a current are not readily defined as ‘‘business’’ trails.208In addition, NADA argued it need for the data and that financial purposes, such as the retention of data did not believe maintenance of logs institutions periodically review their by educational institutions for would increase security but would data practices to minimize their data institutional research or student instead create records that could be retention.214 analytics.221 sought by parties ‘‘seeking to place The Commission believes requiring Several other commenters opposed blame’’ for breaches.209 the disposal of customer information for The Commission believes logging user the disposal requirement as set forth in which the financial information has no activity is a crucial component of the Proposed Rule. Some argued the legitimate business purpose is within information security because in the requirement to dispose of information the authority granted by the GLB Act to event of a security event it allows goes beyond the Commission’s authority protect the security of customer financial institutions to understand under the GLB Act.215NADA argued the information. The disposal of records, what was accessed and when. However, GLB Act does not ‘‘contain[] any both physical and digital, can result in the term ‘‘audit trails’’ may have been authority to require financial exposure of customer information if not unclear in this context. In order to institutions to delete any information’’ performed properly.222Similarly, if clarify that logging user activity is a part and a requirement to have procedures to records are retained when they are no of the user monitoring process, the Final delete information for which a company longer necessary, there is a risk those Rule does not include paragraph (c)(7) has no legitimate business purpose records will be subject to unauthorized of the Proposed Rule and instead would constitute a ‘‘new privacy access. The risk of unauthorized access modifies the user monitoring provision regime.’’216The American Financial may be reasonable where the retention to include a requirement to log user Services Association (AFSA) stated the of data provides some benefit. In activity.210By putting the ‘‘monitoring’’ requirement was too prescriptive and situations where the information is no and ‘‘logging’’ requirements together, the Rule should allow financial longer needed for a legitimate business the Final Rule provides greater clarity institutions to retain information as long purpose, though, the risk to the on the comment raised by the GPA: as that retention complies with the customer information becomes Financial institutions are expected to retention policy created by the financial unreasonable because the retention is no use logging to ‘‘monitor’’ active users institution.217AFSA further argued the longer benefiting the customer or and reconstruct past events. proposed requirement exceeds the financial institution. Disposing of Disposal Procedures Federal banking standards, pointing to unneeded customer information, the FFIEC Cybersecurity Assessment therefore, is a vital part of protecting Proposed paragraph (c)(8) required Tool, which sets disposal of records customer information and serves the financial institutions to develop ‘‘according to documented requirements purpose of the GLB Act.223 procedures for the secure disposal of and within expected time frames’’ as a 218Cybersecurity Assessment Tool, FFIEC, 203Princeton University Center for Information https://www.ffiec.gov/pdf/cybersecurity/FFIEC_ Technology Policy (comment 54, NPRM), at 8. 211Proposed 16 CFR 314.4(c)(8). CAT_May_2017_Cybersecurity_Maturity_June2.pdf 204Id. 212Princeton University Center for Information at 37 (last visited December 3, 2020). 205National Automobile Dealers Association Technology Policy (comment 54, NPRM), at 8; 219National Automobile Dealers Association (comment 46, NPRM), at 30–31; National Electronic Privacy Information Center (comment 55, (comment 46, NPRM), at 32. Independent Automobile Dealers Association NPRM), at 8; Consumer Reports (comment 52, 220American Council on Education (comment 24, (comment 48, NPRM), at 6; American Financial NPRM), at 7. NPRM), at 12. Services Association (comment 41, NPRM), at 6; 213Consumer Reports (comment 52, NPRM), at 7– 221Id. Global Privacy Alliance (comment 38, NPRM), at 8. 222See, e.g., Complaint, Rite Aid Corp., FTC No.
11. 214Princeton University Center for Information 072–3121 (November 22, 2010) (alleging company 206Global Privacy Alliance (comment 38, NPRM), Technology Policy (comment 54, NPRM), at 8–9. failed to provide reasonable data security when it at 11. 215National Automobile Dealers Association failed to implement policies and procedures to 207American Financial Services Association (comment 46, NPRM), at 31; National Independent dispose securely of personal information). (comment 41, NPRM), at 6. Automobile Dealers Association (comment 48, 223As to the Princeton Center’s suggestion 208American Council of Education (comment 24, NPRM), at 6. financial institutions periodically review their NPRM), at 12. 216National Automobile Dealers Association disposal practices (Princeton University Center for 209National Automobile Dealers Association (comment 46, NPRM), at 31–32. Information Technology Policy (comment 54, (comment 46, NPRM), at 30–31. 217American Financial Service Association NPRM), at 8–9), the Commission believes this 210See Final Rule, 16 CFR 314.4(c)(8). (comment 41, NPRM), at 6. Continued VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70292 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations The Commission disagrees with machines to its information system reason, all financial institutions must commenters who suggested narrowing would need to evaluate the security of have procedures for when the changes the disposal requirement or doing away the new devices and the effect of adding occur. As with all of the requirements with it altogether. As noted above, them to the existing network. of the Rule, though, the exact nature of although no disposal requirement Some commenters supported this these procedures will vary depending appears in FFIEC guidelines, those requirement,226while others stated it on the size, complexity and nature of guidelines represent a different was too broad and would impose the information system. A simple regulatory approach and are not an unnecessary burdens on financial system may have equally simple change appropriate model for the Safeguards institutions.227In particular, NADA management procedures. Rule. argued financial institutions that have The Commission adopts this proposed Finally, as to setting retention periods not made changes in their systems ‘‘for paragraph as paragraph (c)(7) of the or narrowing the legitimate business some time’’ should not be required to Final Rule without change. purposes for which financial create procedures for change System Monitoring institutions may retain customer management.228ACE argued including a information, the Commission recognizes change management requirement is Proposed paragraph (c)(10) required financial institutions need some unnecessary because such a requirement financial institutions to implement flexibility. Whereas customers may is ‘‘generally incorporated into an policies and procedures designed ‘‘to want to, for example, access and transfer organization’s IT operations’’ for non- monitor the activity of authorized users older data in some circumstances, in security purposes and the security and detect unauthorized access or use other circumstances, retaining such data considerations of those changes will be of, or tampering with, customer would not be consistent with any considered as part of those information by such users.’’232The legitimate business purpose. The procedures.229 Proposed Rule required financial Commission believes the Princeton Alterations to an information system institutions to take steps to monitor Center’s recommendation that or network introduce heightened risk of those users and their activities related to companies be required to delete cybersecurity incidents;230thus, it is customer information in a manner information after a set period unless the important to expressly require change adapted to the financial institution’s information is still needed for a management to be a part of an particular operations and needs. legitimate business purpose properly information security program. The NADA stated this requirement would balances the needs of financial Commission agrees with ACE that many create unnecessary expense because it institutions with the need to protect financial institutions will already have would require financial institutions to customer information. Thus, the change management procedures in ‘‘continually monitor all authorized Commission modifies proposed place. If those procedures adequately use’’ and would mean ‘‘yet more new paragraph (c)(6) to require the deletion consider security issues involved in the employees or third-party IT of customer information two years after change, then they may satisfy this consultants.’’233The Commission the last time the information is used in requirement. disagrees, however, noting that connection with providing a product or As to the comment a financial monitoring of system use can be service to the customer unless the institution that has not made changes to automated.234There is no requirement a information is required for a legitimate its environment in some time should separate staff member would be business purpose as paragraph (c)(6)(i) not be required to have change required to exclusively monitor system of the Final Rule. In addition, paragraph management processes, the Commission use. (c)(6)(ii) of the Final Rule requires disagrees. Few information systems can In addition, one commenter stated financial institutions to periodically remain unchanged for a significant monitoring the use of paper files is review their policies to minimize the period of time, given the changing impossible and should be excluded unnecessary retention of information. technical requirements for business and from this provision.235The Commission security. Indeed, NADA acknowledges acknowledges monitoring of paper Change Management financial institutions will need to records is qualitatively different than Proposed paragraph (c)(9) required ‘‘adapt[] their programs to keep up with the monitoring of electronic records. financial institutions to adopt changes in data security.’’231For this This requirement goes hand in hand procedures for change management.224 with limiting access to documents, Change management procedures govern 226Electronic Privacy Information Center whether electronic or paper. For the addition, removal, or modification (comment 55, NPRM), at 8; National Consumer Law example, if an institution has a file room of elements of an information system.225 Center and others, (comment 58, NPRM) at 3. and access to the room is limited to This paragraph required financial NP 2 R 27 M A ) m , a e t r 1 ic 2 a – n 1 3 C ; o N un at c i i o l n o a n l A Ed u u to c m at o io b n il e (c D om ea m le e r n s t 24, particular employees (e.g., the payroll institutions to develop procedures to Association (comment 46, NPRM), at 33. office), the institution should have assess the security of devices, networks, 228National Automobile Dealers Association measures in place to ensure those access and other items to be added to their (comment 46, NPRM), at 32–33. controls are in fact being utilized (e.g., information system, or the effect of 229American Council on Education (comment 24, sign in with front desk, logging of key removing such items or otherwise NPRM), at 12. card access, security camera). 230See Remarks of Rocio Baeza, Safeguards As discussed above, this paragraph is modifying the information system. For Workshop Tr., supra note 17, at 95 (‘‘[E]very time example, a financial institution that there is a change to any of these [network] amended to also require the logging of adds additional servers or other environments, that is creating additional risk.’’); user activity, but is otherwise adopted Remarks of Scott Wallace, Safeguards Workshop as proposed as paragraph (c)(8). Tr., supra note 17, at 147–48 (giving an example of requirement is already encompassed in the an incident in which network changes led to the requirement contained in §314.4(g) to periodically exposure of sensitive information); Remarks of 232Proposed 16 CFR 314.4(c)(10). review their safeguards overall. Matthew Green, Safeguards Workshop Tr., supra 233National Automobile Dealer Association 224Proposed 16 CFR 314.4(c)(9). note 17, at 252 (noting it is ‘‘a little dangerous’’ to (comment 46, NPRM), at 33. 225See, e.g., Change Management, Rutgers OIT make ‘‘major changes’’ to an information system at 234See Remarks of Nicholas Weaver, Safeguards Information Security Office, https://rusecure. a time of heightened stress). Workshop Tr., supra note 17, at 124–25. rutgers.edu/content/change-management (last 231National Automobile Dealers Association 235American Financial Services Association accessed 1 Dec. 2020). (comment 46, NPRM), at 33 n.96. (comment 41, NPRM), at 6. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70293 Proposed Paragraph (d) were ‘‘overlapping and confusing’’ and form. Accordingly, the final version of suggested the Commission avoid paragraph (d)(2) is limited to safeguards Proposed paragraph (d)(1) retained confusion by including continuous on information systems. the current Rule’s requirement that monitoring, penetration testing, The Commission also agrees biannual financial institutions ‘‘[r]egularly test or vulnerability scanning, periodic risk vulnerability testing may not be otherwise monitor the effectiveness of assessment reviews, and logging as sufficient to detect new threats. Thus, the safeguards’ key controls, systems, optional components of an information given the relative ease with which and procedures, including those to security program to be included on an vulnerability assessments can be detect actual and attempted attacks on, as-needed basis.242Some commenters performed, it modifies the Final Rule to or intrusions into, information systems.’’ recommended the testing requirement require financial institutions to perform Proposed paragraph (d)(2) provided be limited to electronic data and assessments when there is an elevated further detail to this requirement by exclude monitoring of physical data.243 risk of new vulnerabilities having been stating the monitoring must take the The American Financial Services introduced into their information form of either ‘‘continuous monitoring’’ Association argued the testing of systems, in addition to the required or ‘‘periodic penetration testing and physical safeguards required by biannual assessments. vulnerability assessments.’’ The paragraph (d)(1) ‘‘would be Beyond these modifications, the proposal explained continuous impossible.’’244Finally, CTIA argued, Commission believes the proposal monitoring is any system that allows for entities that choose the approach of struck the right balance between real-time, ongoing monitoring of an penetration and vulnerability testing, flexibility and protection of customer information system’s security, including these tests should be required less information, and adopts the proposed monitoring for security threats, regularly.245 provision as final. For commenters misconfigured systems, and other On the other hand, the Princeton concerned about costs of testing and vulnerabilities.236For those who elected Center suggested, rather than requiring continuous monitoring, the Commission to engage in periodic penetration testing either continuous monitoring or notes the Rule requires one, not both. and vulnerability assessment, the penetration testing, the Rule should Although many financial institutions proposal required penetration testing at require both. It noted continuous may choose to use both, the least once annually (or more frequently monitoring is very effective at detecting Commission agrees the costs of if called for in the financial institution’s problems with, and threats to, ‘‘off-the- requiring both for all financial risk assessment) and vulnerability shelf systems’’ but penetration testing is institutions may not be justified. 248As assessments at least twice a year.237 better at ‘‘for checking the interaction to arguments that the testing required by Some commenters thought the between systems, proprietary systems, the Rule is too frequent and will proposal went too far in requiring or subtle security issues.’’246Similarly, therefore be too costly, the Commission continuous monitoring or penetration the MSRT was concerned that the does not agree vulnerability assessments and vulnerability testing, while others Proposed Rule suggested annual will be costly. Indeed, there are thought the proposal did not go far penetration testing alone could protect resources for free and automated enough. On one hand, ACE argued financial institutions, rather than serve vulnerability assessments.249And continuous monitoring is too as a supplement to proper although the Commission acknowledges burdensome and difficult for some monitoring.247 penetration testing can be a somewhat financial institutions,238particularly The Commission agrees with lengthy and costly process for large or those with ‘‘highly decentralized commenters who pointed out the complex systems,250a longer period systems,’’ such as colleges and difficulty of applying certain testing between penetration tests will leave universities, which could be required to requirements to physical safeguards. information systems vulnerable to monitor their entire system.239ACE Although the general testing attacks that exploit weaknesses further suggested the Rule should not requirement set forth in paragraph (d)(1) normally revealed by penetration prescribe any particular testing should apply to physical safeguards testing. methodology or schedule and should (e.g., testing effectiveness of physical Two other portions of the Final Rule allow financial institutions to develop a locks), the continuous monitoring, should help financial institutions testing approach appropriate for the vulnerability assessment, and concerned about the costs of monitoring financial institution.240The NPA penetration testing in paragraph (d)(2) is and testing. First, because the commented penetration and not relevant to information in physical Commission is limiting the definition of vulnerability testing would be too ‘‘information system’’ in the Final Rule, expensive for small pawnbrokers with 242Global Privacy Alliance (comment 38, NPRM), financial institutions will be able to small staffs and a small customer base, at 10–11. limit this provision’s application by 243National Independent Automobile Dealers where their members would be ‘‘likely segmenting their network and Association (comment 48, NPRM), at 6; American to notice a penetration of our Financial Services Association (comment 41, conducting monitoring or testing only of records.’’241One commenter stated the NPRM), at 6. systems that contain customer requirements for monitoring and testing 244American Financial Services Association information or that are connected to (comment 41, NPRM), at 6. such systems. Second, this requirement 245CTIA (comment 34, NPRM) at 12–13 (arguing 236Financial institutions that choose the option of penetration testing should be required only once does not apply to those institutions that continuous monitoring would also be satisfying every two years and vulnerability testing be §314.4(c)(8). required only once a year). 248The Commission believes a system for 237Proposed 16 CFR 314.4(d)(1) and (2). 246Princeton University Center for Information continuous monitoring will include some form of 238American Council on Education (comment 24, Technology Policy (comment 54, NPRM), at 5. vulnerability assessment as part of monitoring the NPRM), at 13–14. 247Money Services Round Table (comment 53, information system. 239American Council on Education (comment 24, NPRM), at 9; see also Gusto and others (Comment 249Remarks of Frederick Lee, Safeguards NPRM), at 13. 11, Workshop), at 2 (arguing penetration testing and Workshop Tr., supra note 17, at 139–40. 240American Council on Education (comment 24, vulnerability assessments both have their 250See id. at 129–30 (noting the cost of a NPRM), at 14. weaknesses and financial institutions should penetration test can increase significantly 241National Pawnbrokers Association (comment develop a testing program that it is appropriate for depending on the complexity of the system to be 3, Workshop), at 2. them). tested and the scope of the test). VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70294 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations maintain records on fewer than 5,000 requirement,252the U.S. Chamber of to ensure information security individuals. Accordingly, for example, Commerce argued the Rule should not personnel used by financial institutions it should not apply to businesses small have any specific training requirements are qualified for their positions and enough for staff to personally know a at all.253NADA stated the requirement information security programs are majority of customers. that the training be ‘‘updated to reflect sufficiently staffed. risks identified by the risk assessment’’ Some commenters argued this Finally, the Commission does not will require companies to develop provision was too vague because it does believe the testing requirements are individualized training programs to suit not define what personnel are necessary duplicative of other provisions of the their financial institution and that such and what ‘‘qualified’’ means.256NADA Final Rule. The provision relating to a process would be expensive and argued hiring additional staff to meet additional risk assessments, unnecessary because ‘‘general security this requirement could be prohibitively §314.4(b)(2), requires a financial awareness’’ is generally enough for most expensive.257 institution to reevaluate its risks and to financial institutions.254 As discussed in relation to the determine if safeguards should be Given the current Rule includes a appointment of a ‘‘Qualified modified or added—it does not require similar training requirement and Individual,’’ the Commission believes a testing to detect threats and technical training remains a vital part of effective more specific definition of ‘‘qualified’’ vulnerabilities in the existing system.
employees, additional staffing may not personnel will be trained in current be necessary to meet the demands of the security practices. The Commission Proposed paragraphs (f)(1) and (2) Final Rule. Second, the required staffing views the use of such a service provider retained the current Rule’s requirement, will vary greatly based on the size and as meeting this requirement, as the found in existing paragraphs (d)(1) and complexity of the information system. A financial institution is ‘‘providing’’ the (2), to oversee service providers, and financial institution with an extremely service as part of the price it pays to the added a paragraph (f)(3), requiring simple system may not require even a service provider. Thus, the Final Rule financial institutions also periodically single full time employee. Finally, the adopts paragraph (e)(3) as proposed.264 assess service providers ‘‘based on the Rule allows the use of service providers risk they present and the continued to meet this requirement. This can Verification of Current Knowledge adequacy of their safeguards.’’267The significantly reduce costs as services Proposed paragraph (e)(4) required current Rule expressly requires an exist to share the expense of qualified financial institutions to ‘‘[v]erify[ ] that assessment of service providers’ personnel and offer information security key information security personnel take safeguards only at the onboarding stage; support at significantly less than the steps to maintain current knowledge of proposed paragraph (f)(3) required cost of employing a single qualified changing information security threats financial institutions to monitor their employee.260The Commission and countermeasures.’’265This service providers on an ongoing basis to continues to believe utilizing qualified requirement was intended to ensure they are maintaining adequate and sufficient information security complement the proposed requirement safeguards to protect customer personnel is a vital part of any regarding ongoing training of data information they possess or access.268 information security program and security personnel, by requiring Several commenters argued it would accordingly, adopts proposed paragraph verification such training has taken be costly and difficult for some financial (e)(2) in the Final Rule without place. institutions to periodically assess their NADA argued this requirement service providers.269These commenters modification.
Rule requiring only ‘‘assessment’’ of oversight requirement. The fact that a service providers, and argued financial company maintains an information Paragraph (g) of the Proposed Rule institutions should be required to security certification may be a retained the language of existing monitor their service providers for significant part of assessing the paragraph (e) in the current Rule, which compliance.273Yet other commenters adequacy of a service provider’s requires financial institutions to expressed confusion over the term safeguards, but the Commission evaluate and adjust their information ‘‘service provider,’’ asking whether it declines to prescribe a one-size-fits all security programs in light of the result would cover national consumer approach, given the variation in size of testing required by this section, reporting agencies that smaller financial and complexity of financial institutions material changes to their operations or institutions would be hard-pressed to and their service providers. business arrangements, or any other assess.274 To avoid imposing undue costs on circumstances they know or have reason The Commission retains the service financial institutions, the Commission to know may have a material impact on provider oversight requirement from declines to require ongoing monitoring, their information security program. The proposed paragraph (f) without rather than periodic assessment, as Commission received no comments on modification. Some high profile recommended by Consumer Reports. this paragraph and adopts the language breaches have been caused by service The Commission believes periodic of the Proposed Rule. providers’ security failures,275and the assessment strikes the right balance Proposed Paragraph (h)
Commission views the regular between protecting consumers and assessment of the security risks of imposing undue costs on financial Proposed paragraph (h) required institutions. The Commission financial institutions to establish service providers as an important part of acknowledges financial institutions may written incident response plans that maintaining the strength of a financial have limited bargaining power in addressed (1) the goals of the plan; (2) institution’s safeguards.
285National Automobile Dealer Association 289American Council on Education (comment 24, 294See, e.g., FTC, Data Breach Response: A Guide (comment 46, NPRM), at 12, 38–39. NPA also asked NPRM), at 15. for Business (2019), www.ftc.gov/tips-advice/ for greater detail on what constitutes an ‘‘incident.’’ 290Id. business-center/guidance/data-breach-response- National Pawnbroker Association (comment 32, 291National Pawnbroker Association (comment guide-business; NIST, Guide for Cybersecurity NPRM), at 4. 32, NPRM), at 4. Event Recovery (2016), nvlpubs.nist.gov/nistpubs/ 286American Council on Education (comment 24, 292See Remarks of Serge Jorgenson, Safeguards SpecialPublications/NIST.SP.800-184.pdf; Orion NPRM), at 15. Workshop Tr., supra note 17, at 52 (observing a Cassetto, Incident Response Plan 101: How to Build 287Mortgage Bankers Association (comment 26, prompt response to an incident can prevent a One, Templates and Examples, Exabeam: NPRM), at 4. ‘‘threat actor running around in my environment for Information Security Blog (November 21, 2018), 288Mortgage Bankers Association (comment 26, days, months, years, and able to access anything www.exabeam.com/incident-response/incident- NPRM), at 4. they want.’’). response-plan/ (last visited December 2, 2020). VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70298 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations whether financial institutions must plan because they ‘‘ensure independent program and financial institution’s for security events affecting data that assessment of whether a security compliance with the Safeguards Rule; has been transferred to various kinds of incident represents a threat to consumer and (2) material matters related to the third parties. Where a financial privacy.’’299 information security program, institution has voluntarily opted to store Other commenters opposed the addressing issues such as risk its customer information in the cloud, to inclusion of a reporting requirement.300 assessment, risk management and whatever extent the information is no ACE argued such a requirement ‘‘would control decisions, service provider longer in the ‘‘possession’’ of the simply add another layer on top of an arrangements, results of testing, security financial institution, it is certainly already crowded list of federal and state events or violations and management’s within the institution’s ‘‘control.’’ By law enforcement contacts and state responses thereto, and contrast, customer information that has breach reporting requirements.’’301ACE recommendations for changes in the been obtained by a third party such as also suggested any notification information security program.304For a law enforcement agency, over whom requirement should be limited to a more financial institutions that did not have a financial institution has no authority restricted definition of ‘‘security event’’ a board of directors or equivalent, the and of whose actions the financial than the definition in the Proposed proposal required the CISO to make the institution has no knowledge, cannot Rule, so financial institutions would report to a senior officer responsible for fairly be said to be in the financial only be required to report incidents that the financial institution’s information institution’s control. Consequently, the could lead to consumer harm.302 security program. financial institution need not account The Commission agrees with One commenter supported this for possible disclosures of that commenters that stated a requirement requirement.305Additionally, several information by the third party.295 financial institutions report security workshop participants emphasized the Notification of Security Events to the events to the Commission would have value of communication between Commission many benefits, including allowing the information security leaders and Commission to identify emerging threats corporate boards or their equivalent. For The Commission also requested and assisting the Commission’s example, workshop participant Michele comment on whether the Rule should enforcement of the Rule. In addition, Norin stated it is ‘‘important’’ for the require financial institutions to report such a requirement would be unlikely to topic of information security to be security events to the Commission.
Princeton University Center for Information 299National Association of Federally-Insured involvement from Board and senior management). Technology Policy (comment 54, NPRM), at 7; Credit Unions (comment 43, NPRM), at 1–2. 306Remarks of Michele Norin, Safeguards Credit Union National Association (comment 30, 300National Independent Automobile Dealers Workshop Tr., supra note 17, at 194. NPRM), at 2; Heartland Credit Union Association Association (comment 48, NPRM), at 7; American 307Remarks of Adrienne Allen, Safeguards (comment 42, NPRM), at 2; National Association of Council on Education (comment 24, NPRM), at 15. Workshop Tr., supra note 17, at 199–200. Federally-Insured Credit Unions (comment 43, 301American Council on Education (comment 24, 308American Council on Education (comment 24, NPRM), at 1–2. NPRM), at 15. NPRM), at 16.
312HITRUST (comment 18, NPRM), at 4. the contents of the report. The two §314.4(e), requiring training for 313See Remarks of Karthik Rangarajan, commenters who addressed this Safeguards Workshop Tr., supra note 17, at (‘‘If question stated they should not.318ACE personnel; §314.4(f)(3), requiring quarter over quarter, year over year, this watermark periodic assessment of service isn’t reducing, then board of directors should be noted ‘‘governing boards generally will providers; §314.4(h), requiring a written able to challenge us and say maybe you’re not not have the knowledge and expertise to mapping your risks correctly, or vice versa if it’s incident response plan; and §314.4(i), reducing but we’re seeing more incidents, we’re requiring annual written reports from 316Indeed, workshop participants discussed a seeing potential breaches, things like that, then the the Qualified Individual. All other variety of strategies for meaningful communication board of directors should be able to say maybe you don’t have the right risk quantification framework between security personnel and senior leadership. requirements under the Safeguards Rule or the right risk management framework.’’). Participants noted the proper content, style, and would remain in effect during this six- 314Workshop participants Adrienne Allen, cadence of reporting (beyond the minimum annual month period. These remaining report) will vary depending on, among other things, Karthik Rangarajan, and Michele Norin each requirements largely mirrored the the type of financial institution in question and the emphasized this point. See Safeguards Workshop Tr., supra note 17, pp. 201–09. level of familiarity of leadership with the relevant requirements of the existing Rule. technical issues. See Safeguards Workshop Tr., All commenters that addressed this 315See Juhee Kwon Jackie Rees Ulmer, & Tawei Wang, The Association Between Top Management supra note 17, at 194–200. provision noted the difficulty of Involvement and Compensation and Information 317NADA argued reports required by this complying with some of the provisions S Sp ec ri u n r g it y 2 0 B 1 r 3 e , a a c t h 2 es 1 , 9 J – o 2 u 3 r 6 n a (‘ l ‘ . of . In . f t o h r e m in at v i o o l n v e S m ys e t n e t m o s f , p R r u o l v e i s s t i a o t n e d w t o h u e l y d w be o u e l x d p n en ee si d v e to b b e e c a p u r s e e p a th re e d P b ro y p a o sed of the Proposed Rule, and argued an IT executive decreases the probability of ‘‘CISO,’’ which NADA takes to mean a highly financial institutions should be given information security breach reports by about 35 compensated expert of the type retained by the more time to comply with them. ACE percent . . .’’); Julia L. Higgs, Robert E. Pinsker, most sophisticated large institutions. National suggested financial institutions be given Thomas Joseph Smith, & George Young, The Automobile Dealer Association (comment 46, Relationship Between Board-Level Technology NPRM), at 41. As discussed above, however, the one year to create a plan for compliance Committees and Reported Security Breaches, Rule does not require all financial institutions to and two years to come into actual Journal of Information Systems, Fall 2016, at 79–98 retain such an expert. Instead, the report will be compliance.320AFSA suggested (‘‘[A]s a technology committee becomes more made by the Qualified Individual, whose expertise compliance not be required for two established, its firm is not as likely to be breached. and compensation will vary according to the size To obtain further evidence on the perceived value and complexity of a financial institution’s of a technology committee, this study uses a returns information system. 319American Council on Education (comment 24, analysis and finds that the presence of a technology 318National Automobile Dealer Association NPRM), at 16. committee mitigates the negative abnormal stock (comment 46, NPRM), at 41 n.126; American 320American Council on Education (comment 24, returns arising from external breaches.’’). Council on Education (comment 24, NPRM), at 16. NPRM), at 4–5. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70300 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations years.321ACA International requested customers would be determined.325 institutions should also be exempt from the effective date be one year after NPA asked whether the number of the requirement to designate a single publication of the Rule.322 customers would be counted on an qualified individual to oversee their The Commission agrees some annual basis or include all records the information security programs.335The financial institutions may need longer to financial institution maintains. It also National Federation of Independent modify their information security asked if each transaction with a Business argued businesses with 15 or programs to comply with the new customer would be counted fewer employees should be exempted requirements in the Final Rule, separately.326 from the Rule entirely and instead held especially given the current pandemic Some commenters argued the number only to a requirement to take and the strains it is placing on of customers whose records a financial ‘‘commercially reasonable steps’’ to businesses. Accordingly, the Final Rule institution maintains was the wrong safeguard customer information.336The extends the effective date for these measure by which to assess whether the Small Business Administration Office of enumerated provisions to one year after exemption should apply. For example, Advocacy suggested, in the absence of the publication of this document. commenters suggested the Rule should additional information regarding the take into account businesses with impact of the proposed changes on Proposed §314.6: Exceptions revenue beneath a certain threshold,327 small businesses, the Rule should Proposed §314.6 exempted financial the number of students enrolled at ‘‘maintain the status quo’’ for small institutions that maintain customer covered educational institutions,328or entities as defined by the Small information concerning fewer than five the number of individuals employed by Business Administration’s size thousand consumers from certain the financial institution.329 standards.337 requirements of the Proposed Rule, Additionally, some commenters On the other hand, other commenters namely §314.4(b)(1), requiring a written argued the threshold for application of opposed the inclusion of any risk assessment; §314.4(d)(2), requiring the exemption should be higher. ACA exemption. The Independent continuous monitoring or annual International suggested the exemption Community Bankers of America noted penetration testing and biannual should apply to all financial institutions the Federal Financial Institutions vulnerability assessment; §314.4(h), maintaining records concerning fewer Examination Council Interagency requiring a written incident response than 10,000 customers.330AFSA Guidelines Establishing Standards for plan; and §314.4(i), requiring an annual suggested a 50,000 customer Safeguarding Customer Information written report by the CISO (as revised, threshold.331NADA332and NIADA333 (‘‘FFIEC Guidelines’’), which detail how the Qualified Individual).323This argued the threshold should be raised to depository institutions are required to proposed section was designed to 100,000 customers. Without proposing a protect customer information, include reduce the burden on smaller financial specific alternative, NPA expressed no exemption for smaller institutions institutions. concern the 5,000-customer threshold and suggested the Rule should also have The Commission sought comment on may be too low, noting pawnbrokers no exemption and apply equally to all financial institutions.338 whether it was appropriate to include who accept firearms as collateral are Under the existing Rule, there is no such an exemption, whether the specific required to keep customer records exception for smaller entities. Still, the exemptions were appropriate, whether related to certain transactions for twenty Commission continues to believe it is the use of the number of customers years.334 appropriate to exempt small businesses concerning whom the financial As to the substance of the exemption, from some of the revised Rule’s institution retains customer information some commenters felt it did not go far requirements. Although the FFIEC is the most effective way to determine enough to relieve the burden of the rule Guidelines do not exempt small which financial institutions should be for small financial institutions. ACA businesses from its requirements, the exempted and, if so, whether five International proposed eligible financial FFIEC Guidelines regulate only thousand customers was an appropriate depository financial institutions subject number. After reviewing the comments 325National Pawnbrokers Association (comment to an entirely different regulatory received, the Commission retains the 32, NPRM), at 6.
exemption for financial institutions 326Id.; see also National Independent Automobile regime, including supervision by their Dealers Association (comment 48, NPRM), at 3. regulatory agencies. While the with fewer than 5,000 customers as 327ACA International (comment 45, NPRM), at provisions from which eligible financial proposed.
decision to base this exemption on the (comment 41, NPRM), at 3–4. 336National Federation of Independent Business number of customers whose information 332National Automobile Dealers Association (comment 16, NPRM), at 4. the financial institution maintains, but (comment 46, NPRM), at 43–44. NADA also 337Small Business Administration Office of questioned how the number of suggested information about customers for which Advocacy (comment 28, NPRM), at 6. the nonpublic information has been removed 338Independent Community Bankers of America should not be counted to the total. If the (comment 35, NPRM), at 4; see also American 321American Financial Services Association information is anonymized or otherwise Escrow (comment 6, Workshop), at 3 (arguing even (comment 41, NPRM), at 7. transformed so it is no longer reasonably linkable small companies may need to comply with all 322ACA International (comment 45, NPRM), at to a customer, that information will not count portions of the Rule to maintain consumer 10–11. towards the exemption. NADA’s example of confidence); see also Caiting Wang (Comment 6, 323Proposed 16 CFR 314.6. retaining only ‘‘name, phone number, address, and Privacy) (suggesting exempted provisions should be 324Consumer Reports (comment 52, NPRM), at 6; VIN of the vehicle they own,’’ would still count as optional for smaller businesses, or the Commission see also Credit Union National Association customer information under the Rule. create a fund to enable small businesses to comply (comment 30, NPRM), at 2 (noting the exemption 333National Independent Automobile Dealers with these provisions). will be helpful for smaller businesses, but Association (comment 48, NPRM), at 3. 339See, e.g., Remarks of Brian McManamon, suggesting other changes to the Proposed Rule so 334National Pawnbrokers Association (comment Safeguards Workshop Tr., supra note 17, at 85 the exemption is not required). 32, NPRM), at 6. (noting continuous monitoring allows organizations VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70301 those provisions may be less necessary While a business’s revenue or number of ensure financial institutions of all sizes in situations where the overall volume employees may provide a measure of continue to adequately protect customer of retained data is low. This is true in the burden of compliance for that information in an environment of part because the potential for business, these figures do not capture increasing cybersecurity risk, while cumulative consumer harm is less consumer risk. By contrast, the number avoiding the imposition of undue where fewer consumers’ information of individuals about whom a financial burden. may be exposed as the result of a institution maintains customer
financial institution communicates Commission believes any burden In addition, the amendments modify internally and externally, and the the Safeguards Rule to include more imposed by the revised Rule is structure of the financial institution’s detailed requirements for the substantially mitigated by the fact the information systems. Likewise, the information security program required Rule continues to be process-based, proposed requirement for Qualified by the Rule. flexible, and based on the financial institution’s size and complexity. In Individuals to produce annual reports
V. Regulatory Flexibility Act the FTC sought public comment, both in comments concerned about the burden the regulatory review and in the of the amendments, the Commission The Regulatory Flexibility Act (RFA), proposed rule context, specifically extended the effective date from six as amended by the Small Business related to the costs and benefits of months after the publication of the Final Regulatory Enforcement Fairness Act of existing and proposed Rule Rule to one year after the publication to 1996, requires an agency to either requirements. Following the initial allow financial institutions additional provide an Initial Regulatory Flexibility round of commenting, the Commission time to come into compliance with the Analysis (IRFA) with a proposed Rule, conducted the FTC Safeguards revised Rule. In addition, in response to or certify that the proposed Rule will Workshop and solicited additional comments that argued hiring a chief not have a significant impact on a public comments with the explicit goal information security officer would be substantial number of small entities.348 of gathering additional data relating to prohibitively expensive for small the costs and benefits of the proposed The Commission published an Initial financial institutions, the Commission changes.349As detailed throughout this Regulatory Flexibility Analysis in order amended the rule to clarify such an document, the Commission believes to inquire into the impact of the employee was not required for all there is a strong evidentiary basis for the Proposed Rule on small entities. In financial institutions. The Final Rule is issuance of the Final Rule.
response, the Commission received modified to clarify a financial The Office of Advocacy also argued comments that argued the revision to institution need only appoint an the Proposed Rule’s requirements were the Safeguards Rule would be unduly individual who is qualified to unduly prescriptive and should not be burdensome for smaller financial coordinate its information security enacted as they apply to small institutions. The discussion below businesses until the Commission can program, and those qualifications will summarizes these comments and the vary based on the complexity of the Commission’s response to them. 349See Public Workshop Examining Information program and size and nature of the Security for Financial Institutions and Information Related to Changes to the Safeguards Rule, 85 FR 350Small Business Administration Office of 3485 U.S.C. 603 et seq. 13082 (Mar. 6, 2020). Advocacy (comment 28, NPRM), at 6. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70303 financial institution. The Commission not expected to have an impact on The Commission believes the also clarified employee training covered financial institutions, including protection of consumers’ financial programs need to be updated only as those that may be small entities. (The information is of the utmost importance necessary, to respond to a comment preceding section of this analysis and the cost of the safeguards required regular updating would be difficult for discusses classes of covered financial to provide that protection is justified smaller financial institutions. institutions that may qualify as small and necessary. The Commission entities.) The addition of ‘‘finders’’ to carefully balanced the cost of these 3. Estimate of Number of Small Entities the definition of financial institutions requirements with the need to protect to Which the Amendments Will Apply imposes the obligations of the Rule on consumer information and has made As previously discussed in the IRFA, entities that engage in ‘‘finding’’ activity every effort to ensure the Final Rule determining a precise estimate of the and also collect customer information. retains flexibility so financial number of small entities351—including The addition of more detailed institutions can tailor information newly covered entities under the requirements may require some security programs to the size and modified definition of financial financial institutions to perform complexity of the financial institution, institution—is not readily feasible. additional risk assessments or the nature and scope of its activities, Financial institutions already covered monitoring, or to create additional and the sensitivity of any customer by the Rule as originally promulgated safeguards as set forth in the Proposed information at issue. include lenders, financial advisors, loan Rule. These obligations may require
are. The Commission requested compliance costs (e.g., legal, new and the sensitivity of any customer comment and information on the equipment or systems, modifications to information at issue. The amendments number of ‘‘finders’’ that would be policies or procedures), but, as include certain design standards (e.g., a covered by the Rule’s modified discussed above, the Commission company must implement encryption, definition of ‘‘financial institution,’’ and believes these are limited by several authentication, and incident response) how many of those finders, if any, are factors, including the flexibility of the in the Rule, in addition to the small entities. The Commission received Rule, the existing safeguards in place to performance standards (reasonable no comments that addressed this comply with the existing Rule, and the security) the Rule currently uses. As question. exemption for financial institutions that discussed, while these design standards maintain less consumer information. may introduce some additional burden, 4. Projected Reporting, Recordkeeping, Although two commenters provided the Commission believes many financial and Other Compliance Requirements summaries of the expected expenses for institutions’ existing information The Rule does not impose any some financial institutions to comply security programs already meet most of reporting or any specific recordkeeping with the Rule, those estimates did not these requirements. In addition, the requirements as discussed earlier. See provide sufficient detail to fully requirements in the Final Rule, like supra Section IV (Paperwork Reduction evaluate whether they were accurate or those in the existing Rule, are designed Act). With regard to other compliance representative of other financial to allow financial institutions flexibility requirements, the addition of definitions institutions and appeared to be based, at in how and whether they should be and examples from the Privacy Rule is least in part, on a misunderstanding of implemented. For example, the the requirement to appoint a Qualified requirement encryption be used to 351The U.S. Small Business Administration Table Individual. The Commission believes, protect customer information in transit of Small Business Size Standards Matched to North for most smaller financial institutions, and at rest may be met with effective American Industry Classification System Codes there are very low-cost solutions for any alternative compensating controls if (‘‘NAICS’’) are generally expressed in either millions of dollars or number of employees. A size additional duties imposed by the Final encryption is infeasible for a given standard is the largest a business can be and still Rule. This view is supported by the financial institution. qualify as a small business for Federal Government comments of several experts at the In addition, the amendments exempt programs. For the most part, size standards are the Safeguards Rule Workshop.352 financial institutions that maintain annual receipts or the average employment of a relatively small amounts of customer firm. Depending on the nature of the financial services an institution provides, the size standard 352See, e.g., Remarks of Brian McManamon, information from certain requirements varies. By way of example, mortgage and Safeguards Workshop Tr., supra note 17, at 78 of the Final Rule. The exemptions nonmortgage loan brokers (NAICS code 522310) are (describing virtual CISO services); Matthew Green, would apply to financial institutions classified as small if their annual receipts are $8.0 Safeguards Workshop Tr., supra note 17, at 225 that maintain customer information million or less. Consumer lending institutions (noting website usage of encryption for data in (NAICS code 522291) are classified as small if their motion is above 80 percent; ‘‘Let’s Encrypt’’ annual receipts are $41.5 million or less. provides free TLS certificates; and costs have gone Changes,’’ estimating costs of multi-factor Commercial banking and savings institutions down to the point that if a financial institution is authentication to be $50 for smartcard or fingerprint (NAICS codes 522110 and 522120) are classified as not using TLS encryption for data in motion, it is readers, and $10 each per smartcard); Slides small if their assets are $600 million or less. Assets making an unusual decision outside the norm); Accompanying Remarks of Wendy Nather, are determined by averaging the assets reported on Rocio Baeza, Safeguards Workshop Tr., supra note Safeguards Workshop Slides, supra note 72, at 37 businesses’ four quarterly financial statements for 17, at 106 (‘‘[T]he encryption of data in transit has (chart showing the use of multi-factor the preceding year. The 2019 Table of Small been standard. There’s no pushback with that.’’); authentication solutions such as Duo Push, phone Business Size Standards is available at https:// Slides Accompanying the Remarks of Lee Waters, call, mobile passcode, SMS passcode, hardware www.sba.gov/sites/default/files/2019-08/ ‘‘Information Security Programs and Smaller token, Yubikey passcode, and U2F token in SBA%20Table%20of%20Size%20Standards_ Businesses,’’ in Safeguards Workshop Slides, supra industries such as financial services and higher Effective%20Aug%2019%2C%202019_Rev.pdf. note 72, at 26 (‘‘Estimated Costs of Proposed education). VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70304 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations concerning fewer than ten thousand PART 314—STANDARDS FOR (b)(1) Consumer means an individual consumers. The Commission believes SAFEGUARDING CUSTOMER who obtains or has obtained a financial exempted financial institutions are INFORMATION product or service from you that is to be generally, but not exclusively, small used primarily for personal, family, or entities. Such financial institutions are ■1. The authority citation for part 314 household purposes, or that individual’s not required to perform a written risk continues to read as follows: legal representative. assessment, conduct continuous Authority: 15 U.S.C. 6801(b), 6805(b)(2). (2) For example: monitoring or annual penetration testing (i) An individual who applies to you ■2. In §314.1, revise paragraph (b) to and biannual vulnerability assessment, for credit for personal, family, or read as follows:
prepare a written incident response household purposes is a consumer of a plan, or prepare an annual written §314.1 Purpose and scope. financial service, regardless of whether report by the Qualified Individual. the credit is extended. * * * * * These exemptions are intended to (ii) An individual who provides
cause undue burden on smaller family, or household purposes is a Namely, this part applies to those financial institutions. consumer of a financial service, ‘‘financial institutions’’ over which the Exempted financial institutions will regardless of whether the loan is Commission has rulemaking authority still need to conduct risk assessments, extended.
VI. Other Matters whom you have a customer (viii) An individual is not your Pursuant to the Congressional Review relationship, or pertains to the consumer solely because he or she is a Act (5 U.S.C. 801 et seq.), the Office of customers of other financial institutions participant or a beneficiary of an Information and Regulatory Affairs that have provided such information to employee benefit plan that you sponsor designated this rule as not a ‘‘major you. or for which you act as a trustee or rule,’’ as defined by 5 U.S.C. 804(2). ■3. Revise §314.2 to read as follows: fiduciary.
request or an application from a activity that is listed in 12 CFR (F)Enters into a lease of personal consumer for a financial product or 225.28(b)(10)(ii) and referenced in property on a non-operating basis with service. section 4(k)(4)(F) of the Bank Holding you;
(h)(1) Financial institution means any Company Act, 12 U.S.C. 1843(k)(4)(F). (G)Obtains financial, investment, or institution the business of which is (vi)A business that regularly wires economic advisory services from you for engaging in an activity that is financial money to and from consumers is a a fee;
in nature or incidental to such financial financial institution because transferring (H)Becomes your client for the activities as described in section 4(k) of money is a financial activity referenced purpose of obtaining tax preparation or the Bank Holding Company Act of 1956, in section 4(k)(4)(A) of the Bank credit counseling services from you;
12 U.S.C. 1843(k). An institution that is Holding Company Act, 12 U.S.C. (I)Obtains career counseling while significantly engaged in financial 1843(k)(4)(A), and regularly providing seeking employment with a financial activities, or significantly engaged in that service demonstrates that the institution or the finance, accounting, or activities incidental to such financial business is significantly engaged in that audit department of any company (or activities, is a financial institution. activity.
while employed by such a financial (2)Examples of financial institutions (vii)A check cashing business is a institution or department of any are as follows: financial institution because cashing a company); (i)A retailer that extends credit by check is exchanging money, which is a (J)Is obligated on an account that you issuing its own credit card directly to financial activity listed in section purchase from another financial consumers is a financial institution 4(k)(4)(A) of the Bank Holding Company institution, regardless of whether the because extending credit is a financial Act, 12 U.S.C. 1843(k)(4)(A). account is in default when purchased, activity listed in 12 CFR 225.28(b)(1) (viii)An accountant or other tax unless you do not locate the consumer and referenced in section 4(k)(4)(F) of preparation service that is in the or attempt to collect any amount from the Bank Holding Company Act of 1956 business of completing income tax the consumer on the account; (12 U.S.C. 1843(k)(4)(F)), and issuing returns is a financial institution because (K)Obtains real estate settlement that extension of credit through a tax preparation services is a financial services from you; or proprietary credit card demonstrates activity listed in 12 CFR 225.28(b)(6)(vi) (L)Has a loan for which you own the that a retailer is significantly engaged in and referenced in section 4(k)(4)(G) of servicing rights. extending credit. the Bank Holding Company Act, 12 (ii)No continuing relationship. A (ii)An automobile dealership that, as U.S.C. 1843(k)(4)(G). consumer does not, however, have a a usual part of its business, leases (ix)A business that operates a travel continuing relationship with you if: automobiles on a nonoperating basis for agency in connection with financial (A)The consumer obtains a financial longer than 90 days is a financial services is a financial institution product or service from you only in institution with respect to its leasing because operating a travel agency in isolated transactions, such as using your business because leasing personal connection with financial services is a ATM to withdraw cash from an account property on a nonoperating basis where financial activity listed in 12 CFR at another financial institution; the initial term of the lease is at least 90 225.86(b)(2) and referenced in section purchasing a money order from you; days is a financial activity listed in 12 4(k)(4)(G) of the Bank Holding Company cashing a check with you; or making a CFR 225.28(b)(3) and referenced in Act, 12 U.S.C. 1843(k)(4)(G). wire transfer through you; section 4(k)(4)(F) of the Bank Holding (x)An entity that provides real estate (B)You sell the consumer’s loan and Company Act, 12 U.S.C. 1843(k)(4)(F). settlement services is a financial do not retain the rights to service that (iii)A personal property or real estate institution because providing real estate loan; appraiser is a financial institution settlement services is a financial activity VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70306 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations listed in 12 CFR 225.28(b)(2)(viii) and payment in the form of cash, checks, or and street addresses that is derived in referenced in section 4(k)(4)(F) of the credit cards that it did not issue. whole or in part using personally Bank Holding Company Act, 12 U.S.C. (iii) A merchant is not a financial identifiable financial information (that 1843(k)(4)(F). institution merely because it allows an is not publicly available), such as
Futures Trading Commission under the consumer in connection with providing
Corporation or any entity chartered and (i) Information included. Personally
1971 (12 U.S.C. 2001 et seq.); includes:
of servicing rights) or similar product or service;
personal information to a nonaffiliated
an internet service provider or a site implementing your information security (i) Authenticate and permit access operator requires a fee or a password, so program and enforcing your information only to authorized users to protect long as access is available to the general security program (for purposes of this against the unauthorized acquisition of public. part, ‘‘Qualified Individual’’). The customer information; and
applications utilized by you for changes to your operations or business transmitting, accessing, or storing arrangements; and whenever there are (4) External and internal customer information and procedures circumstances you know or have reason communications and information for evaluating, assessing, or testing the to know may have a material impact on sharing; security of externally developed your information security program. (5) Identification of requirements for applications you utilize to transmit, (e) Implement policies and the remediation of any identified access, or store customer information; procedures to ensure that personnel are weaknesses in information systems and
and (2) Material matters related to the
management; and arrangements, results of testing, security
(d)(1) Regularly test or otherwise safeguards. ■6. Revise §314.5 to read as follows: monitor the effectiveness of the (g) Evaluate and adjust your safeguards’ key controls, systems, and information security program in light of §314.5 Effective date. procedures, including those to detect the results of the testing and monitoring Section 314.4(a), (b)(1), (c)(1) through actual and attempted attacks on, or required by paragraph (d) of this (8), (d)(2), (e), (f)(3), (h), and (i) are intrusions into, information systems. section; any material changes to your effective as of December 9, 2022.
that can meet the challenges of today’s programs that reduce the risk of breaches.10 Standards for Safeguarding Customer Information, security environment. 84 FR 13158 (April 4, 2019). The agency received For Americans, the harms stemming from almost 50 comments from consumer groups, institutions); National Consumer Law Center et al., the types of security vulnerabilities that this industry associations, and data security experts. See Comment Letter No. 58 on 2019 Safeguards and Rule addresses are all too real. Victims of FTC Seeks Comment on Proposed Amendments to Privacy NPRM (FTC–2019–0019) (Aug. 2, 2019), breaches have their most sensitive Safeguards and Privacy Rules, 16 CFR part 314, https://www.regulations.gov/document/FTC-2019- information exposed, making them more Project No. P145407, (FTC–2019–0019) (‘‘2019 0019-0058 (arguing that the recent Equifax breach vulnerable to identity theft, phishing attacks, Safeguards and Privacy NPRM ’’), https:// showed the need for strengthening the Safeguards www.regulations.gov/docket/FTC-2019-0019/ Rule); Cisco Systems, Inc., Comment Letter No. 51 and other forms of fraud.3In 2018, almost 10 document. Further, the Commission conducted a on 2019 Safeguards and Privacy NPRM (FTC–2019– percent of Americans suffered some form of workshop discussing the proposed amendments 0019) (Aug. 2, 2019), https://www.regulations.gov/ identity theft, costing many of them with information security professionals and experts, document/FTC-2019-0019-0051 (noting that hundreds of dollars and dozens of hours of including IT staff from financial institutions sophisticated hacking techniques used in state time, an experience that many describe as covered by the Safeguards Rule. See Transcript, sponsored attacks are likely to be adopted by ‘‘more distressing.4For some, the cost is much Information Security and Financial Institutions: An garden variety, less sophisticated hackers.’’); higher, with victims losing tens of thousands FTC Workshop to Examine Safeguards Rule, Fed. Safeguards Workshop, at 24–26 (July 13, 2020) of dollars.5 Trade Comm’n (July 13, 2020) (‘‘Safeguards (remarks of Chris Cronin) (stating that many The Rule amendments the FTC is issuing Workshop’’), https://www.ftc.gov/system/files/ companies do not conduct complete or adequate today are strongly supported by the evidence documents/public_events/1567141/transcript-glb- risk assessments). Id. at 38–39 (remarks of Serge safeguards-workshop-full.pdf. Connected with the Jorgensen) (noting that businesses’ understanding of in the record.6The evidence gathered from workshop, the Commission sought and received the need for security has improved, but that they another round of public comments on the continue to struggle to implement controls across 116 CFR part 314. Pursuant to the Gramm Leach amendments. The eleven relevant public comments business units). Id. at 39–41 (remarks of Chris Bliley Act (‘‘GLB’’ or ‘‘GLBA’’), Public Law 106– relating to the subject matter of the July 13, 2020, Cronin) (stating that, ‘‘as a rule,’’ businesses of all 102, 113 Stat. 1338 (1999) (codified as amended in workshop can be found here: Postponement of sizes are ‘‘behind’’ on cybersecurity, attributing this scattered sections of 12 and 15 U.S.C.), the Public Workshop Related to Proposed Changes to in part to consultants whose advice about Commission promulgated the Safeguards Rule in the Safeguards Rule, 85 FR 23354 (FTC–2020–0038) reasonable security is motivated by a desire to 2001. (Apr. 27, 2020) (‘‘Workshop Comment Docket’’), ‘‘make the clients happy’’). Id. at 43 (remarks of 2See, e.g., 2020 Internet Crime Report, Fed. Bur. https://www.regulations.gov/document/FTC-2020- Pablo Molina) (citing ‘‘the mounting losses that Investigations,at 20 (Mar. 2021) (reporting 0038-0001. come from cybercrime’’ as evidence that many consumer loss of over $128 million resulting from 7See, e.g., Electronic Privacy Information Center, businesses are ‘‘falling behind’’ cybercriminals). Id. corporate data breaches to those who filed Comment Letter No. 55 on 2019 Safeguards and at 114 (remarks of Brian McManamon) (noting that complaints in 2020 alone); Int’l Bus. Mach, Cost of Privacy NPRM (FTC–2019–0019), at 3 (Aug. 1, ‘‘the proposed changes are the minimum necessary a Data Breach, at 4 (2021) (estimating that the 2019) (citing dramatic increase in data breaches at to have an effective security program in place.’’). Id. average cost of single data breach has risen to $4.24 financial services firms affecting millions of at 44 (remarks of Sam Rubin) (noting that, in his million). consumers), https://www.regulations.gov/comment/ experience, companies make significant 32013 Identity Fraud Report: Data Breaches FTC-2019-0019-0055; Consumer Reports, Comment investments in technical security measures but that Becoming a Treasure Trove for Fraudsters, Javelin Letter No. 52 on 2019 Safeguards and Privacy investment in personnel to oversee and use those Strategy, at 1 (Feb. 2013) (reporting that 1 in 4 NPRM (FTC–2019–0019) (Aug. 2, 2019), https:// measures is ‘‘a huge shortcoming that I’m seeing in recipients of a data breach notification become www.regulations.gov/comment/FTC-2019-0019- the field.’’); The Clearing House Association LLC, victims of identity theft); Michelle Singletary, Your 0052 (noting several high profile data breaches at Comment Letter No. 49 on 2019 Safeguards and online profile may help identity thieves, financial institutions as evidence for the need for Privacy NPRM (FTC–2019–0019), at 7–9 (Aug. 2, Washington Post (Feb. 28, 2012), https:// stronger regulation); Inpher, Inc., Comment Letter 2019), https://www.regulations.gov/comment/FTC- www.washingtonpost.com/business/economy/ No. 50 on 2019 Safeguards and Privacy NPRM 2019-0019-0049 (citing a 2018 study by the Center michelle-singletary-your-online-profile-may-help- (FTC–2019–0019), at 1 (Aug. 1, 2019), https:// for Financial Inclusion that showed widespread identity-thieves/2012/02/28/gIQAXFjygR_story.html www.regulations.gov/comment/FTC-2019-0019- data security failures among financial technology (reporting that recipients of data breach letters are 0050 (pointing to major breaches at financial companies around the globe). 9.5% more likely to suffer identity theft). institutions as evidence for the need of stronger 8Press Release, Fed. Trade Comm’n, Equifax to 4See Erika Harrell, Victims of Identity Theft, security regulations); Independent Community Pay $575 Million as Part of Settlement with FTC, 2018, U.S. Dep’t of Just., at 1 (Apr. 2021), https:// Bankers of America, Comment Letter No. 35 on CFPB, and States Related to 2017 Data Breach, (July bjs.ojp.gov/content/pub/pdf/vit18.pdf. 2019 Safeguards and Privacy NPRM (FTC–2019– 22, 2019), https://www.ftc.gov/news-events/press- 5See 2021 Consumer Aftermath Report, Identity 0019) (Aug. 2, 2019), https://www.regulations.gov/ releases/2019/07/equifax-pay-575-million-part- Theft Resource Center (2021), at 6 (finding that in comment/FTC-2019-0019-0035 (noting that FTC- settlement-ftc-cfpb-states-related. a study of 427 identity crime victims, 21% of them regulated financial institutions are subject to less 9See infra, note 7. suffered losses of over $20,000). stringent security requirements than those regulated 10See, e.g., for Single Qualified Individual 6The Commission first sought public comments by banking agencies, even though many handle the Requirement: National Consumer Law Center et al., on the proposed amendments in April 2019. See same types of information as those financial Continued VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70310 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations The amended Rule requires that financial communications and oversight.18Indeed, the supra note 7, at 3 (arguing that a clear line of institutions’ information security plans U.S. House Committee on Oversight and reporting with a single responsible individual could address such core concepts as controlling Government identified Equifax’s organization have prevented the Equifax consumer data breach); who is accessing their system,11 as one of the major causes of the breach.19 Safeguards Workshop, at 182–84 (remarks of understanding their system,12monitoring Appointing a single Qualified Individual as Adrienne Allen) (stating that without a single what users do in their system,13and the coordinator of Equifax’s information responsible individual, information security staff protecting the information contained in their security system, as required by §314.4(a) of ‘‘can fall into traps of each relying on someone else to make a hard call . . . [In a program without a system.14More particularly, it also requires the amended Rule, could have helped prevent or limit the scope of one of the single coordinator] issues can sometimes fall encryption of customer information and the largest breaches in American history. By through the cracks.’’). Id. at 184–85 (remarks of use of multifactor authentication. Adopting Michele Norin) (‘‘I think it’s extremely important to these practices will reduce the chances of a implementing the measures required in the have a person in front of the information security breach occurring. amended Rule, financial institutions will program. I think that there are so many components prevent or mitigate many future breaches, In fact, it is likely that the massive breach to understand, to manage, to keep an eye on. I think protecting consumers and their information. at Equifax could have been prevented or it’s difficult to do that if it’s part of someone else’s There is also no support for the dissent’s job. And so I found that it’s extremely helpful to mitigated by adopting practices required by notion that the amendments eliminate have a person in charge of that program just from these amendments. For example, the financial institutions’ flexibility in a way that a pure basic management perspective and Commission’s complaint alleged that the will hurt smaller businesses. The understanding perspective.’’); Risk Assessment vulnerability that led to the breach was not amendments require that information Requirement: Id. at 25 (remarks of Chris Cronin) detected for four months because Equifax’s security programs address certain aspects of (stating that evaluating the likelihoods and impacts automated vulnerability scanner was not security, but do not prescribe any particular of potential security risks and evaluating existing controls is an important component of a risk configured to scan all of the networks in the method for doing so. Specifically, the assessment). Id. at 29–30 (remarks of Serge system, something that could have been amended Rule requires that the information Jorgensen) (emphasizing the importance of risk prevented if Equifax had performed an security program address areas such as access assessments as tools for adjusting existing security adequate inventory of its system as required control, change management, information measures to account for both current and future by §314.4(c)(2) of the amended Rule.15 disposal, and monitoring user activity, but it security threats); Encryption Requirement: Equifax allegedly did not encrypt the data of does not require that financial institutions Princeton University Center for Information 145 million consumers as required by take any particular action in those areas. In Technology Policy, Comment Letter No. 54 on 2019 §314.4(c)(3) of the amended Rule; such fact, the Rule recognizes the concerns of Safeguards and Privacy NPRM (FTC–2019–0019), at encryption might have prevented the small businesses and adopts appropriate 3 (Aug. 2, 2019), https://www.regulations.gov/ intruders from misusing individuals’ flexibilities. Section 314.6 of the revised Rule document/FTC-2019-0019-0054 (noting the effectiveness of encryption); Inpher, Inc., supra note sensitive information, even if they were able exempts financial institutions that maintain 7, at 4; Safeguards Workshop, at 225 (remarks of to obtain it.16In addition, the complaint information concerning fewer than 5,000 Matthew Green) (noting website usage of encryption charged that Equifax did not adequately consumers from certain requirements. In is above 80 percent; ‘‘Let’s Encrypt’’ provides free monitor activity on its network, which addition, financial institutions with smaller TLS certificates; and costs have gone down to the allowed intruders to access and use their and simpler systems may determine that point that if a financial institution is not using TLS network undetected for months; such minimal procedures are required in those encryption for data in motion, it is making an monitoring will be required by areas, and they retain flexibility under these unusual decision outside the norm). Id. at 106 §314.4(c)(8).17Finally, and perhaps most amendments to follow that route. Moreover, (remarks of Rocio Baeza) (‘‘[T]he encryption of data importantly, Equifax split authority over its the record contains significant evidence that in transit has been standard. There’s no pushback with that.’’); Multifactor Authentication information security program between two there are free and low-cost solutions for Requirement: Princeton University Center for people, which caused failures of smaller businesses with more modest data Information Technology Policy, supra note 10, at 6– security needs.20 7; Electronic Privacy Information Center, supra, and able to access anything they want.’’); Board note 7, at 8; National Consumer Law Center et al., Reporting Requirement: Workshop participants 18While the dissent questions the requirements in supra note 7, at 2; Safeguards Workshop, at 102 the Rule regarding elevating security issues to the Adrienne Allen, Karthik Rangarajan, and Michele (remarks of Brian McManamon) (stating that his top levels of the corporate structure, research Norin each emphasized that such reporting can aid company TECH LOCK supports requiring multi- supports these requirements. Boards are becoming decision making. See Safeguards Workshop, at 201– factor authentication for users connecting from increasingly involved in cybersecurity governance, 09; see also Rocio Baeza, Comment Letter No. 12 internal networks). Id. at 266 (remarks of Matthew as demonstrated by surveys of practitioners and the on Workshop Comment Docket (FTC–2020–0038), Green) (explaining that passwords are not enough growth of literature aimed at educating board at 3–8 (Aug. 12, 2020), https://www.regulations.gov/ of an authentication feature but when MFA is used members on cybersecurity. Some studies suggest comment/FTC-2020-0038-0012 (supporting and deployed, the defenders can win against that Board attention to data security decisions can requirement and providing sample report form and attackers). Id. at 239 (describing how because smart dramatically improve data safeguarding. For compliance questionnaire); Juhee Kwon et al., The phones have modern secure hardware processors, example, one study found a 35% decrease in the Association Between Top Management Involvement biometric sensors and readers built in, increasingly probability of information security breaches when and Compensation and Information Security consumers can get the security they need through companies include the Chief Information Security Breaches, J. L. Info. Sys., at 219–236 (2013) (‘‘. . .
the devices they already have by storing Officer (or equivalent) in the top management team the involvement of an IT executive decreases the cryptographic authentication keys on the devices probability of information security breach reports and the CISO has access to the board. See Juhee and then using the phone to activate them); by about 35 percent . . .’’); Julia L. Higgs et al., The Kwon et al., supra note 10. see also Safeguards Incident Response Plan: Credit Union National Relationship Between Board-Level Technology Workshop, at 201–09. Association, Comment Letter No. 30 on 2019 Committees and Reported Security Breaches, J. L. 19U.S. H. Rep. Comm. on Oversight and Gov. Safeguards and Privacy NPRM (FTC–2019–0019), at Info. Sys., at 79–98 (2016) (‘‘[A]s a technology Reform, Majority Staff Report on The Equifax Data 2 (Aug. 1, 2019), https://www.regulations.gov/ committee becomes more established, its firm is not Breach, 115th Cong., at 55–62 (Dec. 2018). document/FTC-2019-0019-0030 (noting that that an as likely to be breached. To obtain further evidence 20See, e.g., Safeguards Workshop, at 267 (remarks incident response plan ‘‘helps ensure that an entity on the perceived value of a technology committee, of Wendy Nather) (‘‘we have a lot more options, a is prepared in case of an incident by planning how this study uses a returns analysis and finds that the lot more technologies today than we did before that it will respond and what is required for the presence of a technology committee mitigates the are making both of these solutions, both encryption response.’’). Consumer Reports, supra note 7, at 6 negative abnormal stock returns arising from and MFA, easier to use, more flexible, in some cases (observing that ‘‘a written incident response plan is external breaches.’’). cheaper, and we should be encouraging their an essential component of a good security 1116 CFR 314.4(c)(1). adoption wherever possible.’’). Id. at 265–66 system.’’); HITRUST, Comment Letter No. 18 on 1216 CFR 314.4(c)(2). (remarks of Matthew Green) (‘‘I think that we’re in 2019 Safeguards and Privacy NPRM (FTC–2019– a great time when we’ve reached the point where 1316 CFR 314.4(c)(8). 0019), at 2 (July 1, 2019), https:// we can actually mandate that encryption be www.regulations.gov/document/FTC-2019-0019- 1416 CFR 314.4(c)(3) and 314.4(c)(5). used. . . . And we’ve reached the point where now 0018 (commenting that incident response plans can 15Compl. for Permanent Injunction & Other it is something that’s come to be and we can help organizations ‘‘to better allocate limited Relief., FTC v. Equifax, Inc., No. 1:19–mi–99999– actually build well.’’). Id. at 229–30 (remarks of resources.). Safeguards Workshop, at 52 (remarks of UNA (N.D. Ga. July 22, 2019) ¶17. Randy Marchany) (noting that encryption is already Serge Jorgenson) (observing that a prompt response 16Id. ¶22.E. built into the Microsoft Office environment and that to an incident can prevent a ‘‘threat actor running 17Id. ¶22.F. a number of Microsoft products, such as around in my environment for days, months, years, VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70311 We believe that these amendments evolving threats and standards, a one-size- Safeguards Rule. While we recognize the represent a much-needed step forward in fits-all approach to data security may not value in regularly reviewing our rules and protecting Americans’ data security. Given work. Under Democratic and Republic updating them as needed, we dissented then growing recognition that the requirements leadership, the Commission has repeatedly because the proposal lacked data captured in the Rule represent best practices, emphasized this principle.3We have demonstrating the need for and efficacy of some financial institutions seem to have traditionally eschewed an overly prescriptive the proposed amendments.7 already taken appropriate steps to protect approach, both to data security in general We appreciate Staff’s diligent work on this customers’ data and meet the requirements and to the Safeguards Rule itself.4The FTC rule and many of the modifications made to set out in the amended Rule. It is important, has never demanded ‘‘perfect’’ security the original proposal. The Federal Register though, to require those that lag behind to because the Commission has recognized that Notice does a commendable job of presenting strengthen their security and prevent future data security is neither cost- nor the full panoply of comments that the breaches before they occur, rather than in the consequence-free, and often requires Commission received. The FTC is at its best wake of a devastating breach after the damage tradeoffs.5At the same time, during our when it seeks input from experts, industry, has already been done. tenure, the Commission has continued to and consumer groups; this rulemaking Joint Statement of Commissioners Noah enforce data security standards vigorously, process reflects a commitment to that Joshua Phillips and Christine S. Wilson in including those embodied in the Safeguards approach. But the comment period did not the Matter of the Final Rule Amending the Rule.6 produce data demonstrating that the previous Gramm-Leach-Bliley Act’s Safeguards Rule In March 2019, the Commission approved iteration of the rule was inadequate, or that a Notice of Proposed Rulemaking (‘‘NPRM’’) the costs and consequences of the new In 1999, Congress passed the Gramm- proposing additional requirements to the prescriptive obligations will translate into Leach-Bliley Act, which charged the Federal actual consumer safeguards. That was our Trade Commission (the ‘‘Commission’’) with promulgating and enforcing a regulation to 3See, e.g., Federal Trade Commission, Statement concern, and the comments did not allay it. Marking the FTC’s 50th Data Security Settlement, In fact, as several commenters observed, ensure that financial firms take care to at 1 (Jan. 31, 2014), https://www.ftc.gov/system/ the new prescriptive requirements could safeguard the information they collect from files/documents/cases/140131gmrstatement.pdf weaken data security by diverting finite consumers.1The Safeguards Rule2has (‘‘FTC Data Security Statement’’) (‘‘Through its resources towards a check-the-box established more data security obligations for settlements, testimony, and public statements, the compliance exercise and away from risk consumer financial data than for data Commission has made clear that it does not require management tailored to address the unique collected by non-financial firms, a gap that perfect security; reasonable and appropriate underlies our view—shared by our security is a continuous process of assessing and security needs of individual financial colleagues—that congressional data security addressing risks; there is no one-size-fits-all data institutions. It is ironic that the revisions security program; and the mere fact that a breach mandate a risk assessment and then order legislation is warranted.
Inf. Security & Fin. Inst.: An FTC Workshop of GLB accommodate technological changes and Safeguards, at 27–28 (July 13, 2020) (slides advances.’’). that covered firms had a systematic Accompanying remarks of Rocio Baeza, ‘‘Models for 5Under the FTC’s unfairness authority, the problem—i.e., that the Rule was not Complying to the Safeguards Rule Changes) Commission brings cases when companies under its (‘‘Safeguards Workshop Presentation Slides’’) jurisdiction fail to employ ‘‘reasonable’’ security. 7Dissenting Statement of Commissioner Noah https://www.ftc.gov/system/files/documents/ FTC Data Security Statement, supra note 3 (‘‘The Joshua Phillips and Commissioner Christine S. public_events/1567141/slides-glb-workshop.pdf touchstone of the Commission’s approach to data Wilson, Review of Safeguards Rule (Mar. 5, 2019), (describing three different compliance models: In- security is reasonableness: a company’s data https://www.ftc.gov/system/files/documents/ house, outsource, and hybrid, with costs ranging security measures must be reasonable and public_statements/1466705/reg_review_of_ from $199 per month to more than $15,000 per appropriate in light of the sensitivity and volume safeguards_rule_cmr_phillips_wilson_dissent.pdf; month). Safeguards Workshop, at 81–83 (remarks of of consumer information it holds, the size and See, e.g., Noah Joshua Phillips (@FTCPhillips), Rocio Baeza) (describing three compliance models complexity of its business, and the cost of available Twitter (Mar. 5, 2019, 3:08 p.m.), https:// in more detail); Safeguards Workshop Presentation tools to improve security and reduce twitter.com/FTCPhillips/status/ Slides, at 29 (remarks of Brian McManamon, vulnerabilities.’’). 1103024596247289867 (‘‘A reexamination of the ‘‘Sample Pricing’’) (estimating the cost of 6See, e.g., In the matter of Ascension Data & Rule may indeed be appropriate and necessary; but, cybersecurity services based on number of Analytics, LLC, FTC File No. 1923126 (2020), before we borrow from other existing schemes, we endpoints). Id. at 83–85. https://www.ftc.gov/enforcement/cases- must first understand whether the existing Rule is 1Public Law 106–102, 113 Stat. 1338 (1999). proceedings/192-3126/ascension-data-analytics-llc- inadequate for its purpose and whether the data Notably, even as it transferred authority for other matter; U.S. v. Mortgage Solutions FCS, Inc., Civ. supports the efficacy of the alternatives.’’); Christine consumer financial regulation to the Consumer Action No. 4:20–cv–110 (N.D. Cal 2020), https:// S. Wilson, Remarks at NAD 2020, One Step Financial Protection Bureau in the Dodd-Frank Act, www.ftc.gov/enforcement/cases-proceedings/182- Forward, Two Steps Back: Sound Policy on Congress left this rulemaking authority with the 3199/mortgage-solutions-fcs-inc; FTC v. Equifax, Consumer Protection Fundamentals 7–8 (Oct. 5, Commission, a vote of confidence in our approach. Inc., Civ. Action No. 1:19–cv–03297–TWT (N.D. Ga. 2020), https://www.ftc.gov/system/files/documents/ 15 U.S.C. 6804(a)(1). 2019), https://www.ftc.gov/enforcement/cases- public_statements/1581434/wilson_remarks_at_ 216 CFR part 314. proceedings/172-3203/equifax-inc. nad_100520.pdf. VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 70312 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations working.8The Commission can—and does— lapses that led to the Equifax breach, the Since our original statement, we have been promote best practices and reasonable care largest Safeguards case on record.11 provided with no additional information on requirements through speeches, guidance, That these proposals may constitute best the impact and efficacy of the NYDFS rules.16 reports, and the like, to help financial firms practices appropriate to certain firms or Without this critical input, we do not believe evaluate whether they are taking proper situations does not justify imposing them on adopting wholesale the NYDFS approach is precautions.9But new rules that set concrete every firm and in every situation.12The FTC the prudent course.17We would have been standards for all companies, regardless of historically has been appropriately cautious better served by monitoring the efficacy, risk, require more justification. Such rules in mandating specific security practices, and costs and unintended consequences of the make companies liable for penalties, and we see no sound basis in the rulemaking NYDFS rules during this ramp-up period. could focus efforts on compliance to address record to change that approach.13 Imposing similar rules on far more firms penalty deterrence rather than risk. across a broader array of industries makes Dozens of commenters have shared their The Revised Safeguards Rule Is Premature even less sense. views on the Safeguards proposal, and FTC In our 2019 statement, we expressed Congress, with the encouragement of the Staff held a workshop to evaluate the need concern that the proposals in the NPRM were Commission, has continued to consider to change the Rule. While there is no premature. They are based in large part on legislative initiatives in this area. Throughout shortage of opinions as to the need and the New York Department of Financial 2019, 2020 and 2021, we saw the release of benefits of the proposed changes (nor is there Service data security rules,14adopted in several draft bills addressing data security, as a shortage of opinions critiquing the new 2016. At the same time, Congress and the well as privacy.18And other developments, requirements), this process failed to provide Executive Branch were evaluating new such as data security requirements of the evidence of market failure or other systemic privacy and data security legislation that may General Data Protection Regulation19and problems10necessitating the proposed overlap with the proposed amendments.15 new cybersecurity incidents20ensure that changes for firms already governed by the requirements of the Rule. In fact, one 11Consumer Reports (comment 52, NPRM), Dealers Association (comment 46, NPRM) at 46, commenter that generally supported the rule https://www.regulations.gov/comment/FTC/2019- https://www.regulations.gov/comment/FTC-2019- changes noted that it was not clear that the 0019-0052 at 2. Not all the commenters agreed with 0019-0046 (The new rules ‘‘are premature as they new rules would have prevented the alleged this perspective, and some felt that these rules are based on untested and new standards in a would have prevented the Equifax breach. See rapidly changing environment, and in a context 8Commenters on the proposed rules reflected National Consumer Law Center and others where federal debate is ongoing.’’); New York these same concerns. See, e.g, CTIA (comment 34, (comment 58, NPRM), https://www.regulations.gov/ Insurance Association (comment 31, NPRM), NPRM) at 4, https://www.regulations.gov/comment/ comment/FTC/2019-0019-0058. Chair Khan and https://www.regulations.gov/comment/FTC-2019- FTC/2019-0019-0034 (observing that most examples Commissioner Slaughter focus on the Equifax 0019-0031 (it is premature to adopt these rules cited in the NPRM are from non-financial firms and breach to justify the adoption of prescriptive and without the benefit of the state’s experience). arguing that the FTC’s action in Equifax complex data security measures, measures that 16We appreciate the time and resources the demonstrated that the agency is able to use to the match the sophistication and complexity of the NYDFS invested in commenting on our proposed current framework effectively); Global Privacy consumer financial data managed by one of the rule. Though the NYDFS does say that its rules have Alliance (comment 38, NPRM) at 4, https:// largest credit bureaus. But even assuming the new ‘‘enhanced cybersecurity protection across the www.regulations.gov/comment/FTC/2019-0019- rules would have prevented it, one (albeit) high- financial industry and fostered an environment in 0038 (the changes to the rules started not from FTC profile breach, without more, should not be which the threat of a cyber attack is taken seriously experience but rather from state laws); Electronic extrapolated to an entire industry with diverse at all levels of New York’s financial services firms,’’ Transactions Association (comment 27, NPRM), business models housing varied consumer financial it offers no supporting data. New York State https://www.regulations.gov/comment/FTC/2019- data. Reasonable safeguards for a company like Department of Financial Services (comment 40, 0019-0027 (the current rule is effective and there Equifax, based on its size and complexity, the NPRM), https://www.regulations.gov/comment/ are no harms that warrant these changes); National nature and scope of its activities, and the sensitivity FTC-2019-0019-0040. Automobile Dealers Association (comment 46, of the information involved, would likely outpace 17As several commenters pointed out, the NYDFS NPRM) at 6, https://www.regulations.gov/comment/ procedures that would be appropriate or reasonable rules are more nuanced that the amendments FTC/2019-0019-0046 (‘‘[N]ew requirements for all for a sole proprietorship or small business. introduced today. For instance, under the NYDFS financial institutions should not be based on 12While the Final Rule is based on proposals regulations, certain additional requirements only unrelated enforcement actions that may not be from New York State Department of Financial apply to a category of sensitive data, a limitation generally applicable to all financial institutions Services (‘‘NYDFS’’), the FTC imposes its not carried through to the Safeguards Rule. See, e.g., subject to the Rule.’’). requirements much more broadly than the NYDFS U.S. Chamber of Commerce (comment 33, NPRM), 9Federal Trade Commission, Data Security, Cybersecurity Requirements for Financial Services https://www.regulations.gov/comment/FTC-2019- https://www.ftc.gov/datasecurity. Companies, 23 NYCRR Pt. 500. The NYDFS 0019-0033; CTIA (comment 34, NPRM), https:// 10One study cited by commenters pointed toward requirements exempt a much larger cross-section of www.regulations.gov/comment/FTC/2019-0019- widespread problems among fintech firms organizations from the most onerous, prescriptive, 0034; Electronic Transactions Association ‘‘including misuse of cryptography, use of weak and expensive provisions in their rule. 23 NYCRR (comment 27, NPRM), https://www.regulations.gov/ cryptography, and excessive permission §500.19. Nor do the exceptions in the Final Rule, comment/FTC/2019-0019-0027. These distinctions requirements.’’ The Clearing House Association while helpful, suffice. only raise more questions and concerns about LLC (comment 49, NPRM) at 7–9, https:// 13Unfortunately, this is not the first time this basing our regulations on the New York rules. www.regulations.gov/comment/FTC/2019-0019- Commission has emphasized what we can do over 18See, e.g., Fourth Amendment is Not for Sale 0049 (citing a 2018 study by the Center for what we should do. See, e.g., Joint Statement of Act, S. 1265, 117th Cong. (2021); Data Care Act of Financial Inclusion, https://content.centerfor Commissioners Noah Joshua Phillips and Christine 2021, S. 919, 117th Cong. (2021); Data Protection financialinclusion.org/wp-content/uploads/sites/2/ S. Wilson, In the matter of Resident Home LLC, Act of 2021, S. 2134, 117th Cong. (2021); SAFE 2018/09/CFI43-CFI_Online_Security-Final- Commission File No. 2023179 (Oct. 7, 2021), DATA Act, S. 2499, 117th Cong. (2021); Consumer 2018.09.12.pdf). This study included firms from https://www.ftc.gov/system/files/documents/ Online Privacy Rights Act, S. 2968, 116th Cong. around the world and did not indicate that this public_statements/1597270/resident_home_ (2019). See also, California Privacy Rights Act of limited set of issues arose in U.S. firms covered by dissenting_statement_wilson_and_phillips_final_ 2020, Cal. Civ. Code §1798.100 et seq.; Virginia the Safeguards Rule. See also National Automobile 0.pdf; Joint Statement of Commissioners Noah Consumer Data Protection Act, Va. Code §59.1–575 Dealers Association (comment 46, NPRM) at 46, Joshua Phillips and Christine S. Wilson, U.S. v. et seq.; and Colorado Privacy Act, 2021 Colo. ALS https://www.regulations.gov/comment/FTC/2019- iSpring Water Systems, LLC, Commission File No. 483, 2021 Colo. Ch. 483, 2021 Colo. SB. 190. 0019-0046 (‘‘These requirements have largely not C4611 (Apr. 12, 2019), https://www.ftc.gov/system/ 19Council Directive 2016/679, art. 32 2016 O.J. been proven to be necessary or effective.’’). files/documents/public_statements/1513499/ (L119). Participants at the FTC’s July 2020 Workshop ispring_water_systems_llc_c4611_modified_joint_ 20See, e.g., Joseph Menn and Christopher Bing, generally agreed that companies could invest more statement_of_commissioners_phillips_and_wilson_ Hackers of SolarWinds stole data on U.S. sanctions in security, but the fact of under-investment does 4-12.pdf. policy, intelligence probes, Reuters (Oct. 8, 2021), not mean that these changes to the Safeguards Rule 14Cybersecurity Requirements for Financial https://www.reuters.com/world/us/hackers- constitute the best course of action. FTC, Services Companies, 23 NYCRR Pt. 500 (2016). solarwinds-breach-stole-data-us-sanctions-policy- Information Security and Financial Institutions: An 15See Consumer Data Industry Association intelligence-probes-2021-10-07/; Stephanie Kelly FTC Workshop to Examine Safeguards Rule Tr. at (comment 36, NPRM) at 2, https:// and Jessica Resnick-ault, One password allowed 23–70 (July 13, 2020), https://www.ftc.gov/system/ www.regulations.gov/document?D=FTC-2019-0019- hackers to disrupt Colonial Pipeline, CEO tells files/documents/public_events/1567141/transcript- 0036 (noting that the NY rule is too recent and senators, Reuters (June 8, 2021), https:// glb-safeguards-workshop-full.pdf (‘‘Safeguards Congress is debating new legislation that should be www.reuters.com/business/colonial-pipeline-ceo- Workshop’’). left to Congress to resolve); National Automobile tells-senate-cyber-defenses-were-compromised- VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 86, No. 234/Thursday, December 9, 2021/Rules and Regulations 70313 these issues will continue to draw Advocacy stated its belief that the demonstrating that when security personnel congressional attention. The decisions about Commission itself does not appear to are busy with compliance and regulatory tradeoffs in this space are complex and understand fully the economic impact of the response, they have less time to focus on a significant for consumers, business, and proposed changes to the Safeguards Rule.24 firm’s actual security needs.27Further, government; intrusive mandates are best left The burden of these new rules may also without the flexibility to prioritize, finite to the people’s representatives rather than to reduce competition and innovation, as resources may be diverted to areas of lower the vagaries of the administrative rulemaking smaller firms less able to absorb the financial risk but higher regulatory scrutiny; 28 process.21 costs cede ground to larger firms better commenters noted the irony of mandating a equipped to handle new regulatory risk assessment and then ordering firms to The Revised Rules Inhibit Flexibility and mandates.25 prioritize specified precautions ahead of the Impose Substantial Costs Security itself may also suffer. A series of risks and needs counseled by that The Safeguards Rule originally drafted and specific rules can incentivize companies to assessment.29And potentially innovative evaluated by the Commission embraced a move from a thoughtful assessment of risk security practices that address changing flexible approach, emphasizing protections and precautions to a check-the-box exercise threats and needs may be discouraged.30As targeted to a company’s size and risk to ensure that they are complying with profile.22As we wrote in 2019, these new regulatory mandates—in other words, from a will chill these approvals except in the most rules move us away from that approach; that focus on real security to an emphasis on rule ironclad circumstances, thereby potentially loss of flexibility will impose costs without compliance.26One commenter cited data thwarting industry-wide adoption of new and better necessarily improving safeguards for security standards.’’); New York Insurance consumer data, which should be the point of Association (comment 31, NPRM), https:// 24Small Business Administration Office of this exercise. Advocacy (comment 28, NPRM) at 3–4, https:// www.regulations.gov/comment/FTC-2019-0019- Commenters and the Commission itself www.regulations.gov/comment/FTC-2019-0019- 0031 (‘‘This runs the risk that companies might feel compelled to encrypt all consumer data regardless have noted that there are financial impacts to 0028 (‘‘An agency cannot consider alternatives that of whether the CISO’s compensating controls would these new requirements.23The Small minimize any significant economic impact if the be second guessed in the event a company were to Business Administration’s Office of agency does not know what the economic impact lose unencrypted customer information.’’);
requirements,32locking in place the primacy The specifics of the proposals also raise The Commission has elected to proceed of current practices.33 issues, as we expressed in 2019, with regard The reduction in flexibility and imposition to mandating the appropriate level of board with most of these governance requirements, of these costs must be justified by a engagement,35hiring and training forcing the hand of management and shifting significant reduction in risk or some other requirements,36and program accountability their priorities to avoid the risk of regulatory substantial consumer benefit. But the record structures.37We wrote then, and remain action,39without clear evidence of their need provides scant support for these tradeoffs. Or concerned now, that the Commission is or efficacy. as one commenter put it: substituting its own judgement about [A]s with many of these requirements, we governance decisions for those of private Conclusion do not take issue with the notion that there companies covered by this Rule. Regularly reviewing our rules to ensure is merit to this step [requiring monitoring], In certain extraordinary cases involving that they address the current environment is and that many financial institutions will clear evidence of management failure, we an important part of the FTC’s regular implement some version of this control. have imposed prescriptive governance process. But rules have far-reaching and However, by making this an explicit, stand- obligations on respondents.38Those rare and frequently unintended impacts in the real alone requirement, the Commission is world; when imposing additional legal enshrining costs and efforts that will be 34National Automobile Dealers Association (comment 46, NPRM) https://www.regulations.gov/ obligations in the rulemaking context, we comment/FTC-2019-0019-0046 (arguing that the must do so with great care. The amended 0036 (minimization requirement can impact Commission needs additional study into the costs Safeguards Rule replaces a rule that has innovative uses more broadly). and benefits); See also Consumer Data Industry 31See Cisco Systems Inc. (comment 51, NPRM) at Association (comment 36, NPRM), https:// worked well for 20 years, a rule that took a 3, https://www.regulations.gov/comment/FTC-2019- www.regulations.gov/comment/FTC-2019-0019- principle-based approach in order to provide 0019-0051 (noting also in the context of multi-factor 0036 (benefits of new rule not justified by financial institutions flexibility to determine authentication that there will come a time when it tradeoffs). the appropriate and realistic security is no longer the ‘‘appropriate baseline’’ and 35American Council on Education (comment 24, safeguards for their organizations. The record ‘‘covered entities could find themselves in full NPRM) at 16, https://www.regulations.gov/ compliance with the rule as long as they use access comment/FTC-2019-0019-0024; National before us at best fails to convince that the control technology no less protective than MFA as Automobile Dealers Association (comment 46, changes are necessary and at worst raises defined in the Proposed Amendments.’’). NPRM) at 41, https://www.regulations.gov/ concern about the substantial costs and risks 32National Automobile Dealers Association comment/FTC-2019-0019-0046. in imposing these amendments. Accordingly, (comment 46, NPRM), https://www.regulations.gov/ 36U.S. Chamber of Commerce (comment 33, we dissent.
comment/FTC-2019-0019-0046. NPRM) at 12, https://www.regulations.gov/ 33See CTIA (comment 34, NPRM) at 3–5, https:// comment/FTC-2019-0019-0033; National [FR Doc. 2021–25736 Filed 12–8–21; 8:45 am] www.regulations.gov/comment/FTC-2019-0019- Automobile Dealers Association (comment 46, BILLING CODE 6750–01–P 0034 (flexibility in the rule allowed it to keep up NPRM) at 34–36, https://www.regulations.gov/ with evolving threats, whereas new rule could limit comment/FTC-2019-0019-0046. innovation); HITRUST Alliance (comment 18, 37See Final Rule. See also American Council on enforcement/cases-proceedings/092-3184/facebook- NPRM), https://www.regulations.gov/comment/ Education (comment 24, NPRM) at 14, https:// inc. FTC-2019-0019-0018 (expressing concern about www.regulations.gov/comment/FTC-2019-0019- 39These governance rules may not even promote creating outdated requirements); The American 0024 (critiquing the intrusion on personnel security. See Consumer Data Industry Association Financial Services Association (comment 41, practices). (comment 36, NPRM), https://www.regulations.gov/ NPRM), https://www.regulations.gov/comment/ 38U.S. v. Facebook, Inc., Civ. Action No. 19–cv– comment/FTC-2019-0019-0036 (arguing that the FTC-2019-0019-0041. 2184 (D.D.C. July 24, 2019), https://www.ftc.gov/ annual reporting will become a checkbox exercise).
VerDate Sep<11>2014 18:18 Dec 08, 2021 Jkt 256001 PO 00000 Frm 00044 Fmt 4701 Sfmt 9990 E:\FR\FM\09DER3.SGM 09DER3 Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations 77499 Authority: 49 U.S.C. 106(f), 106(g); 40103, involving 500 or more consumers is conducted panels with information 40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR, acquired without authorization. security experts discussing subjects 1959–1963 Comp., p. 389. DATES: The amendments are effective related to the proposed amendments.7 §71.1 [Amended] May 13, 2024. The Commission received 11 comments FORFURTHERINFORMATIONCONTACT: following the workshop. After reviewing ■ 2. The incorporation by reference in David Lincicum (202–326–2773), the initial comments to the NPRM, 14 CFR 71.1 of FAA Order JO 7400.11H, Division of Privacy and Identity conducting the workshop, and then Airspace Designations and Reporting Protection, Bureau of Consumer reviewing the comments received Points, dated August 11, 2023, and Protection, Federal Trade Commission, following the workshop, the effective September 15, 2023, is 600 Pennsylvania Avenue NW, Commission issued final amendments to amended as follows: Washington, DC 20580. the Safeguards Rule on December 9, Paragraph 5000 Class D Airspace. SUPPLEMENTARYINFORMATION: 2021.8 In the NPRM, the Commission * * * * *
RIN 3084–AB35 1Public Law 106–102, 113 Stat. 1338 (1999). 886 FR 70272 (Dec. 9. 2021). 2See 15 U.S.C. 6801(b), 6805(b)(2). 984 FR 13158, 13163 (Apr. 4, 2019). Standards for Safeguarding Customer 367 FR 36483 (May 23, 2002). 10Id. at 13169. Information 4Id. 11See Interagency Guidance on Response 584 FR 13158 (Apr. 4, 2019). Programs for Unauthorized Access to Customer AGENCY: Federal Trade Commission. 6The 49 relevant public comments received on or Information and Customer Notice, 70 FR 15736, after March 15, 2019, can be found at 15752 (Mar. 29, 2005) (originally issued by the ACTION: Final rule. Regulations.gov. See FTC Seeks Comment on Office of the Comptroller of the Currency; the Board Proposed Amendments to Safeguards and Privacy of Governors of the Federal Reserve System; the SUMMARY: The Federal Trade Rules, 16 CFR part 314, Project No. P145407, Federal Deposit Insurance Corporation; and the Commission (‘‘FTC’’ or ‘‘Commission’’) https://www.regulations.gov/docket/FTC-2019- Office of Thrift Supervision) (‘‘At a minimum, an is issuing a final rule (‘‘Final Rule’’) to 0019/comments. The 11 relevant public comments institution’s response program should contain relating to the subject matter of the July 13, 2020, procedures for the following: . . . Notifying its amend the Standards for Safeguarding workshop can be found at: https:// primary Federal regulator as soon as possible when Customer Information (‘‘Safeguards www.regulations.gov/document/FTC-2020-0038- the institution becomes aware of an incident Rule’’ or ‘‘Rule’’) to require financial 0001/comment. This notice cites comments using involving unauthorized access to or use of sensitive institutions to report to the Commission the last name of the individual submitter or the customer information, as defined below; . . . [and name of the organization, followed by the number notifying] customers when warranted’’), https:// any notification event where based on the last two digits of the comment ID www.occ.treas.gov/news-issuances/federal-register/ unencrypted customer information number. 2005/70fr15736.pdf (emphasis in original). VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR 77500 Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations affects a certain number of customers, the information is possible to determine, argued that the proposed notification (3) whether such reports should be the date or date range of the notification requirement would be duplicative of made public, (4) whether events event; (4) the number of consumers State breach notification laws and is, involving encrypted information should affected; (5) a general description of the therefore, unnecessary.21The be included in the requirement, and (5) notification event; and, if applicable, Commission, however, disagrees that whether the requirement should allow whether any law enforcement official requiring financial institutions to law enforcement agencies to prevent or has provided the financial institution provide notice to the Commission is delay notification if notification would with a written determination that redundant because of State breach affect law-enforcement investigations.12 notifying the public of the breach would notification laws. State breach The final rule, which the Commission impede a criminal investigation or cause notification laws provide notice to published in the Federal Register on damage to national security, and a consumers and in some cases also to December 9, 2021, did not include a means for the Federal Trade State regulators, while the notice reporting requirement.13However, on Commission to contact the law requirement of the Final Rule requires the same date, the Commission enforcement official. The notice must be notice to the Commission and is published a supplemental notice of provided electronically through a form designed to ensure that the Commission proposed rulemaking (‘‘SNPRM’’) in the located on the FTC’s website, https:// receives notice of security breaches Federal Register, which proposed www.ftc.gov.
(1) the name and contact information of Commission would enable the this indirect method would be as the reporting financial institution, (2) a Commission to more easily enforce the efficient or effective as requiring description of the types of information Rule.17The Clearing House argued that regulated financial institutions to involved in the security event, (3) the the requirement is appropriate because directly notify the Commission.23Such date or the date range of the security it would place financial institutions an approach would be extremely event, if it can be determined, and (4) covered by the Rule in the same burdensome on the Commission and a general description of the security position as banks, which are required to would require the diversion of resources event. In response to the SNPRM, the report data breaches to their prudential from enforcement to search for and Commission received 14 comments regulators.18The Electronic Privacy collect information about breaches from various interested parties, Information Center (‘‘EPIC’’) suggested involving regulated financial including industry groups, consumer that the amendment would incentivize institutions. Also, as some of the groups, and individual consumers.15 ‘‘use of strong data security measures by commenters noted,24State laws vary in After reviewing the comments, the financial institutions, bring additional what types of incidents must be Commission now finalizes the proposed accountability and transparency to the amendments with minor changes. handling of security events, and Escrow Association (Comment 16); CTIA (Comment enhance the data security and privacy of 20); National Automobile Dealers Association III. Overview of Final Rule all consumers.’’19 (‘‘NADA’’) (Comment 21); U.S. Chamber of The Final Rule requires financial Other commenters opposed the Commerce (Comment 22). institutions to report notification events, proposal.20Many of these commenters 21See, e.g., AFSA (Comment 12) at 3; CDIA (Comment 13) at 2–3; CTIA (Comment 20) at 2–4;
defined as the unauthorized acquisition NADA (Comment 21) at 2–3; U.S. Chamber of of unencrypted customer information, 16See Anonymous (Comment 2); Briggs Commerce (Comment 22) at 3. involving at least 500 customers to the (Comment 4); Clearing House Association L.L.C. 22CTIA (Comment 20) at 6–7. Commission. The notice to the (‘‘Clearing House’’) (Comment 11); Anonymous 23While some States that require notification to Commission must include: (1) the name (Comment 14); Securities Industry and Financial a State agency make companies’ breach Markets Association (‘‘SIFMA’’) and Bank Policy notifications public, see, e.g., N.H. Dep’t of Just., and contact information of the reporting Institute (‘‘BPI’’) (‘‘SIFMA/BPI’’) (Comment 15) Off. of Attorney Gen., Security Breach Notifications, financial institution; (2) a description of (supporting notification requirement for financial https://www.doj.nh.gov/consumer/security- the types of information that were institutions that are not regulated by non-FTC breaches/, other States do not make notifications involved in the notification event; (3) if financial agencies); American Council on Education public, and as noted above, not all States require (Comment 18) (supporting proposed notice notice to a State government agency. Some non- requirement with revisions); Electronic Privacy governmental sources report breach notifications, 12Id. Information Center (‘‘EPIC’’) (Comment 19). but there is no guarantee that such sources are 1386 FR 70272 (Dec. 9. 2021). 17See, e.g., Anonymous (Comment 2); Briggs comprehensive as they depend in part on reporting 14See 86 FR 70062, 70067 (Dec. 9, 2021). (Comment 4); The Clearing House (Comment 11) at by consumers who received a breach notification 15The 14 relevant public comments received can 2 (describing breaches in the fintech industry). letter. Thus, the Commission could not obtain be found at Regulations.gov. See FTC Seeks 18Clearing House (Comment 11) at 1–2. comprehensive data relating to breaches at Comment on Proposed Amendments to Safeguards 19EPIC (Comment 19) at 2. regulated financial institutions by compiling reports and Privacy Rules, 16 CFR part 314, Project No. 20See American Financial Services Association of breaches from other sources. P145407, https://www.regulations.gov/docket/FTC- (‘‘AFSA’’) (Comment 12); Consumer Data Industry 24See, e.g., Clearing House (Comment 11) at 8; 2021-0071/comments. Association (‘‘CDIA’’) (Comment 13); American CDIA (Comment 13) at 3; CTIA (Comment 20) at 4. VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations 77501 reported and to whom.25The more efficient enforcement of the Rule, Commission to enforce the Safeguards Safeguards Rule notice requirement will which will in turn increase financial Rule is inappropriate because not every establish a uniform reporting institutions’ incentive to comply. In breach is the result of a failure to requirement for all regulated financial addition, as discussed below, making comply with the Safeguards Rule.32 institutions, assisting the Commission the notices public will enable NADA suggested that the reporting in getting consistent information about consumers to make more informed requirement should only ‘‘apply after a notification events affecting those decisions about which financial series of security events,’’ because only financial institutions regardless of institutions they choose to entrust with multiple events can be ‘‘suggestive of which State’s consumers are affected. their information, providing financial compliance failures,’’ while any single This benefit is not offset by the cost to institutions with an additional incentive breach ‘‘certainly . . . is not.’’33While financial institutions because the to comply with the Rule. the Commission acknowledges that not burden on individual financial The National Automobile Dealers every notification event is necessarily institutions is minimal, as the Final Association (‘‘NADA’’) argued that a the result of a failure to comply with the Rule does not require an extensive requirement for financial institutions to Safeguards Rule, it disagrees that a report and, in many instances, financial report events in order to facilitate single breach cannot be ‘‘suggestive of institutions will already be preparing enforcement against them is compliance failures.’’34Indeed, the fact notices to consumers and State agencies. ‘‘unprecedented’’28and ‘‘raises serious that an institution has not experienced Some commenters argued that the questions,’’ including ‘‘potential First a breach does not necessarily mean that notification requirement would not Amendment and potentially even Fifth the institution is in compliance with the improve financial institutions’ data Amendment concerns.’’29The Rule’s requirements. The Commission security.26Other commenters disagreed Commission disagrees. Far from being believes that taking action to correct a with this assertion, arguing that the unique, the requirement to report potential Safeguards Rule violation notification requirement would further security events to law enforcement before additional security events can incentivize financial institutions to agencies that might result in harm consumers is appropriate and protect customer information.27The enforcement actions against the desirable. The American Financial Commission agrees with these notifying company is common. Many Services Association (‘‘AFSA’’) commenters that the notification Federal agencies30require regulated contended that ‘‘the FTC should clarify requirement will increase the efficiency entities to report data breaches to them, what factors in a report could lead to and effectiveness of the Commission’s and most States require that companies enforcement concerns,’’ arguing that enforcement of the Rule. As noted report breaches to State attorneys otherwise ‘‘institutions may seek to above, while State breach notification general or other State law enforcement minimize all risks associated with a laws require notice to consumers, some and have done so for years.31 report.’’35The Commission does not States do not require that such notices NADA also argued that requiring believe that providing a guide to when be provided to State regulators as well, reporting security events to assist the a report could possibly lead to and not all State regulators that do enforcement is either possible or receive such notices publish them. By 28NADA argues that banking regulations are not desirable because the reports are requiring financial institutions to relevant examples because they are designed ‘‘to unlikely to contain all of the provide notice directly to the protect depositors and to ensure the public interest information that the Commission would Commission, the Commission will not in the safety and soundness of banks,’’ rather than have to devote resources to continually to facilitate enforcement. NADA (Comment 21) at need to determine that law enforcement 4–5, n.8. The banking regulations, however, are also is appropriate or necessary. Such search for breach notifications posted by designed to facilitate enforcement. In addition, the determinations are typically made other sources in order to know that a Safeguards Rule is also designed to protect following investigations that afford financial institution has experienced a customers of financial institutions and ensure the breach. Without a notification, the public interest in the safety of consumer’s financial entities the opportunity to provide information. context and information.
Commission would have no guarantee 29NADA (Comment 21) at 4–5, n. 9. In addition, the Commission notes that it has found all breaches in its 30See, e.g., Interagency Guidance on Response that requiring a financial institution to searches. The required notices will Programs for Unauthorized Access to Customer report an event is not suggesting that enable the Commission to identify Information and Customer Notice, 70 FR 15736, breaches that merit investigation more 15752 (Mar. 29, 2005) (originally issued by the every notification event is the result of Office of the Comptroller of the Currency, the Board a violation of the Rule and will result in quickly and efficiently. Also, receiving of Governors of the Federal Reserve System, the an enforcement action or even notice of breaches will allow the Federal Deposit Insurance Corporation, and the investigation. Rather, the reporting Commission to develop better Office of Thrift Supervision); 45 CFR 164.408 awareness of emerging risks to financial (requiring covered entities to report breaches requirement will provide the affecting 500 or more individuals to the Secretary Commission with valuable information institutions’ security. The Commission of Health and Human Services); 12 CFR 53.3 about security threats to financial expects that these benefits will enable (requiring banking organizations to report security institutions and assist in the events to the Office of the Comptroller of the 25See, e.g., Tex. Bus. & Com. Code 521.053(i) Currency); 12 CFR 225.302 (requiring Board- determination of whether any (requiring companies to notify Texas Attorney supervised banking organization to report certain individual event should be investigated General if a breach affects at least 250 Texas breaches to the Board); 12 CFR 304.23 (requiring further. This will improve the residents); Va. Code Ann. 18.2–186.6(E) (requiring certain bank organizations to report breaches to the Commission’s ability to respond to data companies to notify Virginia Attorney General if a FDIC); see also 87 FR 16590 (Mar. 23, 2022) breach affects at least 1,000 Virginia residents); Fla. (proposed rule requiring companies to report breaches and may enable the Stat. 501.171(3) (requiring businesses to notify the security incidents to the SEC). Commission to issue business and Florida Department of Legal Affairs if a breach 31See, e.g., Tex. Bus. & Com. Code 521.053(i) affects at least 500 individuals in Florida). (requiring companies to notify Texas Attorney 26See, e.g., AFSA (Comment 12) at 1; CDIA General if a breach affects at least 250 Texas 32NADA (Comment 21) at 3–5. (Comment 13) at 2–3; American Escrow Association residents); Va. Code Ann. 18.2–186.6(E) (requiring 33NADA (Comment 21) at 4. (Comment 16) at 2; CTIA (Comment 20) at 3–6; companies to notify Virginia Attorney General if a 34See, e.g., FTC v. Equifax, 1:19–cv–03297–TWT NADA (Comment 21) at 2–3; U.S. Chamber of breach affects at least 1,000 Virginia residents); Fla. (N.D. Ga., July 22, 2019), available at https:// Commerce (Comment 22) at 2–3. Stat. 501.171(3) (requiring businesses to notify the www.ftc.gov/legal-library/browse/cases- 27See EPIC (Comment 19) at 2, see also Florida Department of Legal Affairs if a breach proceedings/172-3203-equifax-inc. Anonymous (Comment 2); Briggs (Comment 4). affects at least 500 individuals in Florida). 35AFSA (Comment 12) at 1. VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR 77502 Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations consumer education about emerging in §314.2, which defines the term Other commenters argued the term threats. ‘‘notification event’’ as the ‘‘acquisition ‘‘security event’’ is too broad a term to Other commenters argued that the of . . . [unencrypted customer] act as a trigger for the notification reporting requirement would be unduly information without the authorization of process, stating that the term burdensome.36Some of these the individual to which the information encompasses types of incidents that commenters suggested that because the pertains.’’ Section 314.2(m) further pose little risk of consumer harm and Rule’s requirement may differ from clarifies that: (1) ‘‘[c]ustomer for which notification is unnecessary.41 State notification laws’ requirements, information is considered unencrypted Some commenters felt notification complying with the Rule will be . . . if the encryption key was accessed should be required only when harm to burdensome.37Other commenters by an unauthorized person;’’ and (2) consumers has occurred or is likely to disagreed, noting that the information ‘‘[u]nauthorized acquisition will be occur, rather than when ‘‘misuse’’ has required is limited to basic information presumed to include unauthorized occurred or is reasonably likely.42Some about the company and the notification access to unencrypted customer commenters argued a trigger that event.38The Commission agrees with information unless you have reliable requires consumer harm would be more these commenters. The information evidence showing that there has not in accord with State notification laws.43 required to be reported is minimal and been, or could not reasonably have Similarly, several commenters argued is very similar to the information been, unauthorized acquisition of such the notification requirement should required by many State notification information.’’ exclude security events that involve laws.39The company will have this only encrypted customer information, Several commenters addressed information as the result of even a basic because there is little chance of whether becoming aware of a security investigation of the security event, an consumer harm in such cases.44Others event is an appropriate trigger for the investigation that would be required in argued requiring financial institutions to notification process. In a joint comment, any event to comply with the Rule and report breaches that do not involve the Securities Industry and Financial basic security practices. The fact that possible harm to consumers would be Markets Association (‘‘SIFMA’’) and the some State laws may be triggered under unduly burdensome on financial Bank Policy Institute (‘‘BPI’’) argued different circumstances and may require institutions and would produce an that the notification process should not different information does not render overwhelming number of reports to the begin when a financial institution this simple report burdensome. Commission.45Conversely, EPIC argued becomes aware of an event, but instead In addition to addressing the notice should be required for all begin when the financial institution proposed amendment in general, security events regardless of whether ‘‘determines’’ a security event has commenters also addressed specific misuse had occurred or was likely.46 occurred. SIFMA and BPI suggested that elements of the proposed amendments. EPIC argued that removing the analysis ‘‘determination’’ takes place sometime These comments are addressed in the of whether misuse was likely would after ‘‘discovery,’’ and that financial following detailed discussion. lower the burden of determining institutions should have 30 days to whether a report should be made and Triggering Event notify the Commission after making this would prevent attempts by financial The Commission adopts proposed determination rather than after institutions to avoid reporting to the §314.4(j) as originally proposed, with discovery. SIFMA and BPI argued that Commission.47 minor changes. Proposed paragraph (j) ‘‘determination’’ ‘‘connotes a higher The Commission agrees with EPIC would have required financial standard of certainty than ‘discovery,’’’ that the trigger for notification requires institutions that become aware of a and would include determining whether clarification. The meaning of the term security event to promptly determine any further requirements for notice, ‘‘misuse’’ in the proposed rule was the likelihood that customer such as number of consumers affected, ambiguous. It was not clear if information has been or will be had been met. The Commission acquisition of customer information misused. Under the provision as disagrees that 30 days after discovery of alone constituted misuse, or if other originally proposed, financial a notification event is insufficient time forms of misuse, such as alteration of institutions would have been required to determine whether the event meets data, would fall within the notification to make a report to the Commission the requirements for notification and to requirement. Given this ambiguity, upon determining that, among other prepare the notice. The Commission financial institutions would have had conditions, ‘‘misuse of customer expects that companies will be able to difficulty evaluating the likelihood of information ha[d] occurred or . . . [was] decide quickly whether a notification misuse of customer information that has reasonably likely [to occur].’’ However, event has occurred by determining been acquired without authorization. At upon consideration of the comments, whether unencrypted customer the same time, the ambiguity could have Commission is clarifying the triggering information has been acquired and, if language by adding a new paragraph (m) so, how many consumers are affected, 41See, e.g., SIFMA/BPI (Comment 15) at 8–9; so there will not be a significant CTIA (Comment 20) at 11–12; NADA (Comment 21) 36CDIA (Comment 13) at 2–3; SIFMA/BPI difference between ‘‘determination’’ and at 2–3. (Comment 15) at 8; ETA (Comment 17) at 2–3; CTIA ‘‘discovery.’’40In addition, the 42See CDIA (Comment 13) at 4–5; SIFMA/BPI (Comment 20) at 3–6; NADA (Comment 21) at 2– notification to the Commission requires (Comment 15) at 9–10; American Escrow 3; U.S. Chamber of Commerce (Comment 22). minimal details and will not take Association (Comment 16) at 2–3; ETA (Comment 37CDIA (Comment 13) at 2–3; CTIA (Comment 17) at 2; CTIA (Comment 20) at 11–14.
20) at 6; NADA (Comment 21) at 2–3. significant time to prepare and, as 43See, e.g., CDIA (Comment 13) at 4–5. 38American Escrow Association (Comment 16) at discussed above, many States require 44AFSA (Comment 12) at 2; CDIA (Comment 13) 2; ACE (Comment 18) at 2, 7–8; EPIC (Comment 19) reports containing similar information, at 6; SIFMA/BPI (Comment 15) at 9; ACE (Comment at 6–7. so the financial institutions will need to 18); CTIA (Comment 20) at 12; NADA (Comment 39See, e.g., Ala. Code 8–38–5(d); Ariz. Rev. Stat. prepare such a report in any event. 21) at 3; U.S. Chamber of Commerce (Comment 22) 18–552(E); Cal. Civ. Code 1798.82(d); Fla. Stat. at 4.
501.171(3)(b); Mich. Comp. Laws 445.72(6); Mo. 45SIFMA/BPI (Comment 15) at 9; ETA (Comment Rev. Stat. 407.1500(2)(4); N.H. Rev. Stat. Ann. 359– 40As discussed below, the Final Rule no longer 17) at 2; CTIA (Comment 20) at 11. C:20(IV); N.Y. U.C.C. Law 899–AA(7); and Or. Rev. requires the financial institution to determine 46EPIC (Comment 19) at 4. Stat. 646A.604(5). whether misuse had occurred or was likely. 47Id. VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations 77503 been used as an opportunity to customer information is encrypted. disagrees with this contention. The circumvent the reporting requirement. Accordingly, the Final Rule does not definition of ‘‘customer information’’ in Specifically, because the proposed rule require notification if the customer the Rule does not encompass all required the financial institution to information acquired is encrypted, so information that a financial institution assess the likelihood of misuse, it would long as the encryption key was not has about consumers. ‘‘Customer have allowed financial institutions to accessed by an unauthorized person. information’’ is defined as records underestimate the likelihood of misuse, See §314.2(m). By requiring notice containing ‘‘non-public personal and, thereby, the need to report the relating to unauthorized acquisition information’’ about a customer.53‘‘Non- security event. only of unencrypted customer public personal information’’ is, in turn, Accordingly, the Final Rule requires information, this change brings the Rule defined as ‘‘personally identifiable notification where customer information into accord with most State breach financial information,’’ and excludes has been acquired, rather than when notification laws. If customer information that is publicly available or misuse is considered likely. information was encrypted but the not ‘‘personally identifiable.’’54The Specifically, the Commission is adding encryption key was also accessed Commission believes security events a new §314.2(m) that defines the term without authorization, then the that trigger the notification ‘‘[n]otification event’’ to mean the customer information will be requirement—where customers’ non- acquisition of unencrypted customer considered to be unencrypted. Someone public personally identifiable, information without the authorization of who has both the encrypted information unencrypted financial information has the individual to which the information and the encryption key can easily been acquired without authorization— pertains. Section 314.2(m) also provides decrypt the information.50 are serious and support the need for that unauthorized access of information In summary, the Final Rule requires Commission notification.
will be presumed to result in notification if the financial institution unauthorized acquisition unless the discovers that unencrypted customer In the SNPRM, the Commission asked financial institution can show that there information has been acquired without whether, rather than having a stand- has not been, or could not reasonably authorization. See §314.2(m). Unlike alone reporting requirement, the Rule have been, unauthorized acquisition of under the proposed rule, notification is should require reporting only when such information. This rebuttable not conditioned on the assessment of another State or Federal statute, rule, or presumption is consistent with the likelihood of misuse. The Commission regulation requires a financial Health Breach Notification Rule. See 16 believes that determining whether institution to provide notice of a CFR 318.2(a) (‘‘Unauthorized acquisition has occurred simplifies the security event or similar event to a acquisition will be presumed to include requirement and will enable financial governmental entity. Some commenters unauthorized access to unsecured PHR institutions to more speedily determine supported this suggestion, arguing that [personal health record] identifiable whether a notification event has such a requirement would reduce health information unless the vendor of occurred. In addition, the Commission duplicative notice and consumer personal health records, PHR related believes this change will reduce the confusion.55Other commenters opposed entity, or third party service provider number of notifications by excluding it, arguing that because of the varied that experienced the breach has reliable events where encrypted information nature of State notification laws, this evidence showing that there has not was acquired, while ensuring it receives would produce inconsistent reporting to been, or could not reasonably have notice of events that are more likely to the Commission.56The Commission been, unauthorized acquisition of such result in harm. As noted earlier, the agrees that a stand-alone requirement information.’’).48Here, too, the Rule also includes a rebuttable will help ensure the Commission presumption is ‘‘intended to address the presumption stating that when there is receives consistent information difficulty of determining whether access unauthorized access to data, regarding security events.
to data (i.e., the opportunity to view the unauthorized acquisition will be data) did or did not lead to acquisition presumed unless the entity that Determination of Scope of Security (i.e., the actual viewing or reading of the experienced the breach ‘‘has reliable Event data).’’49 evidence showing that there has not The Commission also agrees been, or could not reasonably have After a financial institution becomes notification should not be required been, unauthorized acquisition of such aware of a security event, the proposed when harm to consumers is rendered information.’’ See §314.2(m). rule would have required it to extremely unlikely because the Some commenters argued the determine whether at least 1,000 notification requirement should trigger consumers have been affected or 48See also 74 FR 42962, 42966 (Aug. 25, 2009). only when especially ‘‘sensitive’’ reasonably may be affected and, if so, to Examples of this rebuttable presumption cited in information is involved.51These notify the Commission. that rulemaking, and equally relevant here, commenters argue that requiring included a circumstance where ‘‘an unauthorized A number of commenters expressed employee inadvertently accesses an individual’s notification when any kind of customer views pertaining to the minimum PHR and logs off without reading, using, or information is involved would result in threshold for the number of affected disclosing anything. If the unauthorized employee notifications when there is no risk of read the data and/or shared it, however, he or she customers. Some commenters agreed harm to consumers.52The Commission ‘acquired’ the information, thus triggering the that notification of security events notification obligation in the rule.’’ Another should not be required if the number of example related to a lost laptop: ‘‘If an entity’s 50See, e.g., Ala. Code 8–38–2(6)(b)(2); Alaska consumers that could be affected fell employee loses a laptop in a public place, the Stat. 45.48.090(7); Colo. Rev. Stat. 6–1–716 (2)(a.4); information would be accessible to unauthorized 815 Ill. Comp. Stat. 530/5 (‘‘Personal Information’’ below the proposed threshold (1,000 persons, giving rise to a presumption that definition); NY Gen. Bus. Law 899–aa(b); Tex. Bus. unauthorized acquisition has occurred. The entity & Com. Code 521.053(a). 5316 CFR 314.2(d).
can rebut this presumption by showing, for 51AFSA (Comment 12) at 2; CDIA (Comment 13) 5416 CFR 314.2(l).
example, that the laptop was recovered, and that at 5–6; ETA (Comment 17) at 2; CTIA (Comment 20) forensic analysis revealed that files were never at 11–12. 55CTIA (Comment 20) at 9–10; NADA (Comment opened, altered, transferred, or otherwise 52AFSA (Comment 12) at 2; CDIA (Comment 13) 21) at 7. compromised.’’ Id. at 42966. at 5–6; ETA (Comment 17) at 2; CTIA (Comment 20) 56Clearing House (Comment 11) at 9; ACE 49Id. at 11–12. (Comment 18) at 7; EPIC (Comment 19) at 6–7. VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR 77504 Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations consumers).57The Clearing House, own Health Breach Notification Rule, investigation.66Alternatively, EPIC however, suggested that notification and the Health Insurance Portability and suggested the Commission should not should be required in all cases, Accountability Act (HIPAA) Breach allow companies to delay reporting in regardless of the number of consumers Notification Rule,62also require cases of a law enforcement potentially affected.58 notification of breaches involving 500 or investigation, but should instead delay AFSA suggested there should be a more people. The Commission publication of the notice in cases where higher threshold of affected consumers concludes that a lower threshold than in publication would interfere with an before notice is required.59AFSA the proposed rule is appropriate. investigation.67The Commission agrees argued that the thousand consumer Accordingly, the Commission is that, while notifications to the threshold was too low because of ‘‘the adopting a minimum threshold of 500 Commission should not be made public large number of financial institutions consumers, rather than the minimum if law enforcement has requested a with many more customers.’’60The threshold of 1,000 consumers that was delay, there is no reason to delay notice Commission disagrees that the fact that in proposed §314.4(j). The Commission to the Commission itself on that basis. some financial institutions hold the believes a security event that involves This conclusion is consistent with the information of millions of consumers the acquisition of unencrypted customer approach taken by the Securities and suggests a higher threshold is information involving at least 500 Exchange Commission and by other appropriate. The Clearing House, consumers is significant enough to Federal financial regulators in conversely, argues the Rule should warrant notification of the Commission, rulemakings that require notice of cyber require that the Commission receive regardless of the size of the financial incidents to a regulator, as opposed to notice whenever any consumer is institution. notice directly to consumers.68 affected, because otherwise consumers Accordingly, §314.4(j)(1)(vi) of the whose information was involved in Time To Report Final Rule provides that a financial smaller breaches would have no notice The proposed Rule would have institution’s notice must (1) indicate of the breach and would be ‘‘without the required Commission notification whether any law enforcement official benefit of important notices’’ if financial within 30 days from discovery of the has provided the institution with a institutions were not required to report notification event. Some commenters written determination that public breaches affecting fewer consumers.61 that addressed this deadline agreed that disclosure of the breach would impede The Commission does not agree that setting a minimum threshold of this would provide financial institutions a criminal investigation or cause consumers affected before requiring sufficient time to make the required damage to national security, and (2) notification would leave consumers determinations and to notify the provide a means for the Commission to involved in smaller breaches without Commission.63Other commenters contact the law enforcement official. In notice, as consumers will typically argued that financial institutions should order that notice to the public is not receive direct notification under State be given significantly less time to notify delayed indefinitely, the provision also breach notification laws, regardless of the Commission.64Other commenters provides that a law enforcement official whether notice to the Commission is argued that financial institutions should may request an initial delay of up to 30 required. In determining the proper be given more time to notify the days following the date when the threshold, the Commission notes that Commission.65The Commission disclosure is filed with the Commission. numerous State laws require believes that a 30-day deadline properly The delay may be extended for an notification of breaches either with no balances the need for prompt additional period of up to 60 days if the minimum threshold, or with a threshold notification with the need to allow law enforcement official seeks such an of 250 or 500 people. The Commission’s financial institutions to investigate a extension in writing. Additional delay security event, determine whether the may be permitted only if the 57CDIA (Comment 13) (suggesting a requirement information was acquired without Commission staff determines that public of notification when a security event affects at least authorization and how many consumers disclosure of a notification event 1,000 consumers and may cause substantial harm); were affected, and learn enough about continues to impede a criminal American Escrow Association (Comment 16) at 2 the event to make the notification to the (supporting 1,000 consumer requirement while suggesting other changes to the notice requirement); Commission meaningful. Accordingly, 66See SIFMA/BPI (Comment 15) at 10; ACE ACE (Comment 17) at 2 (stating that requiring finalized §314.2(j)(1) retains the 30-day (Comment 18) at 4–5; CTIA (Comment 20) at 15; notice when 1,000 consumers are affected would be deadline from the SNPRM. U.S. Chamber of Commerce (Comment 22) at 5. appropriate, if notices were required only when 67EPIC (Comment 19) at 5–6. there was a risk of substantial harm); EPIC Some commenters argued that 68See Securities and Exchange Commission, (Comment 19) at 4 (suggesting that notice be financial institutions should be Cybersecurity Risk Management, Strategy, required whenever an event involves the permitted to delay or withhold Governance, and Incident Disclosure, 88 FR 51896, information of at least 1,000 consumers regardless notification of a security event to the 51898 (Aug. 8, 2023) (allowing delay of required of the likelihood of misuse).
affected by the event).
Several commenters supported these commenters argued that making the institutions are willing to share in the elements as an appropriate level of reports public would benefit consumers reports in order to avoid public detail.70However, NADA was opposed by helping them to make informed revelation of the details of the breach.82 to the requirement that the report decisions about which financial As discussed above, the Commission include a description of the security institutions to entrust with their acknowledges not all security events at event,71while EPIC suggested the Rule financial information or to determine financial institutions are the result of a should require a more detailed whether they might have been affected failure to comply with the Safeguards description of the security event.72EPIC by a security event.75Other commenters Rule. Nevertheless, the Commission argued that financial institutions should argued the reports should be believes providing more information to confidential and not shared with the consumers about these events will both 69SIFMA/BPI argued that financial institutions public.76Some commenters argued that benefit consumers and incentivize should be allowed to notify the Commission by making the reports public could companies to better protect that phone because that ‘‘could foster confidentiality.’’ encourage further cybersecurity attacks information. The Commission is not SIFMA/BPI (Comment 15) at 7. Similarly, the U.S. on affected financial institutions by persuaded that attention given to C in h s a ti m tu b t e io r n o s f s C h o o m u m ld e b rc e e a s ll u o g w ge e s d t e t d o n th o a t t i f f y i n th an e cial making potential attackers aware of breaches is ‘‘undue’’ or otherwise Commission by alternative means, such as mail, inappropriate, as suggested by some ‘‘where covered entities may lack access to the 73Id. commenters. Apart from providing internet.’’ U.S. Chamber of Commerce (Comment 74As noted above, if applicable, financial
22) at 4. The Commission believes that notification institutions would also inform the Commission should be limited to the form on the Commission’s whether any law enforcement official has provided 77SIFMA/BPI (Comment 15) at 7; ACE (Comment website, as this will ensure that all notifications are a written determination that notifying the public of 18) at 5–7; CTIA (Comment 20) at 15–16; NADA received and recorded in the same way. The the breach would impede a criminal investigation (Comment 21) at 6. Commission believes that it is not likely that a or cause damage to national security, and a means 78NADA (Comment 21) at 6. financial institution that has suffered a notification for the FTC to contact the law enforcement official. 79AFSA (Comment 12) at 2–3; NADA (Comment event will not be able to access the internet for the 75Briggs (Comment 4); Clearing House (Comment 21) at 5. entirety of the 30-day reporting window. 11) at 10; EPIC (Comment 19) at 5–6. 80CDIA (Comment 13) at 7; see also SIFMA/BPI 70See AFSA (Comment 12) at 2; ACE (Comment 76AFSA (Comment 12) at 2–3; CDIA (Comment (Comment 15) at 6 (suggesting that publication of 18) at 2; U.S. Chamber of Commerce (Comment 22) 13) at 7; SIFMA/BPI (Comment 15) at 5–7; ACE the reports could cause confusion for consumers at 4. (Comment 18) at 5–7; CTIA (Comment 20) at 15– and investors); ACE (Comment 18) at 5–7. 71NADA (Comment 21) at 6. 16; NADA (Comment 21) at 5–6; U.S. Chamber of 81CTIA (Comment 20) at 16. 72EPIC (Comment 19) at 3. Commerce (Comment 22) at 5. 82SIFMA/BPI (Comment 15) at 6. VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR 77506 Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations actionable information for individuals assessment. . . .’’ In the Final Rule, an additional 5% of financial who are directly affected, reporting this error is corrected. institutions to report—a generous provides a broader value to the general estimate—FTC staff estimates the Section 314.5: Effective Date public to consider proactive measures, reporting requirement will affect such as implementing a credit freeze, The proposed rule revised §314.5 so approximately 115 financial institutions prioritizing methods to secure their own that the reporting requirement in each year.87FTC staff anticipates the data, and determining where to do §314.4(j) would not go into effect until burden associated with the reporting business. The Commission does not six months after the publication of a requirement will consist of the time believe a confidential reporting system final rule. As proposed, finalized §314.5 necessary to compile the requested is needed in order to incentivize more provides that §314.4(j) will become information and report it via the comprehensive reporting by financial effective on May 13, 2024. electronic form located on the institutions. The general level of detail Commission’s website. FTC staff
to control the risks you identity through threshold by 500 consumers will likely 2019 End-of-Year Data Breach Report, Identity risk assessment. . . .’’ Actually, a make only a small difference in the Theft Resource Center at 2, available at https:// financial institution must ‘‘[d]esign and number of breaches reported.86 www.idtheftcenter.org/wp-content/uploads/2020/ implement safeguards to control the Assuming that reducing the reporting 01/01.28.2020_ITRC_2019-End-of-Year-Data- Breach-Report_FINAL_Highres-Appendix.pdf.
risks you identify through risk threshold by 500 individuals will lead Although this number may exclude some entities that are covered by the Safeguards Rule but are not 83Clearing House (Comment 11) at 8–9; EPIC 8544 U.S.C. 3502(3)(A)(i). contained in the ‘‘Banking/Credit/Financial’’ (Comment 19); see also Anonymous (Comment 14) 86According to the Identity Theft Resource category, not every security event will trigger the (stating that if there is a data breach, consumers Center, 108 entities in the ‘‘Banking/Credit/ reporting obligations (e.g., breaches affecting less ‘‘need to know what happened to their Financial’’ category suffered data breaches in 2019, than 500 people). Therefore, Commission staff information.’’ which affected more than 100 million consumers. estimated in the SNPRM that 110 institutions 84See AFSA (Comment 12) at 3; CDIA (Comment 2019 End-of-Year Data Breach Report, Identity Theft would have reportable events. Because of the 13) at 8; SIFMA/BPI (Comment 15) at 10; CTIA Resource Center at 2, available at https://www.idthe change in the reporting threshold the Commission (Comment 20) at 16–17; NADA (Comment 21) at 7; ftcenter.org/wp-content/uploads/2020/01/ expects an additional 5 entities to have reporting see also American Council on Education (Comment 01.28.2020_ITRC_2019-End-of-Year-Data-Breach- obligations.
18) at 8 (stating that the Commission should engage Report_FINAL_Highres-Appendix.pdf. On average, 88See, e.g., Cal. Civil Code 1798.82; Tex. Bus. & with covered financial institutions about existing each breach would have involved more than Com. Code 521.053; Fla. Stat. 501.171. notification requirements before establishing a 930,000 consumers, far over both the 500 and the 89This figure is derived from the mean hourly consumer notification requirement). 1,000 consumer thresholds. wage for Information security analysts. See VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations 77507 also anticipates that affected financial VI. Regulatory Flexibility Act burdensome for businesses,95none institutions may use attorneys to argued specifically that smaller The Regulatory Flexibility Act formulate and submit the required businesses in particular would be (‘‘RFA’’)93requires that the Commission report, resulting in 2 hours of labor at provide an Initial Regulatory Flexibility subject to special burden. Other a mean hourly wage of $78.74 (2 hours Analysis (‘‘IRFA’’) with a proposed rule, commenters argued that the reporting × $78.74 = $157.48).90Accordingly, FTC and a Final Regulatory Flexibility requirement would create little staff estimates the approximate labor Analysis (‘‘FRFA’’) with the final rule, burden.96One commenter specifically argued that the requirement would not cost to be $330 per report (rounded to unless the Commission certifies that the create significant burden for small the nearest dollar). This yields a total Rule will not have a significant businesses.97As discussed above, the annual cost burden of $37,950 (115 economic impact on a substantial annual responses × $330). number of small entities.94As discussed Commission does not anticipate that covered financial institutions will incur in the IRFA, the Commission does not The Commission is providing an any new capital or non-labor costs in believe this amendment to the online reporting form on the complying with the reporting Safeguards Rule has the threshold Commission’s website to facilitate requirement. Additionally, the average impact on small entities. The reporting reporting of qualifying notification annual labor costs per covered financial requirement will apply to financial events. As a result, the Commission institution are de minimis because most institutions that, in most cases, already does not anticipate covered financial entities, including small entities, will have an obligation to disclose similar institutions will incur any new capital only infrequently be required to file a information under certain Federal and or non-labor costs in complying with report. Thus, the Commission does not State laws and regulations and will not the reporting requirement. believe that the reporting requirement require additional investigation or will create a significant burden for Pursuant to Section 3506(c)(2)(A) of preparation.
(1) whether the disclosure requirements adopts the amendments proposed in its The Commission did not receive any are necessary, including whether the SNPRM with only minimal comments filed by the Chief Counsel for information will be practically useful; modifications. In its IRFA, the Advocacy of the Small Business (2) the accuracy of our burden estimates, Commission determined that the Administration (‘‘SBA’’). including whether the methodology and proposed rule would not have a assumptions used are valid; (3) ways to significant impact on small entities 3. Description and an Estimate of the enhance the quality, utility, and clarity because of the minimal information Number of Small Entities to Which the being requested. Although the Final Rule Will Apply, or Explanation of the information to be collected; and Commission certifies under the RFA Why No Estimate Is Available (4) ways to minimize the burden of providing the required information to that the rule will not have a significant As explained in the IRFA, the Commission. Although the impact on a substantial number of small determining a precise estimate of the entities, and hereby provides notice of number of small entities98that would Commission received several comments that certification to the Small Business that argued that the required Administration, the Commission 95CDIA (Comment 13) at 2–3; SIFMA/BPI notifications would be burdensome for nonetheless has determined that (Comment 15) at 8; ETA (Comment 17) at 2–3; CTIA businesses, none addressed the accuracy publishing a FRFA is appropriate to (Comment 20) at 3–6; NADA (Comment 21) at 2– of the Commission’s burden estimate.91 3; U.S. Chamber of Commerce (Comment 22). ensure that the impact of the rule is Other commenters argued that the 96American Escrow Association (Comment 16) at fully addressed. Therefore, the 2; ACE (Comment 18) at 2, 7–8; EPIC (Comment 19)
reporting requirement would create Commission has prepared the following at 6–7. little burden.92For the reasons analysis: 97American Escrow Association (Comment 16) at discussed above, the Commission agrees 2 (stating that the reporting requirement ‘‘does not with these commenters and does not 1. Need for and Objectives of the Final appear to be onerous as a reporting matter and we Rule also agree with the FTC’s conclusion that there believe that reporting requirement will would not be a significant impact on small create a significant burden for The need for and the objective of the business’’). businesses. Final Rule is to ensure the Commission 98The U.S. Small Business Administration Table is aware of notification events that of Small Business Size Standards Matched to North American Industry Classification System Codes could suggest a financial institution’s ‘‘Occupational Employment and Wages—May (‘‘NAICS’’) are generally expressed in either 2022,’’ Bureau of Labor Statistics, U.S. Department security program does not comply with millions of dollars or number of employees. A size of Labor (April 5, 2023), Table 1 (‘‘National the Rule’s requirements, thus facilitating standard is the largest that a business can be and employment and wage data from the Occupational Commission enforcement of the Rule. still qualify as a small business for Federal Employment Statistics survey by occupation, May Government programs. For the most part, size To the extent the reported information 2023’’), available at https://www.bls.gov/ standards are the annual receipts or the average news.release/pdf/ocwage.pdf. is made public, the information will employment of a firm. Depending on the nature of 90This figure is derived from the mean hourly also assist consumers by providing the financial services an institution provides, the wage for Lawyers. See ‘‘Occupational Employment information as to notification events size standard varies. By way of example, mortgage and Wages—May 2019,’’ Bureau of Labor Statistics, experienced by various financial and nonmortgage loan brokers (NAICS code U 1 . ( S ‘‘ . N D a e ti p o a n r a tm l e e m nt p o lo f y L m ab e o n r t ( a M nd ar w ch a g 3 e 1 d , 2 a 0 ta 2 f 0 r ) o , m Ta t b h l e e institutions. 5 re 2 c 2 e 3 ip 10 ts ) a a r r e e $ c 1 la 5 s s m if i i l e l d io a n s o s r m le a s ll s . i f C t o h n e s ir u m an e n r u l a e l n ding institutions (NAICS code 52291) are classified as Occupational Employment Statistics survey by 2. Significant Issues Raised in Public small if their annual receipts are $47 million or less. occupation, May 2019’’), available at https:// Comments in Response to the IRFA Commercial banking and savings institutions www.bls.gov/news.release/pdf/ocwage.pdf.
VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR 77508 Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations have to report a notification event in a is minimal. In drafting the reporting been, unauthorized acquisition of such given year is not readily feasible. No requirement, the Commission has made information. commenters addressed this issue. Both every effort to avoid unduly * * * * * small entities and larger ones burdensome requirements for entities. ■3. In §314.4, revise the introductory experience security incidents involving The reporting requirement only text of paragraph (c) and add paragraph disclosure of consumer information.99 mandates that affected financial
However, other factors complicate the institutions provide the Commission analysis. There are no estimates with information necessary to assist it in §314.4 Elements. available reflecting the percentage of its regulatory and enforcement efforts. * * * * * financial institutions under the The rule minimizes burden on all (c) Design and implement safeguards Commission’s jurisdiction that would be covered financial institutions, including to control the risks you identify through considered small entities, and small small businesses, by providing for risk assessment, including by: entities may be more likely to reporting through an online form on the * * * * * experience notification events that fall Commission’s website. In addition, the
and, therefore, it is not possible to potential burden on small businesses
report in a given year were a small designated this rule as not a ‘‘major The notice shall include the following:
entity, the reporting requirement would rule,’’ as defined by 5 U.S.C. 804(2).
4. Projected Reporting, Recordkeeping, determine, the date or date range of the Federal Trade Commission amends 16 and Other Compliance Requirements notification event;
The notification requirement imposes (iv) The number of consumers reporting requirements. As outlined PART 314—STANDARDS FOR affected or potentially affected by the above, the amendment will affect only SAFEGUARDING CUSTOMER notification event; those financial institutions that suffer a INFORMATION (v) A general description of the notification event in which unencrypted notification event; and customer information affecting at least ■1. The authority citation for part 314 (vi) Whether any law enforcement 500 consumers is acquired without continues to read as follows: official has provided you with a written authorization. If such an event occurs, Authority: 15 U.S.C. 6801(b), 6805(b)(2). determination that notifying the public the affected financial institution may ■2. In §314.2: of the breach would impede a criminal expend costs to provide the Commission ■a. Redesignate paragraphs (m) through investigation or cause damage to with the information required by the (r) as paragraphs (n) through (s), national security, and a means for the reporting requirement. As noted in the respectively; and Federal Trade Commission to contact PRA analysis above, the total estimated ■b. Add a new paragraph (m). The the law enforcement official. A law annual cost burden for all entities addition reads as follows: enforcement official may request an subject to the reporting requirement will initial delay of up to 30 days following be approximately $37,950. §314.2 Definitions. the date when notice was provided to * * * * * the Federal Trade Commission. The
5. Description of Steps Taken To (m) Notification event means delay may be extended for an additional Minimize Significant Economic Impact, acquisition of unencrypted customer period of up to 60 days if the law If Any, on Small Entities, Including information without the authorization of enforcement official seeks such an Alternatives the individual to which the information extension in writing. Additional delay The Commission did not propose any pertains. Customer information is may be permitted only if the specific small entity exemption or other considered unencrypted for this Commission staff determines that public significant alternatives because the purpose if the encryption key was disclosure of a security event continues burden imposed upon small businesses accessed by an unauthorized person. to impede a criminal investigation or Unauthorized acquisition will be cause damage to national security. 99See, e.g., 2023 Verizon Data Breach presumed to include unauthorized (2) Notification event treated as Investigations Report at 65, available at https:// access to unencrypted customer discovered. A notification event shall be www.verizon.com/business/resources/reports/dbir/ information unless you have reliable treated as discovered as of the first day (reporting cybersecurity incidents and confirmed evidence showing that there has not on which such event is known to you. data disclosures for companies with fewer than or more than 1000 employees). been, or could not reasonably have You shall be deemed to have knowledge VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR Federal Register/Vol. 88, No. 217/Monday, November 13, 2023/Rules and Regulations 77509 of a notification event if such event is 8 p.m. on December 10, 2023, and on enforced from 5:30 p.m. through 8 p.m. known to any person, other than the December 17, 2023. This enforcement on December 10, 2023, and December person committing the breach, who is action is being taken to provide for the 17, 2023. your employee, officer, or other agent. safety of life on navigable waterways FORFURTHERINFORMATIONCONTACT: If ■ 4. Revise §314.5 to read as follows: during the event. The Coast Guard’s you have questions about this regulation for recurring marine events in notification of enforcement, call or §314.5 Effective date. the San Diego Captain of the Port Zone email Lieutenant Shelley Turner, Section 314.4(j) is effective as of May identifies the regulated entities and area Waterways Management, U.S. Coast 13, 2024. for this event. During the enforcement Guard Sector San Diego, CA; telephone By direction of the Commission. periods and under the provisions of 33 (619) 278–7656, email April J. Tabor, CFR 100.1101, persons and vessels are MarineEventsSD@uscg.mil. prohibited from anchoring, blocking, Secretary. SUPPLEMENTARYINFORMATION: The Coast loitering, or impeding within this Guard will enforce the special local [FR Doc. 2023–24412 Filed 11–9–23; 8:45 am] regulated area, unless authorized by the regulations in 33 CFR 100.1101 for the BILLING CODE 6750–01–P Captain of the Port, or his designated location identified in Item No. 6 in representative. The Coast Guard may be Table 1 to §100.1101, from 5:30 p.m.
100.1101 will be enforced from 5 p.m.
(619) 278–7656, email are prohibited from entering into, RIN 1625–AA00 MarineEventsSD@uscg.mil. transiting through, or anchoring within SUPPLEMENTARYINFORMATION: The Coast this regulated area unless authorized by Safety Zone; APEC 2023 Fireworks; Guard will enforce the special local the Captain of the Port Sector San Diego San Francisco Bay, San Francisco, CA regulations in 33 CFR 100.1101 for the or their designated representative. AGENCY: Coast Guard, Department of San Diego Parade of Lights in San Diego DATES: The regulations in 33 CFR Homeland Security (DHS). Bay, CA in 33 CFR 100.1101, Table 1, 100.1101 for the location described in ACTION: Temporary final rule.
Item 5 of that section from 5 p.m. until Item 6 in Table 1 to §100.1101, will be VerDate Sep<11>2014 15:58 Nov 09, 2023 Jkt 262001 PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 E:\FR\FM\13NOR1.SGM 13NOR1 SELUR 590 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations FEDERAL TRADE COMMISSION (a) Add-On or Add-On Product(s) or (o) Whether, or Under What Service(s) Circumstances, a Vehicle May Be 16 CFR Part 463 (b) Add-On List Repossessed
I. Background Consumer Reviews or Ratings of the Recordkeeping, and Other Compliance
II. Motor Vehicle Financing and Leasing Services Is or Was Affiliated With, Alternatives to the Proposed Rule Which
III. Section-by-Section Analysis or Sweepstakes (b) Issues Raised by Comments, Including
VII. Final Regulatory Analysis Under Section Frank Act, the Commission published in things, proposed to (i) prohibit motor 22 of the FTC Act the Federal Register a notice discussing vehicle dealers from making certain
I. Background and 15 U.S.C. 57a(b)(1) (establishing that certain bait-switch-tactics-plaguing-car-buyers.
A. Statutory Authority rulemaking proceedings by the Commission under 9See Fed. Trade Comm’n, Notice of Proposed non-APA procedures are subject to requirements in Rulemaking, Motor Vehicle Dealers Trade The Dodd-Frank Wall Street Reform addition to those under the APA). Regulation Rule, 87 FR 42012 (released June 23, and Consumer Protection Act (‘‘Dodd- 4See 12 U.S.C. 5411(a). 2022; published July 13, 2022) [hereinafter NPRM], 576 FR 14014, 14015 (Mar. 15, 2011). https://www.govinfo.gov/content/pkg/FR-2022-07- Frank Act’’) was signed into law in 6See Fed. Trade Comm’n, ‘‘The Road Ahead: 13/pdf/2022-14214.pdf. 2010.1Section 1029 of the Dodd-Frank Selling, Financing & Leasing Motor Vehicles’’ (Apr. 10The Commission received 27,349 comment Act authorizes the FTC to prescribe 12, 2011), https://www.ftc.gov/news-events/events/ submissions filed online in response to its NPRM. rules with respect to unfair or deceptive 2011/04/road-ahead-selling-financing-leasing- See Gen. Servs. Admin., Dkt. No. FTC–2022–0046, acts or practices by motor vehicle motor-vehicles (providing materials from Proposed Rule, Motor Vehicle Dealers Trade roundtable in Detroit, Michigan); Fed. Trade Regulation Rule (July 13, 2022), https:// dealers.2The FTC is authorized to do so Comm’n, ‘‘The Road Ahead: Selling, Financing & www.regulations.gov/document/FTC-2022-0046- under the FTC Act and in accordance Leasing Motor Vehicles’’ (Aug. 2, 2011), https:// 0001 (noting comments received). To facilitate with section 553 of the Administrative www.ftc.gov/news-events/events/2011/08/road- public access, over 11,000 such comments have Procedure Act (‘‘APA’’).3The grant of ahead-selling-financing-leasing-motor-vehicles been posted publicly on Regulations.gov at https:// (providing materials from roundtable in San www.regulations.gov/document/FTC-2022-0046- Antonio, Texas); Fed. Trade Comm’n, ‘‘The Road 0001/comment (noting posted comments). As 1Public Law 111–203, 124 Stat. 1376 (2010). Ahead: Selling, Financing & Leasing Motor explained at Regulations.gov, agencies may choose 212 U.S.C. 5519(d). See 12 U.S.C. 5519(f)(1) and Vehicles’’ (Nov. 17, 2011), https://www.ftc.gov/ to redact or withhold certain submissions (or (2) for definitions of the terms ‘‘motor vehicle’’ and news-events/events/2011/11/road-ahead-selling- portions thereof) such as those containing private ‘‘motor vehicle dealer’’ under section 1029 of the financing-leasing-motor-vehicles (providing or proprietary information, inappropriate language, Dodd-Frank Act, respectively. materials from roundtable in Washington, District or duplicate/near duplicate examples of a mass- 3See 12 U.S.C. 5519(a) (discussing the authority of Columbia). mail campaign. See Gen. Servs. Admin., over ‘‘motor vehicle dealer[s] that [are] 7As used herein, references to the ‘‘Statement of Regulations.gov Frequently Asked Questions, Find predominantly engaged in the sale and servicing of Basis and Purpose’’ or ‘‘SBP’’ refer to the portions Dockets, Documents, and Comments FAQs, ‘‘How motor vehicles, the leasing and servicing of motor of this document that precede the regulatory text of are comments counted and posted to vehicles, or both’’); 12 U.S.C. 5519(d) the Final Rule. References to the ‘‘Rule,’’ ‘‘Final Regulations.gov?,’’ https://www.regulations.gov/ (‘‘Notwithstanding section 57a of title 15, the Rule,’’ or ‘‘CARS Rule’’ refer to the text in part faq?anchor=downloadingdata (last visited Dec. 5, Federal Trade Commission is authorized to 463—Combating Auto Retail Scams (‘‘CARS’’) 2023). The Commission has considered all timely prescribe rules under sections 45 and 57a(a)(1)(B) Trade Regulation Rule. Because the Final Rule is and responsive public comments it received in of title 15[] in accordance with section 553 of title narrower than the proposed Motor Vehicle Dealers response to its NPRM. 5, with respect to a person described in subsection Trade Regulation Rule in the NPRM, the 11See, e.g., Individual commenter, Doc. No. FTC– (a).’’); 5 U.S.C. 553. Because the Commission has Commission has modified the Rule title to reflect 2022–0046–4648 (‘‘As a young Marine stationed in authority to promulgate this Rule in accordance the more limited scope. Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 592 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations also included dealerships and their critical of the Commission’s proposal or consumers’ largest expense—on a par employees, industry groups, consumer that urged the Commission to adopt with housing, child care and food, and and community groups, and Federal and additional requirements. Thus, to accounting for 16% of the median State lawmakers and law enforcement ensure that this document also reflects annual household income before agencies. Many commenters, such as the many comments in the public record taxes.18In 2022 alone, Americans spent consumers, some dealers and dealer from stakeholders who supported the more than $720 billion on motor employees, consumer groups, and proposal as is, the Commission has vehicles and vehicle parts.19 lawmakers and enforcers, were excerpted a number of such comments Given these costs, many consumers supportive of the proposed rule in in portions of its SBP. who purchase a motor vehicle rely on whole or in part. Many of these financing to complete their purchases.
III. consumers, and the second-largest for medical visits, and many other The Commission notes that it has U.S. consumers ages 40 and over.22 important tasks in their daily lives.14 undertaken careful review and Servicemembers have an average of These vehicles have become consideration of each of the comments twice as much auto debt as civilians— increasingly costly: the average price of it received in response to its NPRM. The particularly young servicemembers, a new vehicle sold at a new car Commission has dedicated the majority who generally require vehicles for dealership in 2022 was more than of its section-by-section analysis to transportation while living on military $46,000,15while the average price of a descriptions of, and responses to, bases.23By the age of 24, around 20 used vehicle sold at such dealerships comments or portions thereof that were was more than $30,000.16By the second business/car-ownership-costs.html (citing average quarter of 2023, the average monthly a military town I was taken advantage of by a payment for used cars reached $533, monthly payment figures from TransUnion). dealership when purchasing my first car. It set me 18Id. (citing data from AAA and the U.S. Census back financially for years. I know of many young and the average monthly payment for Bureau). military people who purchased vehicle[]s and new cars reached $741—both record 19Bureau of Econ. Analysis, ‘‘National Data: we[]re instantly so far upside down after leaving highs.17Vehicles are now many National Income and Product Accounts, Personal the dealership with thousands of dollars in add on Consumption Expenditures by Major Type of junk charges . . . .’’); Individual commenter, Doc. Product’’ tbl. 2.3.5, https://apps.bea.gov/iTable/ No. FTC–2022–0046–0542 (‘‘As a former member of 13Unless otherwise indicated, the terms ‘‘auto,’’ ?reqid=19&step=2&isuri=1&categories=survey the Military, the amount of scams and horror stories ‘‘automobile,’’ ‘‘car,’’ ‘‘motor vehicle,’’ and #eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDNd I have heard regarding young service members ‘‘vehicle,’’ as used in this SBP and the LCJkYXRhIjpbWyJjYXRlZ29yaWVzIiwiU3VydmV5I buying cars is absurd. . . . Someone shouldn’t Commission’s final regulatory analysis, refer to l0sWyJOSVBBX1RhYmxlX0xpc3QiLCI2NSJdXX0= have to do hours of research on how to buy a car ‘‘Covered Motor Vehicle’’ as defined in this part. (last revised July 27, 2023) (listing estimated annual so they don’t get taken advantage of.’’); Individual 14During 2017 to 2022, an average of 91% of expenditure rates of between $713.1 billion and commenter, Doc. No. FTC–2022–0046–0637 (‘‘As a American workers who did not work from home $737.1 billion in 2022). small business owner and active duty military drove to work. See U.S. Census Bureau, ‘‘American 20Melinda Zabritski, Experian Info. Sols., Inc., member I have played the role of both a buyer, Community Survey: Means of Transportation to ‘‘State of the Automotive Finance Market Q4 2020’’ toiling for hours to just reach fair deals on vehicles, Work by Selected Characteristics, 2022: ACS 1-Year 5, https://www.experian.com/content/dam/ as well as that of an advocate for my Sailors who Estimates Subject Tables’’ (2023), https://data. marketing/na/automotive/quarterly-webinars/ have been preyed upon by local dealerships. census.gov/table?q=Commuting&tid= credit-trends/2020-quarterly-trends/v2-2020-q4- Nowhere else in our society do so many average ACSST1Y2022.S0802 (reporting 110,245,368 state-automotive-market.pdf (on file with the citizens have to mentally prepare for a battle over workers 16 years and over who drove alone to work Commission). fair pricing and treatment for something that is in a car, truck, or van, and 13,881,067 workers 16 21Fed. Rsrv. Bank of N.Y., ‘‘Quarterly Report on realistically a modern necessity.’’); Individual years and over who drove by carpool to work in a Household Debt and Credit, 2023: Q1’’ 3–4 (May commenter, Doc. No. FTC–2022–0046–9840 (‘‘I car, truck or van, together accounting for 91% of the 2023), https://www.newyorkfed.org/medialibrary/ can’t list the number of times I have either seen, or total of 136,196,004 workers 16 years and over who interactives/householdcredit/data/pdf/HHDC_ have stepped in a situation, where car dealers have did not work from home); U.S. Census Bureau, 2023Q1; Fed. Rsrv. Bank of N.Y., ‘‘Data Underlying either attempted to take, or have successfully taken, ‘‘American Community Survey: Means of Report’’ on ‘‘Page 3 Data’’ and ‘‘Page 4 Data’’ tabs, advantage of a young military member or their Transportation to Work by Selected Characteristics, https://www.newyorkfed.org/medialibrary/ family by baiting and switching when it came to the 2021: 2017–2021 ACS 5-Year Estimates Subject interactives/householdcredit/data/xls/HHD_C_ price of a car, or stated that the price was one Tables’’ (2022), https://data.census.gov/ Report_2023Q1 (last visited Dec. 5, 2023) (listing amount, only to be charged, and over-charged a table?q=Commuting&tid=ACSST5Y2021.S0802 number of open ‘‘Auto Loan’’ accounts and total higher amount. These dealers have even attempted (reporting 113,724,271 workers 16 years and over outstanding balance in such accounts). to pull unethical tricks on me and my wife, even who drove alone to work in a car, truck, or van, and 22Fed. Rsrv. Bank of N.Y., ‘‘Quarterly Report on after they found out that I was a military member, 13,340,838 workers 16 years and over who drove by Household Debt and Credit, 2023: Q1’’ 3, 21 (May a combat veteran, that was serving this great carpool to work in a car, truck or van, together 2023), https://www.newyorkfed.org/medialibrary/ nation.’’); Individual commenter, Doc. No. FTC– accounting for 91% of the total of 140,223,271 interactives/householdcredit/data/pdf/HHDC_ 2022–0046–0845 (‘‘Predatory practices like [bait- workers 16 years and over who did not work from 2023Q1; Fed. Rsrv. Bank of N.Y., ‘‘Data Underlying and-switch pricing] are common near military home). Report’’ on ‘‘Page 3 Data’’ and ‘‘Page 21 Data’’ tabs, installations . . . .’’). 15Nat’l Auto. Dealers Ass’n, ‘‘NADA Data 2022’’ https://www.newyorkfed.org/medialibrary/ 12Industry commenters claimed that many of the 7, https://www.nada.org/media/4695/download interactives/householdcredit/data/xls/HHD_C_ areas covered by the proposed rule are already ?inline (noting average retail selling price of Report_2023Q1 (last visited Dec. 5, 2023) (listing addressed in industry guidance. The Commission $46,287 for new vehicles sold by dealerships in total ‘‘Auto Loan’’ debt balance compared to other notes that, although industry guidance can provide 2022). product type categories). helpful information to dealers, dealers who choose 16Id. at 10 (noting average retail selling price of 23See Consumer Fin. Prot. Bureau, ‘‘Financially not to follow such guidance, or who engage in $30,736 for used vehicles sold by new-vehicle Fit? Comparing the Credit Records of Young deceptive or unfair practices, subject their dealerships in 2022). Servicemembers and Civilians’’ 27 (July 2020), customers to significant harm. The Rule addresses 17Lydia DePillis, ‘‘How the Costs of Car https://files.consumerfinance.gov/f/documents/ such practices, thus protecting consumers and law- Ownership Add Up,’’ N.Y. Times (Oct. 6, 2023), cfpb_financially-fit_credit-young-servicemembers- abiding dealers. https://www.nytimes.com/interactive/2023/10/07/ civilians_report_2020-07.pdf. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 593 percent of young servicemembers have typically offered through dealers’ ‘‘buy here, pay here’’ dealers.36In this at least $20,000 in auto debt, which financing and insurance (‘‘F&I’’) offices, scenario, consumers typically borrow equates to nearly two-thirds of an which may also offer leasing and add- from, and make their payments directly enlisted soldier’s typical base salary at on products or services. In the dealer- to, the dealership. that age.24 provided financing scenario, the dealer The remainder of financed vehicle In addition to the expense, the collects financial information about the transactions use what is commonly process of buying or leasing a vehicle is consumer and forwards that information referred to as ‘‘direct’’ financing, often time-consuming and arduous. It to prospective motor vehicle financing provided by a credit union, bank, or can take several hours or days to finalize entities. These financing entities other financing entity.37In this scenario, a transaction,25on top of the hours it evaluate this information and, in the consumers typically receive an interest can take, particularly in rural areas, to rate quote from the financing entity process, determine whether, and on drive to a dealership.26Consumers may prior to arriving at a dealership to what terms, to provide credit.29These need to take time off work or arrange purchase a vehicle, and use the terms include the ‘‘buy rate’’: a risk- childcare, and families with a single financing to pay for their chosen based finance charge that reflects the vehicle may be forced to delay other vehicle.38Dealerships do not profit on interest rate at which the entity will important appointments due to the the financing portion of the vehicle sale finance the deal.30Dealers often add a length of the vehicle-buying or -leasing transaction when a consumer arranges finance charge called a ‘‘dealer reserve’’ process. financing directly.
L. Reynolds, Fed. Trade Comm’n, ‘‘The Auto Buyer dealerships do not have a separate F&I When consumers lease a vehicle, they Study: Lessons from In-Depth Consumer Interviews and Related Research’’ 15 (July 2020) [hereinafter office, more than half of such do not own it, and they must return the Auto Buyer Study], https://www.ftc.gov/system/ dealerships sell add-on products.35 vehicle when the lease expires, though files/documents/reports/auto-buyer-study-lessons- Six to eight percent of financed they may have the option to purchase depth-consumer-interviews-related-research/ bcpreportsautobuyerstudy.pdf (noting that the vehicle purchases use what is called purchase transactions in the FTC’s qualitative study 36Melinda Zabritski, Experian Info. Sols., Inc., often took 5 hours or more to complete, with some ‘‘State of the Automotive Finance Market Q2 2020’’ that 7 out of 10 consumers finance through their extending over several days); Cf. Cox Auto., ‘‘2020 8 (2020), https://www.experian.com/content/dam/ dealership). This is also known as ‘‘dealer Cox Automotive Car Buyer Journey’’ 6 (2020) marketing/na/automotive/quarterly-webinars/ financing,’’ because consumers obtain financing [hereinafter 2020 Cox Automotive Car Buyer credit-trends/2020-q2-safm-final.pdf [http:// through the dealer that partners with other entities Journey], https://b2b.autotrader.com/app/uploads/ web.archive.org/web/20201106002015/https:// in the financing process.
2020-Car-Buyer-Journey-Study.pdf (reporting www.experian.com/content/dam/marketing/na/ average consumer time spent shopping for a vehicle 29Dealers often originate the contract governing automotive/quarterly-webinars/credit-trends/2020- at 14 hours, 53 minutes); Cox Auto., ‘‘2022 Car the extension of retail credit or retail leases and q2-safm-final.pdf] (Mar. 6, 2023). Buyer Journey: Top Trends Edition’’ 6 (2023) then sell, or otherwise assign, these contracts to 37Consumer Fin. Prot. Bureau, ‘‘Automobile [hereinafter 2022 Car Buyer Journey], https:// unaffiliated third-party finance or leasing sources, Finance Examination Procedures’’ 4 (Aug. 2019), www.coxautoinc.com/wp-content/uploads/2023/01/ including such third parties the dealer may have https://files.consumerfinance.gov/f/documents/ 2022-Car-Buyer-Journey-Top-Trends.pdf (reporting contacted in the course of arranging dealer- 201908_cfpb_automobile-finance-examination- average consumer time spent shopping for a vehicle provided ‘‘indirect’’ financing. See Consumer Fin. procedures.pdf. Prot. Bureau, ‘‘Automobile Finance Examination at 14 hours, 39 minutes). 38Consumer Fin. Prot. Bureau, ‘‘Consumer Voices Procedures’’ 3 (Aug. 2019), https://files.consumer ab o u F t o g r o e in x g a m to p a le d , e c a o l n e s rs u h m ip e r b s a h s a e v d e o c n o a m n p o la ff i e n r e t d h at finance.gov/f/documents/201908_cfpb_automobile- o fi n le A s.c u o to n m su o m bi e l r e f i F n i a n n a c n e c .
vehicle, and negotiating the price and financing web.archive.org/web/20210311174922/https:// terms, is an often hours-long process; and that, after 31See, e.g., id. at 1 n.4 & accompanying text. www.experian.com/content/dam/marketing/na/ this time, dealers falsely told consumers that add- 32Id. (describing this as the amount dealers earn automotive/quarterly-webinars/credit-trends/2020- on products or packages were required to purchase for arranging financing, measured as the difference quarterly-trends/v2-2020-q4-state-automotive- or finance the vehicle, even though they were not between the consumer’s annual percentage rate market.pdf] (Mar. 6, 2023). included in the low prices advertised or disclosed (‘‘APR’’) and the wholesale ‘‘buy rate’’ at which a 40See Fed. Trade Comm’n, ‘‘Financing or Leasing to consumers who called to confirm prices). finance source buys the finance contract from the a Car,’’ https://www.consumer.ftc.gov/articles/0056- 27Unless otherwise indicated, the terms ‘‘dealer,’’ dealer, and noting that finance sources typically financing-or-leasing-car (last visited Dec. 5, 2023) ‘‘dealership,’’ and ‘‘motor vehicle dealer’’ as used permit dealers to retain the dealer participation). (‘‘The annual mileage limit in most standard leases in this SBP and the Commission’s final regulatory 33Nat’l Auto. Dealers Ass’n, ‘‘Average Dealership is 15,000 or less.’’); Consumer Fin. Prot. Bureau, analysis refer to ‘‘‘Covered Motor Vehicle Dealer’ or Profile’’ 1 (2020), https://www.nada.org/media/ ‘‘What should I know about the differences between ‘Dealer’’’ as defined in this part. 4136/download?attachment[http://web.archive.org/ leasing and buying a vehicle?,’’ https:// 28See Nat’l Auto. Dealers Ass’n, ‘‘Dealer-Assisted web/20220623204158/https://www.nada.org/ www.consumerfinance.gov/ask-cfpb/what-should-i- Financing Benefits Consumers,’’ https:// media/4136/download?attachment] (June 23, 2022). know-about-the-differences-between-leasing-and- www.nada.org/autofinance/[https:// 34Nat’l Indep. Auto. Dealers Ass’n, ‘‘NIADA Used buying-a-vehicle-en-815/ (last visited Aug. 24, 2023) web.archive.org/web/20220416131718/https:// Car Industry Report 2020’’ 21 (2020). (‘‘Most leases restrict your mileage to 10,000–15,000 www.nada.org/autofinance/] (Apr. 16, 2022) (noting 35Id. at 8, 10. miles per year.’’). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 594 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations the vehicle at the end of the lease consistently at or near the top of private matter, the Commission received 391 period. Nearly 27% of new vehicles are sources of consumer complaints.46 complaints—about add-ons and other leased, as are just over 8% of used Many of these complaints concerned issues—over a several-month period vehicles.41 deceptive or unfair acts or practices prior to filing a complaint against the affecting U.S. consumers. Complaints thirteenth largest dealership group in B. Deceptive and Unfair Practices in the about motor vehicle transactions are the country by revenue as of 2020.50 Motor Vehicle Marketplace regularly in the top ten complaint However, in a survey of the dealer’s Section 5 of the Federal Trade categories tracked by the FTC.47For customers over the same time period, Commission Act (‘‘FTC Act’’), as military consumers as well, auto-related 83% of respondents—or at least 16,848 amended (15 U.S.C. 45), authorizes the complaints are among the top 10 customers—indicated they were subject FTC to address deceptive or unfair acts complaint categories outside of identity to the dealer’s unlawful practices or practices in or affecting commerce, theft.48 related to add-ons alone.51 including in the motor vehicle Moreover, law enforcement Similarly, in other contexts where marketplace. experience shows that complaints are companies were charged with making An act or practice is deceptive if there just the tip of the iceberg.49The misrepresentations or engaging in is a representation, omission, or other Commission’s recent enforcement action misconduct regarding add-on products, practice that is likely to mislead against a large, multistate dealership information obtained after filing has consumers acting reasonably under the group is illustrative of this point in the shown widespread harm far beyond the circumstances and is material to motor vehicle marketplace: in that initial consumer complaint volumes consumers—that is, it is likely to affect reported prior to filing.52 consumers’ conduct or decisions with financing, service & warranties, and rentals & As examined in greater detail in the regard to a product or service.42 leasing, collectively, of more than 100,000 in 2019, paragraphs that follow, consumers in Deceptive conduct can involve omission 2020, and 2021). the motor vehicle marketplace are 46According to commenters, complaints to the of material information, the disclosure confronted with chronic deceptive or Better Business Bureau about new and used auto of which is necessary to prevent the dealers, when combined, have been either the first unfair practices, including bait-and- claim, practice, or sale from being or second highest regarding any industry in the U.S. switch tactics and hidden charges.53 misleading.43 for the past twenty years. See Comment of Nat’l Consumer L. Ctr. et al., Doc. No. FTC–2022–0046– 1. Bait-and-Switch Tactics An act or practice is considered unfair 7607 at ii; see also Better Bus. Bureau, ‘‘BBB under section 5 of the FTC Act if: (1) it Complaint and Inquiry Statistics,’’ https:// Advertisements for motor vehicles are causes, or is likely to cause, substantial www.bbb.org/all/bbb-complaint-statistics (last often consumers’ first contact in the injury to consumers; (2) the injury is not visited Dec. 5, 2023) (listing complaint statistics vehicle-buying or -leasing process. from 2010 through 2022, sorted by industry). In reasonably avoidable by consumers; and Dealers utilize a variety of means to addition, for the past seven years annual surveys of (3) the injury is not outweighed by State and local consumer protection agencies have countervailing benefits to consumers or reported that auto-related complaints were the top 50See Complaint, Fed. Trade Comm’n v. N. Am. to competition.44 complaint received from consumers. See Comment Auto. Servs., Inc., No. 1:22–cv–0169 (N.D. Ill. Mar. In each of the past four years, the FTC of Nat’l Consumer L. Ctr. et al., Doc. No. FTC–2022– 31, 2022); see also WardsAuto, ‘‘WardsAuto 2020 0046–7607 at 13; Consumer Fed’n of Am., ‘‘2022 Megadealer 100,’’ https://www.wardsauto.com/ received more than 100,000 complaints Consumer Complaint Survey Report’’ 4–5 (May dealers/wardsauto-2020-megadealer-100-industry- regarding motor vehicle sales, financing, 2023), https://consumerfed.org/wp-content/ force (last visited Dec. 5, 2023) (listing Napleton service and warranties, and rentals and uploads/2023/05/2022-Consumer-Complaint- Automotive Group as the 13th-ranked dealership leasing.45This industry is also Survey-Report.pdf (‘‘For the seventh year in a row, group by total revenue). auto sales, leases and repairs are the #1 complaint 51Complaint ¶27, Fed. Trade Comm’n v. N. Am. category. Consumers filed complaints about add-on Auto. Servs., Inc., No. 1:22–cv–0169 (N.D. Ill. Mar. 41Melinda Zabritski, Experian Info. Sols., Inc., products and services, bait and switch pricing, and 31, 2022) (alleging that defendants buried charges ‘‘State of the Automotive Finance Market Q4 2020’’ mechanical condition issues.’’). for add-ons in voluminous paperwork, making them 5 (2020), https://www.experian.com/content/dam/ 47See Consumer Sentinel Network Data Book difficult to detect); see Press Release, Fed. Trade marketing/na/automotive/quarterly-webinars/ 2021, supra note 45, at 8 (listing vehicle-related Comm’n, ‘‘FTC Returns Additional $857,000 To credit-trends/2020-quarterly-trends/v2-2020-q4- complaints as the seventh most common report Consumers Harmed by Napleton Auto’s Junk Fees state-automotive-market.pdf [https:// category, outside of identity theft, in 2021); and Discriminatory Practices’’ (Nov. 20, 2023), www.experian.com/content/dam/marketing/na/ Consumer Sentinel Network Data Book 2022, supra https://www.ftc.gov/news-events/news/press- automotive/quarterly-webinars/credit-trends/2020- note 45, at 8 (listing motor vehicle-related releases/2023/11/ftc-returns-additional-857000- quarterly-trends/v2-2020-q4-state-automotive- complaints as the fifth most common report consumers-harmed-napleton-autos-junk-fees- market.pdf] (Mar. 6, 2023). category, outside of identity theft, in 2022). discriminatory-practices. 42See Fed. Trade Comm’n, ‘‘FTC Policy 48See Consumer Sentinel Network Data Book 52For example, in a recent action involving Statement on Deception’’ 2, 5, 103 F.T.C. 174 (1984) 2021, supra note 45, at 18 (listing vehicle-related deceptive pre-approval claims, the FTC had [hereinafter FTC Policy Statement on Deception] complaints as the eighth most common complaint received roughly 30 complaints about the (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110, category for military consumers, outside of identity company’s pre-approval conduct in the five-year 183 (1984)), https://www.ftc.gov/system/files/ theft categories, in 2021); Consumer Sentinel period prior to announcing its action. But in the documents/public_statements/410531/831014 Network Data Book 2022, supra note 45, at 18 five months following announcement of the action, deceptionstmt.pdf. (listing vehicle-related complaints as the ninth most more than 900 additional consumers came forward 43Id. common complaint category for military with complaints about the conduct. See Press 4415 U.S.C. 45(n). consumers, outside of identity theft categories, in Release, Fed. Trade Comm’n, ‘‘FTC Announces 45See, e.g., Fed. Trade Comm’n, ‘‘Consumer 2022). Claims Process for Consumers Harmed by Credit Sentinel Network Data Book 2022’’ app. B3 at 85 49See, e.g., United States v. Brien, 617 F.2d 299, Karma ‘Pre-Approved’ Offers for Which They Were (Feb. 2023) [hereinafter Consumer Sentinel Network 308 (1st Cir. 1980); United States v. Offs. Known as Denied’’ (Dec. 5, 2023), https://www.ftc.gov/news- Data Book 2022], https://www.ftc.gov/system/files/ 50 State Distrib. Co., 708 F.2d 1371, 1374–75 (9th events/news/press-releases/2023/12/ftc-announces- ftc_gov/pdf/CSN-Data-Book-2022.pdf (reporting Cir. 1983); Keith B. Anderson, Fed. Trade Comm’n, claims-process-consumers-harmed-credit-karma- complaints about new and used motor vehicle sales, ‘‘Consumer Fraud in the United States: An FTC pre-approved-offers-which-they-were (‘‘[W]ithin financing, service & warranties, and rentals & Survey’’ 80 (2004), https://www.ftc.gov/sites/ five months of that announcement, the agency leasing, collectively, of more than 100,000 in 2020, default/files/documents/reports/consumer-fraud- received nearly 900 more such complaints’’). 2021, and 2022); Fed. Trade Comm’n, ‘‘Consumer united-states-ftc-survey/040805confraudrpt.pdf 53While other issues exist in the motor vehicle Sentinel Network Data Book 2021’’ app. B3 at 85 (staff report noting consumers who reported they sales, financing, and leasing space, including issues (Feb. 2022) [hereinafter Consumer Sentinel Network were victims of fraud complained to an official involving discrimination, financing application Data Book 2021], https://www.ftc.gov/system/files/ source only 8.4 percent of the time, filing falsification, data privacy and security, and yo-yo ftc_gov/pdf/CSN%20Annual%20Data%20 complaints with the BBB in 3.5 percent of incidents financing, this Rule’s core focus is on Book%202021%20Final%20PDF.pdf (reporting and to a Federal agency, including the FTC, in only misrepresentations and add-on and pricing complaints about new and used motor vehicle sales, 1.4 percent of cases). practices. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 595 reach consumers, including social potential buyers through financial packing has been a particular concern in media and online advertisements, incentives incidental to the purchase, the military community.62The television and radio commercials, and such as deceptive promises of a valuable protracted and paperwork-heavy direct mail marketing. New vehicle prize that is redeemable only by visiting vehicle-buying or -leasing process can dealers spend an average of more than the dealership.58 make it difficult for consumers to spot $700 on advertising per vehicle Deceptive tactics can cause significant add-on charges, particularly when sold54—more than two-thirds of which consumer harm and impede advertised prices or payment terms do goes toward online advertising.55 competition, competitively not mention add-ons.63If consumers are The FTC has brought many law disadvantaging law-abiding dealers. financing or leasing the vehicle, they enforcement actions involving motor When dealerships advertise prices, undergo a separate financing process vehicle dealers’ deceptive advertising discounts, or other terms that are not after selecting a vehicle, which can and other unlawful tactics. Such actions actually available to typical consumers, include wading through a thick stack of have charged dealers with, inter alia, consumers who select that dealership dense paperwork filled with fine making misrepresentations regarding instead of others spend time visiting the print.64For example, according to an the price of a vehicle, the availability of dealership or otherwise interacting with FTC law enforcement action, consumers discounts and rebates, the monthly the dealership under false pretenses. visiting one large dealership group were payment amount for a financed required to complete a stack of
No. C–4429 (F.T.C. Jan. 28, 2014) (alleging years, dealers have substantially who thought that they had not purchased add-ons, dealership advertised internet prices and dealer increased prices for these add-ons, or that the add-ons were included at no additional discounts that were only available through rebates not applicable to the typical consumer); Complaint, notwithstanding that such products or charge, were surprised to learn, when going through Ganley Ford West, Inc., No. C–4428 (F.T.C. Jan. 28, services largely are not constrained by the paperwork, that they had in fact paid extra for 2014) (alleging dealership advertised discounts on supply.60 add-ons. This is consistent with consumers’ v w e e h r i e c o le n p ly r i a c v e a s i , l b a u b t l e f a o i n le t d h t e o m d o is s c t l e o x s p e e t n h s a i t v d e i s m c o o d u e n l t s s ) ; A significant consumer protection e c x o p n e fu ri s e io n n ci w ng i t f h a t a i g f u in e a d n u c r ia in ll g y t c h o e m b p u l y e i x n g tr p an ro s c a e c s ti s o o n r , Complaint, Progressive Chevrolet Co., No. C–4578 concern is consumers paying for add- but would also be consistent with dealer (F.T.C. June 13, 2016) (alleging deceptive failure to ons without knowing about, or misrepresentations.’’). disclose material conditions of obtaining the lease expressly agreeing to, these products or 62Consumers for Auto Reliability and Safety, monthly payment in their online and print services.61This type of payment Comment Letter on Motor Vehicle Roundtables, advertising); Complaint ¶¶38–46, Fed. Trade Project No. P104811 at 2–3 (Apr. 1, 2012), https:// Comm’n v. Tate’s Auto Ctr. of Winslow, Inc., No.
No. 3:16–cv–02401–K (N.D. Tex. Aug. 18, 2016) Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv– have clients with auto financing problems and cited (alleging misrepresentation that terms were for 0169 (N.D. Ill. Mar. 31, 2022). ‘‘loan packing’’ and yo-yo financing as the most financing instead of leasing); Complaint ¶¶85–87, 60See Ben Eisen, ‘‘Car Dealer Markups Helped frequent auto lending abuses affecting Fed. Trade Comm’n v. Universal City Nissan, Inc., Drive Inflation, Study Finds,’’ Wall St. J., Apr. 23, servicemembers).
No. 2:16–cv–07329 (C.D. Cal. Sept. 29, 2016) 2023, https://www.wsj.com/articles/car-dealer- 63Complaint ¶¶17–19, Fed. Trade Comm’n v. (alleging that dealerships claimed consumers could markups-helped-drive-inflation-study-finds- Liberty Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y. finance the purchase of vehicles with attractive 7c1d5a2d; U.S. Bureau of Labor Statistics, May 21, 2020); Complaint ¶60, Fed. Trade Comm’n terms and buried disclosures indicating that such ‘‘Automotive Dealerships 2019–2022: Dealer v. Universal City Nissan, Inc., No. 2:16–cv–07329 terms were applicable to leases only). Markup Increases Drive New-Vehicle Consumer (C.D. Cal. Sept. 29, 2016); Carole L. Reynolds & 57Complaint ¶¶82–84, Fed. Trade Comm’n v. Inflation’’ (Apr. 2023), https://www.bls.gov/opub/ Stephanie E. Cox, Fed. Trade Comm’n, ‘‘Buckle Up: Universal City Nissan, Inc., No. 2:16–cv–07329 mlr/2023/article/automotive-dealerships- Navigating Auto Sales and Financing’’ (2020) (C.D. Cal. Sept. 29, 2016) (alleging markups.htm. [hereinafter Buckle Up], https://www.ftc.gov/ misrepresentation that dealer would pay off a 61See Nat’l Consumer L. Ctr., ‘‘Auto Add-ons reports/buckle-navigating-auto-sales-financing. consumer’s trade-in when in fact consumers were Add Up: How Dealer Discretion Drives Excessive, 64See, e.g., Buckle Up, supra note 63, at 10–11 still responsible for outstanding debt on trade-in Arbitrary, and Discriminatory Pricing’’ (Oct. 1, (noting the long, complex transaction process); vehicles); Complaint ¶¶17–19, TXVT Ltd. P’ship, 2017), https://www.nclc.org/images/pdf/car_sales/ Complaint ¶¶23–28, Fed. Trade Comm’n v. N. Am.
No. C–4508 (F.T.C. Feb. 12, 2015) (alleging report-auto-add-on.pdf; Adam J. Levitin, ‘‘The Fast Auto. Servs., Inc., No. 1:22–cv–01690 (N.D. Ill. Mar. misrepresentation in leasing advertising that the and the Usurious: Putting the Brakes on Auto 31, 2022) (same). dealership would pay off the negative equity of a Lending Abuses,’’ 108 Geo. L.J. 1257, 1265–66 65Complaint ¶24, Fed. Trade Comm’n v. N. Am. consumer’s trade in vehicle, when in fact, it was (2020), https://www.law.georgetown.edu/ Auto. Servs., Inc., No. 1:22–cv–01690 (N.D. Ill. Mar. merely rolled into the financed amount for the georgetown-law-journal/wp-content/uploads/sites/ 31, 2022); see also Buckle Up, supra note 63, at 10– consumer’s newly financed vehicle). 26/2020/05/Levitin_The-Fast-and-the-Usurious- 11. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 596 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations to purchase those add-ons without for these items past consumers dealers might wait until late in the knowing about or agreeing to them, or unnoticed and into purchase contracts transaction to mention add-ons, and without knowing or agreeing to their through a variety of means, including by then do so in a misleading manner. For costs or other key terms.66 not mentioning them at all,67or by example, participants in an FTC Unscrupulous dealers are able to slip focusing consumers’ attention on other qualitative study on consumers’ car- the often considerable additional costs aspects of the complex transaction, such buying experiences cited situations as monthly payments, which might where dealers waited until the financing 66Complaint ¶¶25, 27, 29–32, Fed. Trade increase only marginally with the stage to mention add-ons, after Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv– addition of prorated add-on costs, or consumers believed they had agreed on 01690 (N.D. Ill. Mar. 31, 2022); see also Complaint may even be made to decrease if the terms, and even though many add-ons ¶¶17–19, Fed. Trade Comm’n v. Liberty Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y. May 21, 2020);
558507–00060 (Dec. 29, 2011), https:// enforcement actions, dealers also have www.regulations.gov/comment/FTC-2022-0036- 67Under the Truth in Lending Act (‘‘TILA’’) and represented that add-ons are required 0051 (consumer protection lawyer noting ‘‘payment its implementing Regulation Z, required add-on when in fact they are not,71have packing’’ among problems ‘‘that cry out for scrutiny products or services must be factored into the APR misrepresented the purported benefits and regulation’’); Michael Archer, Comment Letter and the finance charge disclosed during the on Public Roundtables: Protecting Consumers in the transaction. See 15 U.S.C. 1605, 1606, 1638; 12 CFR of add-ons, and have failed to disclose Sale and Leasing of Motor Vehicles, Project No. 226.4, 226.18(b), (d), (e), and 226.22. It is legally material limitations.72 P104811, Submission No. 558507–00041 at 3 (Aug. impermissible for dealers to include charges for 6, 2011), https://www.regulations.gov/comment/ such products in a consumer’s contract without trade-commission-staff-perspective/military_ FTC-2022-0036-0014 (workshop panelist stating, ‘‘I disclosing them. See, e.g., Complaint ¶¶57–60, Fed. consumer_workshop_-_staff_perspective_2-2-18.pdf have seen cases wherein the dealer uses financing Trade Comm’n v. Stewart Fin. Co. Holdings, Inc., (explaining the unique situation of servicemembers to pack in extra costs or to wipe out trade-in No. 1:03–CV–2648 (N.D. Ga. Sept. 4, 2003) (alleging whose steady paychecks make them attractive value.’’); Dawn Smith, Comment Letter on Public violations for failure to include the cost of required customers for dealers, while having no or minimal Roundtables: Protecting Consumers in the Sale and add-on products in the finance charge and annual credit history, meaning they qualify for less Leasing of Motor Vehicles, Project No. P104811, percentage rate disclosed to consumers). advantageous credit terms and higher interest rate Submission No. 558507–00027 (July 27, 2011), 68See, e.g., Buckle Up, supra note 63, at 6; Fed. financing).
https://www.regulations.gov/comment/FTC-2022- Trade Comm’n, Military Consumer Financial 0036-0043 (‘‘Confusing or misleading sales terms[.] Workshop, Panel 1, Tr. 19:25–41 (July 19, 2017), 70See, e.g., Buckle Up, supra note 63, at 6 Extra fees was [sic] added at the time of purchase https://www.ftc.gov/news-events/events-calendar/ (observing that the introduction of ‘‘add-ons during and to this day I still do not understand what the military-consumer-workshop; Fed. Trade Comm’n, financing discussions caused several participants’ fee was for; it made the payment higher.’’); Carrie ‘‘The Road Ahead: Selling, Financing & Leasing total sale price to balloon from the cash price’’); id. Ferraro, Legal Servs. of N.J., Comment Letter on Motor Vehicles,’’ Public Roundtable, Session 2, Tr. at 9 (observing that, for most consumers in the Public Roundtables: Protecting Consumers in the at 40–41 (Aug. 2 2011), https://www.ftc.gov/news- study, ‘‘add-ons did not come up until the financing Sale and Leasing of Motor Vehicles, Project No. events/events/2011/08/road-ahead-selling- process, if at all, after a long car-buying process and P104811, Submission No. 558507–00061 (Dec. 29, financing-leasing-motor-vehicles (noting that at a time when the consumer often felt pressure to 2011), https://www.regulations.gov/comment/FTC- optional products and services are often already close the deal’’); id. (noting that most study 2022-0036-0059 (citing ‘‘[d]ealers engage[d] in included in the monthly payment prices advertised participants’ contracts included add-ons charges, packing’’ as an example of the common consumer or quoted); Christopher Kukla, Ctr. for Responsible but that many ‘‘were unclear what those add-ons complaints of car-sales-related fraud received by Lending, Comment Letter on Public Roundtables: included, and sometimes did not realize they had LSNJ’s legal advice hotline); Rosemary Shahan, Protecting Consumers in the Sale and Leasing of purchased any add-ons at all’’); id. at 7 (explaining Consumers for Auto Reliability and Safety, Motor Vehicles, Project No. P104811, Submission situations where the consumer reached the Comment Letter on Public Roundtables: Protecting No. 558507–00071 at 10 (Feb. 1, 2012), https:// financing office after negotiating with the sales staff Consumers in the Sale and Leasing of Motor www.regulations.gov/comment/FTC-2022-0036- and were then told that the agreed upon price was Vehicles, Project No. P104811, Submission No. 0068 (discussing how dealers conceal packing by not compatible with key financing terms—for 558507–00069 at 3 (Jan. 31, 2012), https:// expressing an increase in price in terms of monthly example, a promised rebate or discount could not www.regulations.gov/comment/FTC-2022-0036- payment); Att’ys General of 31 States & DC, be combined with an advertised interest rate). 0069 (noting that ‘‘[m]any common auto scams do Comment Letter on Public Roundtables: Protecting 71Complaint ¶¶12–19, Fed. Trade Comm’n v. not generate complaints in proportion to how Consumers in the Sale and Leasing of Motor Liberty Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y. pervasive or costly the practices are, simply because Vehicles, Project No. P104811, Submission No. May 21, 2020) (alleging deceptive and unauthorized the consumers generally remain unaware they have 558507–00112 at 5 (Apr. 13, 2012), https:// add-on charges in consumers’ transactions); been scammed,’’ including as a result of ‘‘[l]oan www.regulations.gov/comment/FTC-2022-0036- Complaint ¶¶59–64, Fed. Trade Comm’n v. packing’’); Mary W. Sullivan, Matthew T. Jones & 0124 (discussing the ‘‘age-old auto salesperson’s Universal City Nissan, Inc., No. 2:16–cv–07329 Carole L. Reynolds, Fed. Trade Comm’n, ‘‘The Auto trick’’ of quoting monthly payment prices without (C.D. Cal. Sept. 29, 2016) (alleging deceptive and Buyer Study: Lessons from In-Depth Consumer disclosing that the quote includes the cost of unauthorized add-on charges in consumers’ Interviews and Related Research,’’ Supplemental optional items that the customer has not yet agreed transactions); Complaint ¶¶6, 9, TT of Longwood, Appendix: Redacted Interview Transcripts at 525 to purchase). No. C–4531 (F.T.C. July 2, 2015) (alleging (2020) [hereinafter Auto Buyer Study: Appendix], 69See, e.g., Complaint ¶¶9, 26, Fed. Trade misrepresentations regarding prices for added https://www.ftc.gov/system/files/documents/ Comm’n v. Liberty Chevrolet, Inc., No. 1:20–cv– features); see also Auto Buyer Study, supra note 25, reports/buckle-navigating-auto-sales-financing/ 03945 (S.D.N.Y. May 21, 2020) (charging defendants at 14. bcpstaffreportautobuyerstudysuppappendix.pdf with discriminating on the basis of race, color, and 72Complaint ¶¶4–14, Nat’l Payment Network, (Study participant 169810: consumer had national origin by charging higher interest rates and Inc., No. C–4521 (F.T.C. May 4, 2015) (alleging ‘‘additional items’’ charges on contract that inflated fees); Press Release, N.Y. State Att’y Gen., failure to disclose fees associated with financing consumer could not identify); id. at 730, 740–42 ‘‘Attorney General James Delivers Restitution to program; misleading savings claims in (Study participant 188329: dealer did not tell New Yorkers Cheated by Auto Dealership’’ (Nov. advertisements); Complaint ¶¶4–13, Matt Blatt Inc., consumer about GAP or service contract but 17, 2020), https://ag.ny.gov/press-release/2020/ No. C–4532 (F.T.C. July 2, 2015) (alleging failure to consumer was charged $599 and $1,950 for those attorney-general-james-delivers-restitution-new- disclose fees associated with financing program; add-ons, respectively); Press Release, N.Y. State yorkers-cheated-auto-dealership (dealership misleading savings claims); Buckle Up, supra note Att’y Gen., ‘‘A.G. Schneiderman Announces Nearly targeted Chinese speakers for unlawful payment 63, at 10 (noting that some Auto Buyer Study $14 Million Settlement with NYC and Westchester packing or ‘‘jamming’’); Military Consumer participants did not fully understand material Auto Dealerships for Deceptive Practices that Financial Workshop, Tr. 19:21 (July 19, 2017), aspects of extended warranties or service plans they Resulted in Inflated Car Prices’’ (June 17, 2015), https://www.ftc.gov/news-events/events/2017/07/ purchased and ‘‘were surprised to discover during https://ag.ny.gov/press-release/2015/ag- military-consumer-workshop (panelist discussing the interview that their plans had unexpected schneiderman-announces-nearly-14-million- servicemembers experiencing payment packing); limitations’’ or that ‘‘they had to pay out-of-pocket settlement-nyc-and-westchester-auto (‘‘This see also Fed. Trade Comm’n, ‘‘Staff Perspective: A for repairs or services that were not covered’’; for settlement is part of the [New York] attorney Closer Look at the Military Consumer Financial example, one ‘‘consumer purchased a ‘Lifetime’ general’s wider initiative to end the practice of Workshop’’ 2–3 (Feb. 2018), https://www.ftc.gov/ maintenance plan, only to discover later that he ‘jamming,’ unlawfully charging consumers for system/files/documents/reports/closer-look- received a one-year plan that covered periodic oil hidden purchases by car dealerships.’’). military-consumer-financial-workshop-federal- changes’’). Cf. Consent Order ¶¶10–16, Santander VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 597 Indeed, as previously noted, in a consumers and dealership employees. • Generally, I’m not a person in favor recent FTC enforcement action, the Examples of supportive comments of government regulation. However, as a Commission cited a survey finding that include the following: potential customer and cash buyer, I feel 83% of consumers from the named • As a young Marine stationed in a there is certainly a need to bring car dealers were charged for add-on military town I was taken advantage of dealers back into check. I’m just looking products or services that they did not by a dealership when purchasing my for a more honest and transparent authorize or as a result of deceptive first car. It set me back financially for process. I don’t want to be taken claims.73 years. I know of many young military advantage of. I certainly don’t want my One participant in an FTC qualitative people who purchased vehicle[]s and family members or [s]oldiers to be taken study of consumers’ car-buying we[]re instantly so far upside down after advantage of. Therefore, I feel it is in the experiences summed up these issues leaving the dealership with thousands best interest of future customers to during an interview after having of dollars in add on junk charges . . . . support this regulation.80 purchased a vehicle.74The consumer Please make it more difficult for • I cannot stress enough my support purchased a $2,000 service contract that dishonest dealers like these to for these new rules. Currently, the dealer falsely said was free, and a financially burden young Americans dealerships across the US, including the $900 GAP agreement that the dealer and Americans of any age for that one I work for, have made the car falsely said was mandatory. The matter.76 buying process needlessly confusing, consumer only learned about these • Imagine going to a restaurant expensive, and frustrating by engaging purchases during the study interview. franchise and order[ing] a burger and in false advertising and hidden add-on This consumer remarked: fries for $10 and the franchise products.81 employees say[,] ‘Sorry that will be $25 • I can tell you after many years of car I feel I’ve been taken advantage of, to be honest with you. Even though I thought that dollars, there is a $10 restaurant buying I have NEVER walked out of a I was getting a great deal with the interest adjustment price due to market dealership feeling good. Even worse, rate, but I know [sic] see that they’re also conditions and $5 for us to place and I’ve never purchased a car feeling like very sneaky about putting stuff on your document your order.’ You would walk I fully understood what I was paperwork. They only let you skim through away without hesitation because that getting. . . . Looking forward to seeing the paperwork that you have to sign and they would [be] absolutely ridiculous. Yet, the change happen SOON!82 just kind of tell you what it is. This is this, dealerships are allowed to do exactly • When I buy a gallon of milk from this is that, this is this, and then you just sign that. . . . IT IST IME TO CHANGE the store, the price is written next to the it away. You’re so tired, you’re so worn d Y o o w u n ju , s y t o w u a d n o t n t ’ o t g w e a t n it t d to o n be e t a h n e d r e o v n e o r m w o it r h e. . AN • D A P s R i O n T m E a C n T y C ot O h N er S a U r M ea E s, R i S t [ i . s ] 7 t 7 h e m ad i v lk e . r t W is h ed en n I e x g t o t p o a t y h , e I m pa il y k . t h W e o p u r l i d ce i t be vulnerable in our society who are They take advantage of that. Yes, they still OK if I go up to pay and that gallon of play this friendly card, you know, thank you probably most affected by such milk had anywhere between 1% and for your business card kind of thing. Like I deceptive practices. . . . Sadly, it is 1,200% markup depending on the day, said, they never lose. They never lose.75 often these very people who desperately what you look like, what you drove to need a dependable, affordable car for Similarly, in response to the the store in, if you’re a man or a transportation to work, school, Commission’s notice of proposed woman?83 rulemaking, thousands of commenters shopping, or medical care. To entice, • We ended up having to drive 3 described issues they faced when pressure, or trick people into buying a hours to the [vehicle we] wanted. Upon purchasing, financing, or leasing a car that is more than they can afford sets arriving to pick[ ]up the car we were vehicle. Many comments the them up for financial failure, not only told there was a [$]4,300 increase over Commission received in support of the in possibly having a needed car MSRP. We were told if we didn’t take NPRM were from self-identified military repossessed, but in long-term damage to it they had someone else waiting to their credit. . . . Inc losing, I would be purchase it. We needed the car and Consumer USA, Inc., CFPB No. 2018–BCFP–0008 extremely happy to see rules such as didn’t have time to hunt down another (Nov. 20, 2018) (finding that defendant sold GAP those described above enacted, and one so ended up purchasing it. Very product allegedly providing ‘‘full coverage’’ to don’t think these could come a day too disappointed in the long and awful consumers with loan-to-value ratios (‘‘LTVs’’) above soon. It’s a step in the right direction for process.84 125%, when in fact coverage was limited to 125% of 7 L 3 T C V o ) m . plaint ¶27, Fed. Trade Comm’n v. N. Am. the • p N ro o t n e e c t o io f n u s o w f t o h r e k i c n o g n s h u e m re e a r t .7 t 8 h e de • ale T r h s. e Y w o o u r s n t e i v s e d r e k a n li o n w g w w i h t a h t c t a h r e real Auto. Servs., Inc., No. 1:22–cv–01690 (N.D. Ill. Mar. dealership in sales benefit from [unfair price is on a vehicle until you spend a 31, 2022). and deceptive practices]. We cringe as few hours with them. Mandatory 74The study is described in the Commission’s much as every customer and have to add[-] on[]s, market availability reports: Auto Buyer Study, supra note 25, and Buckle Up, supra note 63. Some industry show up to work every[ ]day and hope surcharges, doc fees that vary from commenters critiqued the FTC’s reliance on this we are not forced to screw someone dealer to dealer. . . . Then dealing with qualitative study. The Commission notes that the with these BS products. . . . Iw ould the finance manager who tr[ie]s to sell study provides helpful qualitative insight from hope when [t]he regulators are making you everything you don’t[]need. They consumer interviews regarding their recent motor vehicle purchases and is one of the many sources their decisions, they understand the high pressure the consumer on the Commission has considered, including positive implications this would have purchasing extend[ed] warranties. There consumer complaints, enforcement actions, for dealership employees both outreach and dialogue with stakeholders and financially and mentally.79 consumer groups, among others, as described in 80Individual commenter, Doc. No. FTC–2022– 0046–7366.
this SBP and in the NPRM.
undercoating were mandatory and they Tate’s Auto Ctr. of Winslow, Inc., No. 3:18–cv– 4356 (F.T.C. May 1, 2012); Complaint, Frank Myers refused to sell any vehicles without 08176–DJH (D. Ariz. July 31, 2018); Complaint, AutoMaxx, LLC, No. C–4353 (F.T.C. Apr. 19, 2012); them. There were two Acura dealerships Cowboy AG, LLC, No. C–4639 (F.T.C. Jan. 4, 2018); Complaint, Ramey Motors, Inc., No. C–4354 (F.T.C. in town and one of them included ‘free’ Complaint, Fed. Trade Comm’n v. Norm Reeves, Apr. 19, 2012); Complaint, Fed. Trade Comm’n v. Hope for Car Owners, LLC, No. 2:12–cv–00778– Inc., No. 8:17–cv–01942 (C.D. Cal. Nov. 3, 2017);
lifetime oil changes that I didn’t learn GEB–EFB (E.D. Cal. Mar. 27, 2012); Complaint, Fed. Complaint, Asbury Auto. Grp., Inc., No. C–4606 about until negotiating the price and (F.T.C. Mar. 22, 2017); Complaint, CarMax, Inc., No. Trade Comm’n v. NAFSO VLM, Inc., No. 2:12–cv– 00781–KJM–EFB (E.D. Cal. Mar. 27, 2012);
had already spent two hours in C–4605 (F.T.C. Mar. 22, 2017); Complaint, West- Complaint, Fed. Trade Comm’n v. Stewart Fin. Co.
negotiations. All of these services/price Herr Auto. Grp., Inc., No. C–4607 (F.T.C. Mar. 22, Holdings, Inc., No. 1:03–CV–2648 (N.D. Ga. Sept. 4, adjustments were not disclosed at the 2017); Complaint, Fed. Trade Comm’n v. 2003); Complaint, Pacifico Ardmore, Inc., No. C– start of the negotiation and were only Volkswagen Grp. of Am., Inc., No. 3:16–cv–01534 3920 (F.T.C. Feb. 7, 2000). (N.D. Cal. Jan. 31, 2017); Complaint, Fed. Trade revealed either in the manager’s office Comm’n v. Uber Techs., Inc., No. 3:17–cv–00261 89Operation Steer Clear and Operation Ruse Control, brought with State law enforcement or when the purchase agreement was (N.D. Cal. Jan. 19, 2017); Complaint, Gen. Motors partners around the nation and Canada, presented to me by the salesperson. LLC, No. C–4596 (F.T.C. Dec. 8, 2016); Complaint, encompassed 252 enforcement actions. See Press After spending time on the test drive Jim Koons Mgmt. Co., No. C–4598 (F.T.C. Dec. 8, Release, Fed. Trade Comm’n, ‘‘Multiple Law and negotiating the price, it felt that 2 (F 0 . 1 T 6 .C ); . C D o e m c. p 8 la , i 2 n 0 t 1 , 6 L ) i ; t h C i o a m M p o l t a o in rs t , , I F n e c d ., . N Tr o a . d C e – 4597 E D n e f c o e r p c t e io m n e , n F t r P a a u r d tn in er A s A ut n o n S o a u l n es c , e F C in ra a c n k c d in ow g a n n o d n these last minute price adjustments Comm’n v. Universal City Nissan, Inc., No. 2:16– Leasing’’ (Mar. 26, 2015), https://www.ftc.gov/news- were being revealed that late in the cv–07329 (C.D. Cal. Sep. 29, 2016); Complaint, events/press-releases/2015/03/ftc-multiple-law- process so that I wouldn’t leave.86 United States v. New World Auto Imports, Inc., No. enforcement-partners-announce-crackdown. • Please enact and enforce these 3:16–cv–02401–K (N.D. Tex. Aug. 18, 2016); 90For example, the FTC has held public Complaint, Progressive Chevrolet Co., No. C–4578 workshops: (1) in conjunction with the National regulations to protect vulnerable (F.T.C. June 13, 2016); Complaint, BMW of N. Am., Highway Traffic Safety Administration to examine consumers from predatory business LLC, No. C–4555 (F.T.C. Oct. 21, 2015); Complaint, the consumer privacy and security issues posed by practices enjoyed by dealers. Our family United States v. Tricolor Auto Acceptance, LLC, No. automated and connected motor vehicles, see Fed. experienced such practices when trying 3:15–cv–3002 (N.D. Tex. Sept. 15, 2015); Trade Comm’n, ‘‘Connected Cars: Privacy, Security Complaint, JS Autoworld, Inc., No. C–4535 (F.T.C. Issues Related to Connected, Automated Vehicles’’ to purchase a vehicle in early 2022. It
C. Law Enforcement and Other Consumer Portfolio Servs., Inc., No. 14–cv–00819 Leasing Motor Vehicles’’ (Apr. 12, 2011), https:// www.ftc.gov/news-events/events-calendar/2011/04/ Responses (C.D. Cal. May 28, 2014); Complaint, Nissan N. Am., road-ahead-selling-financing-leasing-motor- Inc., No. C–4454 (F.T.C. May 1, 2014); Complaint, The Commission has taken action to TBWA Worldwide, Inc., No. C–4455 (F.T.C. May 1, vehicles; Fed. Trade Comm’n, ‘‘The Road Ahead: Selling, Financing & Leasing Motor Vehicles’’ (Aug.
protect consumers from deceptive and 2014); Complaint, Bill Robertson & Sons, Inc., No. 2, 2011), https://www.ftc.gov/news-events/events- unfair acts or practices in the motor C–4451 (F.T.C. Apr. 11, 2014); Complaint, calendar/2011/08/road-ahead-selling-financing- Paramount Kia of Hickory, LLC, No. C–4450 (F.T.C.
vehicle marketplace. As noted in the leasing-motor-vehicles; Fed. Trade Comm’n, ‘‘The
NPRM, the Commission has brought Abernathy Motor Co., No. 3:14–cv–00063–BRW Road Ahead: Selling, Financing & Leasing Motor Vehicles’’ (Nov. 17, 2011), https://www.ftc.gov/ more than 50 auto law enforcement (E.D. Ark. Mar. 12, 2014); Complaint, Fowlerville news-events/events-calendar/2011/11/road-ahead- actions;88led two law enforcement Ford, Inc., No. C–4433 (F.T.C. Feb. 20, 2014); selling-financing-leasing-motor-vehicles; see also Complaint, Infiniti of Clarendon Hills, Inc., No. C– Consumers for Auto Reliability and Safety, 4438 (F.T.C. Feb. 20, 2014); Complaint, Luis Comment Letter on Motor Vehicle Roundtables, 85Individual commenter, Doc. No. FTC–2022– Alfonso Sierra, No. C–4434 (F.T.C. Feb. 20, 2014); Project No. P104811, at 6 (Apr. 1, 2012), https:// 0046–0825. Complaint, Mohammad Sabha, No. C–4435 (F.T.C. www.ftc.gov/sites/default/files/documents/public_ 86Individual commenter, Doc. No. FTC–2022– Feb. 20, 2014); Complaint, Norm Reeves, Inc., No. comments/public-roundtables-protecting- 0046–4833. C–4436 (F.T.C. Feb. 20, 2014); Complaint, Ganley consumers-sale-and-leasing-motor-vehicles-project- 87Individual commenter, Doc. No. FTC–2022– Ford West, Inc., No. C–4428 (F.T.C. Jan. 28, 2014); no.p104811-00108/00108-82875.pdf (stating that 0046–1690. Complaint, Timonium Chrysler, Inc., No. C–4429 the Director of the Navy-Marine Corps Relief 88Complaint, Fed. Trade Comm’n v. Rhinelander (F.T.C. Jan. 28, 2014); Complaint, Courtesy Auto Society in San Diego indicated before the California Auto Ctr., Inc., No. 3:23–cv–00737 (W.D. Wis. Oct. Grp., Inc., No. 9359 (F.T.C. Jan. 7, 2014); Complaint, Assembly Committee on Banking and Finance that 24, 2023); Complaint, Fed. Trade Comm’n v. Franklin’s Budget Car Sales, Inc., No. C–4371 ‘‘the number one issue they are confronted with is Passport Auto. Grp., Inc., No. 8:22–cv–02670–GLS (F.T.C. Oct. 3, 2012); Complaint, Fed. Trade used car dealers who are taking advantage of (D. Md. Oct. 18, 2022); Complaint, Fed. Trade Comm’n v. Matthew J. Loewen, No. 2:12–cv–01207– military personnel’’). These events, and others, have Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv– MJP (W.D. Wash. July 13, 2012); Complaint, Key included speakers representing consumers, dealers, 01690 (N.D. Ill. Mar. 31, 2022); Complaint, Traffic Hyundai of Manchester, LLC, No. C–4358 (F.T.C. regulators, and other industry stakeholders. May 4, 2012); Complaint, Billion Auto, Inc., No. C– VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 599 As discussed in the NPRM, the In addition, States have engaged in legislative and regulatory efforts, at least Commission’s law enforcement partners enforcement actions alleging similar four States have enacted consumer have also brought actions addressing dealer misconduct in the motor vehicle protection measures relating to pricing unfair, abusive, and deceptive practices dealer marketplace, and have or add-ons by motor vehicle dealers.93 in the motor vehicle industry. For implemented legislative and regulatory For example, to ‘‘ensure that dealers do example, the Consumer Financial measures to address corresponding not add in hidden or undisclosed costs Protection Bureau (‘‘CFPB’’) has taken consumer protection issues. With regard after the price for a vehicle has been action against third-party motor vehicle to law enforcement, State regulators and advertised,’’ Oregon promulgated a rule financing entities in matters that raise Attorneys General have participated in that requires dealerships to state an similar, and sometimes identical, claims law enforcement sweeps with the FTC, ‘‘offering price’’ that is the actual offer of deceptive and unfair acts or practices and have filed hundreds of actions and amount the consumer can pay to as have been at issue in FTC alleging unlawful conduct by motor own the vehicle, excluding only taxes enforcement actions.91 vehicle dealerships across the and other specific items.94California country.92Furthermore, with regard to and Wisconsin have similarly enacted 91The CFPB has brought at least 23 enforcement actions involving motor vehicles, financing, or add- bank imposed duplicative or unnecessary forced- laws that make it unlawful for on products or services. See Consent Order ¶¶3, placed auto loan insurance on consumers); Consent dealerships to advertise a total price 13–57, Toyota Motor Credit Corp., CFPB No. 2023– Order ¶¶12–23, Toyota Motor Credit Corp., CFPB without including additional costs to CFPB–0015 (Nov. 20, 2023) (finding auto lender No. 2016–CFPB–0002 (Feb. 2, 2016) (finding auto engaged in unfair or abusive acts or practices by finance company engaged in discriminatory pricing the purchaser outside the mandatory making it unreasonably difficult for consumers to markup for motor vehicle financing, without regard tax, title, and registration fees.95Other cancel unwanted add-ons; failing to ensure to creditworthiness); Consent Order ¶¶73–75, Y States, such as Indiana, have enacted consumers received refunds of payments they had King S Corp., CFPB No. 2016–CFPB–0001 (Jan. 21, made for certain add-ons that had become void and 2016) (finding used car dealer failed to disclose codes that prohibit the sale of add-ons worthless; and failing to provide refunds owed to mandatory add-ons as financing charges); Consent in certain circumstances.96 c a o gr n e s e u m m e e n r t s s ) w ; ho canceled their vehicle service O No rd . e 2 r 0 ¶ 15 ¶ – 1 C 2 F – P 5 B 1, – I 0 n 0 t 3 e 2 rs ( t D at e e c A . 1 u 7 t , o 2 G 0 r 1 p 5 . ) , ( I f n i c n . d , i C n F g P B The Commission and its law Complaint ¶¶75–104, CFPB v. USASF Servicing, dealership and financing company reported enforcement partners also regularly LLC, No. 1:23–cv–03433–VMC (N.D. Ga. Aug. 2, information they knew or had reasonable cause to provide business guidance and 2023) (alleging auto loan servicer illegally disabled believe was inaccurate to credit reporting entities, consumer education regarding the motor and repossessed consumers’ vehicles, wrongfully harming consumer credit); Consent Order ¶¶7–90, double-billed consumers, misapplied payments, Westlake Servs., LLC, CFPB No. 2015–CFPB–0026 vehicle marketplace. The Commission and failed to ensure refunds of unearned GAP (Sept. 30, 2015) (finding indirect auto financing has compiled its motor vehicle business premiums to which consumers were entitled); entity used illegal debt collection tactics); Consent guidance into a portal on its website, Consent Order ¶¶7–33, TMX Finance LLC, CFPB Order ¶¶8–23, Fifth Third Bank, CFPB No. 2015– No. 2023–CFPB–0001 (Feb. 23, 2023) (finding auto CFPB–0024 (Sept. 28, 2015) (finding discrimination with links to guidance documents, lender understated and inaccurately disclosed the against loan applicants in credit applications based frequently asked questions, and legal finance charge and annual percentage rate on loans on characteristics such as race and national origin); resources.97Likewise, the Commission and unfairly charged borrowers for a product that Consent Order ¶¶9–24, Am. Honda Fin. Corp., provided no benefit); Complaint ¶¶33–135, 171– CFPB No. 2015–CFPB–0014 (July 14, 2015) (same); provides a web page for consumers to 226, CFPB v. Credit Acceptance Corp., No. 1:23–cv– Consent Order ¶¶4–60, DriveTime Auto. Grp., learn more about buying, financing, and 00038 (S.D.N.Y. Jan. 4, 2023) (alleging indirect auto Inc., CFPB No. 2014–CFPB–0017 (Nov. 19, 2014) leasing motor vehicles.98Several States lender misrepresented key terms of loans provided (finding buy-here-pay-here dealership made have published similar such guidance to subprime and deep-subprime consumers and harassing debt collection calls and provided substantially assisted dealers in the deceptive sale inaccurate credit information to credit reporting manuals for motor vehicle dealers,99 of add-on products); Consent Order ¶¶7–22, Wells agencies); Consent Order ¶¶4–37, First Investors Paul Blanco’s Good Car Co. Auto Grp., No. RG– Fargo Bank, N.A., CFPB No. 2022–CFPB–0011 (Dec. Fin. Servs. Grp., Inc., CFPB No. 2014–CFPB–0012 19036081 (Cal. Super. Ct. Sept. 23, 2019). 20, 2022) (finding bank incorrectly applied (Aug. 20, 2014) (finding auto financing company borrowers’ auto loan payments, erroneously provided inaccurate records to credit reporting 93See, e.g., Cal. Veh. Code 11713.1(b), (c); Or. assessed fees and interest, wrongly repossessed agencies); Consent Order ¶¶7–27, Ally Fin. Inc., Admin. R. 137–020–0020(3)(c); Wis. Admin. Code borrowers’ vehicles, and failed to ensure borrowers CFPB No. 2013–CFPB–0010 (Dec. 20, 2013) (finding Trans. 139.03(3); Ind. Code 24–4.5–3–202. received refunds of unearned GAP fees at early auto lender engaged in discriminatory pricing); 94Or. Admin. R. 137–020–0020(3)(c); Official payoff); Consent Order ¶¶4–55, Hyundai Capital Consent Order ¶¶14–29, U.S. Bank Nat’l Ass’n, Commentary, Or. Admin. R. 137–020–0020(3)(c). America, CFPB No. 2022–CFPB–0005 (July 26, CFPB No. 2013–CFPB–0004 (June 26, 2013) (finding 95Cal. Veh. Code 11713.1(b), (c); Wis. Admin. 2022) (finding auto finance company furnished bank failed to properly disclose all the fees charged Code Trans. 139.03(3). inaccurate information about consumers to credit to participants in the companies’ Military 96Ind. Code 24–4.5–3–202(3)(e)(ix) (prohibiting reporting agencies); Consent Order ¶¶4–14, 3rd Installment Loans and Educational Services auto the sale of any GAP coverage when the LTV is less Generation, Inc., CFPB No. 2021–CFPB–0003 (May loans program, and misrepresented the true cost 21, 2021) (finding subprime auto loan servicer and coverage of add-on products financed along than 80%); Cal. Civ. Code 2982.12(a)(5)(B) charged interest on late payments of fees without with the auto loans); Consent Order ¶¶10–22, (prohibiting the sale of any GAP waiver in three the knowledge or consent of consumers); Consent Dealers’ Fin. Servs., LLC, CFPB No. 2013–CFPB– scenarios, including when the amount financed for Order ¶¶8–50, Santander Consumer USA Inc., 0004 (June 26, 2013) (finding financing company the vehicle exceeds the amount covered by the GAP CFPB No. 2020–BCFP–0027 (Dec. 22, 2020) (finding made deceptive statements regarding the cost of waiver). auto finance company provided inaccurate records add-on products and the scope of coverage of the 97See Fed. Trade Comm’n, Business Guidance, to credit reporting agencies); Consent Order ¶¶11 vehicle service contract). ‘‘Automobiles,’’ https://www.ftc.gov/business- –52, Nissan Motor Acceptance Corp., CFPB No. 92Operation Steer Clear and Operation Ruse guidance/industry/automobiles (last visited Dec. 5, 2020–BCFP–0017 (Oct. 13, 2020) (finding auto Control, brought with State law enforcement 2023). finance company misrepresented financing partners around the nation and Canada, 98See Fed. Trade Comm’n, ‘‘Buying and Owning extension agreements, repossessions, and encompassed 252 enforcement actions. See Press a Car,’’ https://consumer.ftc.gov/shopping-and- limitations to consumer bankruptcy protections); Release, Fed. Trade Comm’n, ‘‘Multiple Law donating/buying-and-owning-car (last visited Dec. Consent Order ¶¶8–22, Lobel Fin. Corp., CFPB No. Enforcement Partners Announce Crackdown on 5, 2023). 2020–BCFP–0016 (Sept. 21, 2020) (finding auto- Deception, Fraud in Auto Sales, Financing and loan servicer unfairly charged delinquent Leasing’’ (Mar. 26, 2015), https://www.ftc.gov/news- 99See, e.g., Ill. Sec’y of State Police, Dealer consumers add-on charges in the form of Loss events/press-releases/2015/03/ftc-multiple-law- Handbook (Apr. 2022), https://www.ilsos.gov/ Damage Waiver premiums); Consent Order ¶¶6–30, enforcement-partners-announce-crackdown. publications/pdf_publications/sos_dop66.pdf; Wis. Santander Consumer USA Inc., CFPB No. 2018– Separately, the California Attorney General’s office DOT—Div. of Motor Vehicles, Motor Vehicle BCFP–0008 (Nov. 20, 2018) (finding auto finance sued a dealership chain under State consumer Salesperson Manual—2020, https://wisconsin company sold GAP to consumers with LTV over protection laws for deceiving consumers about add- dot.gov/Documents/dmv/shared/salesmanual- 125%, misrepresenting that such consumers would on product charges and misrepresenting consumers’ 20.pdf; Enf’t Div. of the Tex. Dep’t of Motor be fully covered with total loss); income on credit applications; the alleged practices Vehicles, Motor Vehicle Dealer Manual (2017), Consent Order ¶¶27–39, Wells Fargo Bank, N.A., specifically targeted low-income consumers with https://www.txdmv.gov/sites/default/files/body- CFPB No. 2018–BCFP–0001 (Apr. 20, 2018) (finding subprime credit. Complaint ¶¶37–86, People v. files/Motor_Vehicle_Dealer_Manual.pdf. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 600 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations while others have provided online Multiple actions by partners since and failing to ensure consumers consumer education resources.100 publication of the Commission’s NPRM received refunds for add-on products While some commenters stated that have involved auto add-ons. The that no longer offered any benefits.108In existing Federal and State efforts are Commission and the State of Wisconsin addition, the State of California enacted sufficient, recent Commission and alleged that a dealership group, its new legislation that regulates a partner actions indicate that misconduct current and former owners, and its particular type of add-on product—GAP has persisted despite prior law general manager deceived consumers by agreements.109A press release enforcement and other efforts, and tacking on hundreds or even thousands introducing the legislation cited despite the NPRM’s detailed description of dollars for add-ons without those concerns about unfair practices in the of chronic problems relating to bait-and- consumers’ authorization or by leading sale of GAP agreements, stating that this switch tactics and hidden add-on and the consumers to believe the add-ons add-on has little value and is often other charges. For example, in a recent were mandatory, and doing so targeted at consumers with lower enforcement action, filed after disproportionately more frequently with incomes and subprime credit.110 publication of the NPRM, the American Indian customers.103The California’s law requires several Commission charged several auto dealer CFPB and the New York State Office of disclosures related to GAP agreements, locations in an auto dealership group the Attorney General alleged that a including disclosures pertaining to their with misrepresenting the price of subprime auto lender knew or recklessly financed cost and informing consumers vehicles. According to the complaint, disregarded that dealers were tricking that such products are optional.111The the dealers advertised one price to lure borrowers into purchasing add-on law also prohibits the sale of GAP consumers to their dealerships, then products without their knowledge or agreements that will not actually cover charged them hundreds to thousands of consent and had incentivized such consumers’ debt.112 dollars more than the advertised price behavior.104In addition, the Despite the array of actions by the by tacking on bogus extra fees for Commonwealth of Massachusetts has Commission and its partners, unfairness inspection, reconditioning, preparation, brought two recent cases involving and deception continue in the motor and certification.101The action also unfair add-on pricing practices.105In vehicle marketplace, including (1) addressed the practice of dealers one such case, Massachusetts deceptive or unfair sales and advertising charging Black and Latino consumers emphasized the dynamics of auto tactics and (2) hidden charges, these fees more often and in higher transactions that frequently lead to particularly with respect to add-on amounts.102 deceptive and unfair practices, products or services. To address the particularly with respect to add-ons, harm these issues inflict on consumers 100See, e.g., Cal. Dept. of Just., ‘‘Buying and noting that add-on products ‘‘are often and on law-abiding dealers, the Final Maintaining a Car,’’ https://oag.ca.gov/consumers/ sprung on consumers in the final steps Rule, in general: g H e i n g e h r w a a l/ y c a S r a s f e (l t a y s & t v M is o it t e o d r V D e e h c. i c 5 l , e 2 s, 0 ‘ 2 ‘B 3) u ; y F i l n a g . from a of completing a transaction’’ after • Prohibits dealers from making Licensed Dealer,’’ https://www.flhsmv.gov/safety- ‘‘multiple rounds of negotiation on the misrepresentations regarding material center/consumer-education/buying-vehicle-florida/ price of a car and/or car financing.’’106 information, including about the cost of buying-licensed-dealer (last visited Dec. 5, 2023); Efforts to combat deceptive and unfair the vehicle, the financing terms, and the O ww r. w D . e d p o ’ j t . s o t f a J t u e. s o t r ., . u ‘‘ s B / u co y n in s g u m a e V r e -p h r ic o l t e e , c ’’ t i h o t n tp /m s: o // tor- practices in the motor vehicle industry availability of rebates or discounts; vehicles/buying-a-vehicle/ (last visited Dec. 5, since the NPRM have gone beyond • Requires dealers to disclose the 2023). enforcement actions. The CFPB offering price of the vehicle—its full 101Complaint ¶17, Fed. Trade Comm’n v. announced that it uncovered several cash price, provided that dealers may Passport Auto. Grp., Inc., No. 8:22–cv–2670 (D. Md. unlawful practices through supervisory exclude required government charges;
Oct. 18, 2022).
Aug. 9, 2022) (granting the Commission’s motion to 2023-24234.pdf. repossession). exclude the defendant’s expert testimony); see also 103Complaint ¶¶3–5, 11–18, 33–43, 48–51, Fed. 108Consumer Fin. Prot. Bureau, ‘‘Supervisory Fed. Trade Comm’n v. FleetCor Techs., Inc., 620 F.
III. Section-by-Section Analysis Rules of Practice, which ‘‘sets forth procedures for amendment that was not preceded by an advance the promulgation of rules under authority other notice of proposed rulemaking). The following discussion provides a than section 18(a)(1)(B) of the FTC Act.’’ 16 CFR This same commenter argued the FTC had not section-by-section analysis that states 1.21. Neither subpart C nor the APA requires complied with the ‘‘Principles of Regulation’’ publication of an ANPR.
the provisions proposed in the NPRM, enumerated in section 1(b) of Executive Order This is consistent with Commission practice in 12866. See Comment of Nat’l Auto. Dealers Ass’n, and discusses the comments received, prior notices to issue or amend regulations, Doc. No. FTC–2022–0046–8368 at 34–36 & n.123; the Commission’s responses to including with the Made in USA Labeling Rule, the E.O. 12866 3(b) (defining ‘‘Agency’’ to mean an comments, and the provisions adopted Children’s Online Privacy Protection Act Rule, and authority of the United States ‘‘other than those in the Final Rule.113 the Telemarketing Sales Rule. See, e.g., Fed. Trade considered to be independent regulatory agencies’’). Comm’n, Notice of Proposed Rulemaking, Made in This provision of the Executive Order does not A. §463.1: Authority USA Labeling Rule, 85 FR 43162 (July 16, 2020), apply to independent agencies such as the FTC. https://www.govinfo.gov/content/pkg/FR-2020-07- Regardless, the Commission did take into account Section 463.1 states that the Final 16/pdf/2020-13902.pdf (issuing original notice of the principles set forth in section 1(b), as is evident Rule is promulgated pursuant to section proposed rulemaking that was not preceded by an throughout the NPRM. See, e.g., NPRM at 42015– advance notice of proposed rulemaking); Fed. Trade 1029 of the Dodd-Frank Act, and that it 17 (identifying problems in the marketplace); id. at Comm’n, Notice of Proposed Rulemaking, is an unfair or deceptive act or practice Children’s Online Privacy Protection Rule, 64 FR 42028–42031 (soliciting comments on alternative approaches); id. at 42036–42044 (assessing costs within the meaning of section 5(a)(1) of 22750 (Apr. 27, 1999), https://www.govinfo.gov/ and benefits).
the FTC Act to violate, directly or content/pkg/FR-1999-04-27/pdf/99-10250.pdf The same commenter also argued that the indirectly, any provision of the Final ( R s u am lem e); a k F i e n d g . , T T r e a l d e e m C a o rk m e m tin ’n g , S N a o le ti s c R e u o l f e P , r 6 o 0 p F o R se 8 d 3 13 Commission’s denial of its request to extend the Rule, including the recordkeeping (Feb. 14, 1995), https://www.govinfo.gov/content/ comment period prejudiced the commenter’s ability requirements, which are necessary to pkg/FR-1995-02-14/pdf/95-3537.pdf (same); Fed. to collect and provide data pertaining to the prevent such unfair or deceptive acts or Trade Comm’n, Notice of Proposed Rulemaking, proposed rule and was inconsistent with the practices and to enforce this Rule.114 Telemarketing Sales Rule, 78 FR 41200 (July 19, Commission’s grant of extensions in other 2013), https://www.govinfo.gov/content/pkg/FR- rulemakings. As described in its letter, the The prohibition against violating any 2013-07-09/pdf/2013-12886.pdf (issuing notice of Commission also received requests opposing an applicable provision ‘‘directly or proposed rulemaking for rule amendment that was extension of the comment period. See Letter, Fed. indirectly’’ applies to each section of not preceded by an advance notice of proposed Trade Comm’n, ‘‘Duration of the Public Comment part 463. As discussed in SBP I.A, r C u h l i e l m dr a e k n i ’ n s g O ); n F l e in d e . T P r r a iv d a e c C y o P m ro m te ’ c n t , i o P n ro R p u o l s e e , d 7 R 6 u F l R e, P h e tt r p io s: d // i w n w M w a . t f t t e c r .g N ov o / . s P y 2 st 0 e 4 m 8 / 0 f 0 il ’ e ’ s (A /ft u c g _ . g 2 o 3 v , / p 2 d 02 f/ 2 ), 59804 (Sept. 27, 2011), https://www.govinfo.gov/ Matter%20No.%20204800%20-%20Letter% 113Regarding the thousands of comments content/pkg/FR-2011-09-27/pdf/2011-24314.pdf 20re%20Extension%20for%20publication.pdf. In received, the Commission notes that many (same); Fed. Trade Comm’n, Notice of Proposed the letter, the Commission noted its ongoing commenters raised similar concerns or addressed Rulemaking, Telemarketing Sales Rule, 74 FR 41988 engagement with stakeholders on issues relating to overlapping issues. To avoid repetition, the (Aug. 19, 2009), https://www.govinfo.gov/content/ the sale, financing, and lease of motor vehicles, Commission has endeavored to respond to issues pkg/FR-2009-08-19/pdf/E9-19749.pdf (same); Fed. since before its 2011 Federal Register notice raised in similar comments together. Responses Trade Comm’n, Notice of Proposed Rulemaking, inviting stakeholder feedback on these issues and provided in any given section apply equally to Children’s Online Privacy Protection Rule, 70 FR continuing since that time. See Fed. Trade Comm’n, comments addressing the same subject in the 2580 (Jan. 14, 2005), https://www.govinfo.gov/ Public Roundtables: Protecting Consumers in the context of other sections. Moreover, throughout the content/pkg/FR-2005-01-14/pdf/05-877.pdf (same); Sale and Leasing of Motor Vehicles, 76 FR 14,014 SBP, the Commission discusses justifications for the Fed. Trade Comm’n, Notice of Proposed (Mar. 15, 2011), https://www.federalregister.gov/ Final Rule that are informed by its careful Rulemaking, Telemarketing Sales Rule, 69 FR 67287 documents/2011/03/15/2011-5873/public- consideration of all comments received, even where (Nov. 17, 2004), https://www.govinfo.gov/content/ roundtables-protecting-consumers-in-the-sale-and- that discussion is not linked to a particular pkg/FR-2004-11-17/pdf/04-25470.pdf (same); Fed. leasing-of-motor-vehicles. The Commission comment. Trade Comm’n, Notice of Proposed Rulemaking, determined that a sixty-day comment period, along 114The proposed authority provision in the Telemarketing Sales Rule, 69 FR 7330 (Feb. 13, with an additional twenty days following the public NPRM omitted the second reference to ‘‘unfair’’ acts 2004), https://www.govinfo.gov/content/pkg/FR- announcement and release of the NPRM and prior or practices with regard to the proposed 2004-02-13/pdf/04-3287.pdf (same); Fed. Trade to its publication in the Federal Register, provided recordkeeping requirements; the Final Rule Comm’n, Notice of Proposed Rulemaking, meaningful opportunity to comment. See also consistently refers to both ‘‘unfair’’ and ‘‘deceptive’’ Telemarketing Sales Rule, 67 FR 4492 (Jan. 30, Steven J. Balla, ‘‘Public Commenting on Federal acts or practices together. 2002), https://www.govinfo.gov/content/pkg/FR- Agency Regulations: Research on Current Practices Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 602 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations The Final Rule defines with specificity discussed in the following paragraphs, Commission will continue to monitor certain unfair or deceptive acts or in response to stakeholder comments, this issue to determine whether practices; the Final Rule provisions are the Commission declines to finalize additional action is warranted. also ‘‘prescribed for the purpose of certain of these provisions; in the Final One individual commenter expressed preventing such acts or practices.’’116 Rule, this term appears in paragraph (a) concern that, under the Commission’s of the Prohibited Misrepresentations proposed definition, dealers could raise B. §463.2: Definitions section (§463.3); the Disclosure the price of a vehicle by advertising 1. Overview Requirements provision in paragraph (c) additional products or services, such as of §463.4; and the provision in ‘‘free lifetime benefits’’ with the vehicle, The proposed rule included §463.5(a) titled ‘‘Dealer Charges for and that dealers could mislead definitions for the following terms:
2. Definition-by-Definition Analysis commenters recommended that the Several dealership association Commission broaden the definition to commenters expressed concern that the (a) Add-On or Add-On Product(s) or include manufacturer-provided proposed definition was too broad, Service(s)
include requirements prescribed for the purpose of 121See NPRM at 42044, 42046 (proposed preventing’’ unfair or deceptive acts or practices). 117§§463.3(b), 463.4(c), 463.5(a). §§463.2(b), 463.4(b), 463.5(b)). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 603 consumers if they want such products, vehicle dealers must refrain from regulating the business of insurance.126 rather than suggesting that such engaging in deceptive or unfair conduct To the contrary, the Final Rule products or services are mandatory, relating to add-ons, the Commission is addresses deceptive or unfair conduct— when they are not; and any hardship excluding recreational boats and marine it prohibits dealers, inter alia, from associated with refraining from charging equipment from the Final Rule’s making misrepresentations regarding for products or services that provide definition of ‘‘‘Covered Motor Vehicle’ material information about add-ons, consumers no benefits are outweighed or ‘Vehicle,’’’ as discussed in additional from failing to disclose when add-ons by the harms to consumers and detail in the definition-by-definition are not required, and from charging for competition from permitting this analysis of §463.2(e) in SBP III.B.2(e). add-ons from which the consumer practice, as explained in the analysis of would not benefit. Nor has the An industry association commenter §463.5(a). Commission been presented with and comments from a number of Commenters including an industry evidence that the Rule’s other dealership associations noted that association suggested limiting the substantive provisions (prohibiting certain State laws already regulate the definition to products or services sold at misrepresentations; requiring sale of add-ons, including, for example, the ‘‘point of vehicle purchase’’ to disclosures of a vehicle’s offering price clarify that indirect charges, such as the laws in many States that regulate and about total of payments; and inclusion of a one-year subscription to vehicle sales contracts or deceptive requiring consumers’ express, informed a satellite radio service, need not be sales practices generally or that regulate consent before charging them) separately itemized.122The industry insurance products. To the extent that invalidate, impair, or supersede State association commenter suggested that, the Final Rule’s add-on provisions may laws enacted for the purpose of as proposed, the definition would duplicate State law, commenters have regulating insurance.127 include charges for which dealers and provided no evidence that any such A number of industry and dealership consumers ‘‘would otherwise not duplication in the provisions that association commenters contended that, account.’’123The Commission has incorporate this defined term—which as proposed, this definition may extend prohibit misrepresentations, require to products or services that are provided determined not to finalize the add-on list and form requirements in proposed disclosures in the event add-ons are not by the manufacturer but that are §§463.4(b) and 463.5(b). For the required, and prohibit charges for add- installed by a distributor of motor provisions being finalized, excluding ons from which the consumer would vehicles, or alternatively, by the dealer, subscription charges, or including only not benefit—will harm consumers or at the instruction of the manufacturer. items added to the vehicle at the ‘‘point competition. Moreover, the Final Rule Relatedly, a State governmental of vehicle purchase,’’ would narrow the provides additional remedies that will association commenter expressed definition of ‘‘Add-on’’ and the benefit consumers who encounter concern that the proposed definition corresponding requirements in a conduct that is already illegal under could create confusion with regard to manner that would allow for deceptive State or Federal law, including by the sale of used vehicles, where a prior or unfair practices, including by adding a mechanism for the owner of a vehicle may have added a allowing dealers to represent a price Commission to redress consumers product to the vehicle. The commenter that is not the offering price, or to injured by a dealer’s violation of the contended that a motor vehicle dealer deceptively state that add-ons are rule, and will assist law-abiding dealers selling the used vehicle may be unaware required. In the example provided by that presently lose business to of the added product, and further, that the commenter, if the satellite radio competitors that act unlawfully. Under listing any such items may confuse buyers.
subscription service is mandatory, it the Final Rule, State laws may provide To the extent the commenters’ needs to be included in the offering more or less specific requirements as concerns stem from the proposed price of the vehicle, as required by long as such requirements are not provisions related to add-on lists and §463.4(a) of the Final Rule; if it is not inconsistent with part 463, as set forth proposed §463.5(b)’s provisions related mandatory, the dealer needs to disclose, at §463.9, and in the event of an to separate disclosures, the Commission when making any representations about inconsistency, the Rule only affects is not finalizing those provisions. Under the service, that it is not required under such State law to the extent of the the provisions being finalized, if a §463.4(c). Further, regardless of inconsistency.124 product is provided to the dealer by the whether such a product or service is A few dealership association manufacturer or another entity, and a mandatory or optional, dealers must commenters expressed concern that the consumer chooses to have the product follow other aspects of the Final Rule, proposed definition of ‘‘Add-on including by not making any Products or Services’’ would include 126See Union Labor Life Ins. Co. v. Pireno, 458 misrepresentations about the insurance-related products, such as U.S. 119, 129 (1982) (setting forth test for whether subscription under §463.3 and by credit life and credit disability an activity constitutes the ‘‘business of insurance’’); obtaining the express, informed consent Humana Inc. v. Forsyth, 525 U.S. 299, 307–08 insurance, and as such, could implicate (1999) (establishing criteria for whether a Federal of the consumer for the associated the McCarran-Ferguson Act’s reverse- law operates to ‘‘invalidate, impair, or supersede’’ charges under §463.5(c). preemption of certain Federal laws that State law). Another industry association ‘‘invalidate, impair, or supersede’’ State 127The Supreme Court has refused to interpret commenter contended that add-ons sold the McCarran Ferguson Act to invalidate Federal laws enacted ‘‘for the purpose of law when applied to remedy a misrepresentation in the marine industry are typically regulating the business of and undo the harm caused by alleged deception. different than those offered in the insurance.’’125Commenters have See SEC v. Nat’l Sec., Inc., 393 U.S. 453, 462 (1969). context of automobile sales and Moreover, lower courts have rejected precisely the provided no evidence that the Rule will described in the NPRM. While all motor concern raised by the commenter about credit life invalidate, impair, or supersede State insurance. See Fed. Trade Comm’n. v. Dixie Fin. laws enacted for the purpose of Co., 695 F.2d 926, 930 (5th Cir. 1983) (McCarran 122Comment of Serv. Cont. Indus. Council, Ferguson Act does not preclude FTC investigation Guaranteed Asset Prot. All., & Motor Vehicle Prot. of ‘‘whether the sale of insurance is a precondition Prods. Ass’n, Doc. No. FTC–2022–0046–8113 at 13– 124See, e.g., English v. Gen. Elec. Co., 496 U.S. to the arrangement of credit’’); Fed. Trade Comm’n 14. 72, 79 (1990). v. Mfrs. Hanover Consumer Servs., Inc., 567 F. 123Id. at 13. 125See 15 U.S.C. 1012(b). Supp. 992, 94 (E.D. Pa. 1983) (same). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 604 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations installed and pay for it, the dealer may finalize additional related restrictions or Add-ons disclosure requirement in its install it and charge for it, as long as the disclosures, such as requiring add-on Final Rule. Thus, after careful dealer complies with the provisions of prices to be fixed and non-negotiable, or consideration, and in light of the the Final Rule, including by disclosing requiring a distinct add-on list for each concerns raised by commenters, the that the product is not required and by vehicle sold. Other commenters, Commission has determined not to obtaining the consumer’s express, including dealership associations, include a definition of ‘‘Cash Price informed consent for the charge. If the raised concerns that, as proposed, the without Optional Add-ons’’ in its Final manufacturer requires the dealer to add-on list definition could impose Rule. install the product or if the dealer significant economic burdens on
Vehicle Dealer’ or ‘Dealer’’’ as described organizations, urged the Commission to This issue, however, is addressed by in more detail in the discussion of include additional requirements, such §463.5(c) of the Rule, which requires §463.2(e) and (f), in SBP III.B.2(e) and as requiring the proposed disclosure express, informed consent for each item (f). documents associated with this charged.128As explained in additional proposed definition to be available in (b) Add-On List detail in the paragraph-by-paragraph different languages, while others, analysis of §463.5(c) in SBP III.E.2(c), if The NPRM proposed defining the including a dealership association, a deal-consummating document is term ‘‘Add-on List,’’ which appeared in raised concerns that the definition and provided in a language that the the associated Add-on List disclosure relevant provision were burdensome or consumer does not understand, and the provision at proposed §463.4(b), as well confusing for dealers. as in the recordkeeping provision at As explained in additional detail in document’s contents are not otherwise proposed §463.6(a)(2). Based on the SBP III.E.2(b) with respect to §463.5(b), clearly understood by the consumer, following, the Commission has in light of commenter concerns that the then the consumer is in no position to determined not to include this proposed provision using this term give unambiguous assent to the charges definition in its Final Rule. would increase costs for legitimate described therein. The Commission Several commenters supported the dealers and add to the time and therefore has determined not to add substantive add-on list proposal and its paperwork for consumers in an already associated definition, and commenters lengthy, paperwork-heavy transaction, 128The language requirements, as they relate to obtaining express, informed consent, are further including consumer advocacy the Commission has elected not to explained in the discussion of §463.5(c) in SBP organizations urged the Commission to include a Cash Price without Optional III.E.2(c). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 605 such a provision to its ‘‘Clear(ly) and between payment options . . . that FTC’s proposal will cause confusion or Conspicuous(ly)’’ definition. However, includes discussion of a lower monthly possible conflict with State law. the Commission will continue to payment.’’ Thus, the language The Commission’s definition of monitor the marketplace and determine requirements in §463.2(d)(5) apply. ‘‘Clear(ly) and Conspicuous(ly)’’ is not whether further language requirements In response to this concern regarding inconsistent with the existing Federal or additional measures are warranted to the applicability of §463.2(d)(5) to legal requirements raised by these address deceptive or unfair practices— disclosures that are not in writing, the commenters. Dealers can comply with particularly those that target or Commission notes that its use of the these laws to the extent they apply as otherwise disproportionately impact word ‘‘appear’’ in §463.2(d)(5) well as with the requirements that language-minority communities. incorporates common meanings, such as follow from the Commission’s Commenters, including consumer ‘‘to show up,’’ ‘‘to come into existence,’’ definition. Regarding State law, advocacy organizations, expressed or ‘‘to become evident or manifest,’’ commenters did not provide examples concern that proposed §463.2(d)(5) may which cause this provision to apply of actual conflicts. Further, to the extent be read to apply only to certain whether the representation requiring the there is truly an inconsistency between disclosures with triggering disclosure appears visually, orally, or the operation of the Commission’s representations and only to disclosures otherwise.130Where the Commission definition and any State law, the that are in writing. These commenters instead intended a provision to be Commission notes that the definition is also requested that the Commission limited to a visual disclosure, as in based on decades of Commission incorporate into its Final Rule the FTC’s §463.2(d)(2), the Rule states so experience policing deceptive and policy statement regarding foreign explicitly. unfair conduct; addresses harmful language advertising and sales In response to the request that the practices including those related to materials, which is separately codified Commission incorporate into this Rule hidden disclosures and charges; and at 16 CFR 14.9.129In response, the its policy statement regarding foreign that §463.9 of the Final Rule sets out Commission notes that to be clear and language advertising and sales the Rule’s relation to State laws. conspicuous, the disclosure must be Other industry association materials, separately codified at 16 CFR ‘‘easily understandable,’’ as stated in the commenters also contended that the 14.9, the Commission emphasizes that definition. If a disclosure is being made proposed definition of ‘‘Clearly and the enforcement statement sets out what in a language the consumer does not Conspicuously’’ would be overly broad is already impermissible under current understand, it does not meet this and challenging for compliance, but did law and is consistent with the requirement. Further, the disclosures not explain why or suggest alternative requirements the Commission is highlighted by the commenters are language. In addition, some dealership finalizing. To the extent dealers take indeed subject to the language association commenters requested more actions that are inconsistent with requirements of §463.2(d)(5), which guidance to understand the definition. Commission statements about such law, requires that disclosures ‘‘appear in The Commission’s definition spells out, they are risking enforcement each language in which the in seven subparts, what clear and proceedings by the Commission or representation that requires the conspicuous means, using simple terms others. Accordingly, the Commission disclosure appears.’’ With regard to the that provide additional information has determined not to add to the Rule offering price disclosure in §463.4(a)(1), about how dealers can make a further requirements regarding foreign the applicable ‘‘representation that disclosure in a manner that is easily language advertising. The Commission requires the disclosure’’ is the understandable and easily noticeable to will continue to monitor the market to ‘‘advertisement that references . . . a the consumer. The definition elaborates determine whether further action is specific Vehicle’’; thus, for example, if basic, common-sense principles, warranted.
an advertisement that references a including that visual disclosures be in a Industry association commenters specific vehicle is in Spanish, the size that consumers will easily notice raised concerns about how the offering price disclosure must also be in and that audible disclosures be in a Commission’s proposed definition Spanish. Similarly, in §463.4(a)(2), the volume, speed, and cadence such that interacts with other Federal laws, such applicable representation that requires consumers will easily hear it. Thus, for as Regulations Z and M, which the disclosure is an ‘‘advertisement that example, disclosures in an illegible font, implement the Truth in Lending Act represents . . . any monetary amount or or that consumers cannot hear, are not and the Consumer Leasing Act, financing term for any Vehicle.’’ In clear and conspicuous. The Commission respectively, and contended that it §463.4(a)(3), the applicable also notes that it did not mandate conflicts with a clear and conspicuous representation is ‘‘any communication specific fonts, volumes, or other definition in Commodity Futures . . . that includes a reference . . . prescriptive measures. Thus, dealers Trading Commission regulations.131 regarding a specific Vehicle, or any have the flexibility to determine the best Industry and dealership association monetary amount or financing term for way to meet the definition’s commenters contended that State any Vehicle.’’ In §463.4(c) and (d), ‘‘any requirements for their consumers under representation’’ regarding an add-on advertising standards already address the circumstances. product or service or a monthly what constitutes ‘‘clear and A dealership association commenter payment for any vehicle, respectively, conspicuous’’ advertising and provide contended that the proposed definition triggers the language requirement of guidance on disclosures, such that the does not include a reasonableness §463.2(d)(5). The monthly payments standard and may be interpreted as comparison disclosure in §463.4(e) is 130See Appear (defs. 1b, 4, 6), Merriam- prohibiting any limitations and Webster.com Dictionary, https://www.merriam- required when there is a ‘‘comparison exclusions, given the requirement in webster.com/dictionary/appear (last visited Dec. 5, 2023); see also Order ¶¶2–3, Asbury Auto. Grp., proposed §462.3(d)(7) that a disclosure 12916 CFR 14.9 is an enforcement policy Inc., No. C–4606 (F.T.C. Mar. 22, 2017) (identical must not be contradicted or mitigated by statement that provides information to advertisers usage in definition provision); Order ¶2, Lithia or inconsistent with anything else in the about clear and conspicuous disclosures in foreign Motors, Inc., No. C–4597 (F.T.C. Dec. 8, 2016) communication. The commenter further language advertisings and sales materials, including (same); Order ¶¶2–3, Jim Koons Mgmt. Co., No. C– ensuring the language of the disclosure matches the 4598 (F.T.C. Dec. 8, 2016) (same). asked whether a statement such as language in the publication. See 16 CFR 14.9. 13117 CFR 162.2. ‘‘with approved credit’’ would VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 606 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations impermissibly mitigate an offer of low Lastly, another dealership association consumers could have avoided the financing under this proposed commenter asked how the proposed disclosure. In addition, the disclosure definition.132The Commission responds definition translates to visual, audible, must be easily noticeable and easily as follows. The standard is an objective and electronic media disclosures and understandable, as set forth expressly in one, evaluated from the perspective of a expressed concern about subjectivity, the definition. Disclosures that do not reasonable consumer.133The definition characterizing the terms ‘‘easily’’ meet this standard include those that does not prohibit all advertising that understood and ‘‘unavoidable’’ within are buried in other text, including as contains limitations and exclusions, but the proposed definition as subjective illustrated by many FTC actions against it does provide that if dealers are and open to different interpretations, dealers.138Regarding the requirement advertising offers that are limited in particularly in the context of websites that disclosures be ‘‘easily’’ noticeable some way, they may not misrepresent and internet promotions. Here, the and understandable, the standard is also such offers. Thus, if a dealer presents Commission declines to mandate more an objective one, evaluated from the consumers with an unqualified prescriptive language regarding, for perspective of a reasonable consumer.
representation of low financing terms, example, font sizes, what volumes are to Determining how reasonable consumers those terms must be available to typical be used, and where exactly the language consumers. Alternatively, a dealer may should appear on a website, such as on are likely to respond may be resolved on offer low financing terms to consumers an overlay with mandated color, size, the basis of the advertisement, context, with particular credit characteristics if and location.136As courts137have or disclosure itself, or based on extrinsic that requirement is presented in a recognized, whether a disclosure is clear evidence, such as consumer manner that does not deceive reasonable and conspicuous is an objective complaints.139To this end, as noted consumers. For example, a dealer may standard rather than a subjective one. previously, the definition enumerates in offer ‘‘0% annual percentage rate (APR) While more prescriptive language seven subparts the meaning of clear and for consumers with a credit score above would provide additional objective conspicuous using simple terms that 800.’’ By contrast, it would be deceptive criteria, the Commission is concerned provide additional guidance on how if the dealer offered ‘‘0% APR,’’ and such language might constrain dealers dealers may make disclosures that are then separately disclosed in fine print from determining the best way to meet easily understandable and easily that such terms are only available to the definition’s requirements for their noticeable to the consumer. consumers with a credit score above consumers under the circumstances After carefully considering the 800, because the qualifying disclosure is involved, and might require dealers that comments, the Commission adopts inconsistent with an offer of ‘‘0% APR’’ are already making clear and that contained no limitations and thus conspicuous disclosures to change their §463.2(d) with a modification to clarify, indicated that 0% APR is available to existing disclosure materials. through the addition of parentheses— the typical consumer regardless of credit The Commission reiterates that the ‘‘Clear(ly) and Conspicuous(ly)’’—that score.134Further, the Commission notes definition of ‘‘Clear(ly) and the definition applies whether the term that to qualify as clear and conspicuous, Conspicuous(ly)’’ elaborates basic, is used as an adjective or adverb. ‘‘disclaimers or qualifications in any common-sense principles, such as Consistent with the Commission’s particular ad are not adequate to avoid requiring visual disclosures in a size experience addressing unfair or liability unless they are sufficiently consumers can see and audible deceptive conduct, the Commission has prominent and unambiguous to change disclosures in a volume they can hear. defined the term ‘‘Clear(ly) and the apparent meaning of the claims and Regarding the requirement that internet Conspicuous(ly)’’ to include disclosures to leave an accurate impression. disclosures be unavoidable, this that are easily understandable and Anything less is only likely to cause language requires evaluating an easily noticeable, while also providing confusion by creating contradictory objective standard—whether or not dealers with additional information on double meanings.’’135 how to meet those requirements.140 Comm’n v. Alcoholism Cure Corp., No. 3:10–cv– 132Comment of Ohio Auto. Dealers Ass’n, Doc. 266–J–34JBT, 2011 WL 13137951, at *51 (M.D. Fla. 138Complaint ¶¶6–14, Jim Burke Auto., Inc., No.
No. FTC–2022–0046–6657 at 4. Sept. 16, 2011) (finding that ‘‘not MD’’ disclaimers C–4523 (F.T.C. May 4, 2015); Complaint ¶¶6, 9, TT 133See FTC Policy Statement on Deception, supra were inadequate to dispel net impression regarding of Longwood, Inc., No. C–4531 (F.T.C. July 2, 2015); note 42, at 2–5. professional qualifications of defendant and other Complaint ¶13, City Nissan Inc., No. C–4524 134Complaint ¶¶5–7, Progressive Chevrolet Co., employees as advertised); Fed. Trade Comm’n v. (F.T.C. May 4, 2015); Complaint ¶¶17–19, Fed.
No. C–4578 (F.T.C. June 13, 2016) (alleging ads Wash. Data Res., 856 F. Supp. 2d 1247, 1274–75 Trade Comm’n v. Liberty Chevrolet, Inc., No. 1:20– touting attractive terms deceptively failed to (M.D. Fla. 2012) (rejecting defendants’ argument cv–03945 (S.D.N.Y. May 21, 2020); Complaint disclose high credit score requirement). that retainer agreement contained sufficient ¶¶4–9, 12–15, 18–20, Billion Auto, Inc., No. C– 135Removatron Int’l Corp. v. Fed. Trade Comm’n, disclaimer to dispel a misrepresentation about 4356 (F.T.C. May 1, 2012) (alleging false ads 884 F.2d 1489, 1496–97 (1st Cir. 1989); see also whether a home loan was guaranteed). promising to pay off consumers’ existing motor Fed. Trade Comm’n v. Brown & Williamson 136The Commission has included such vehicle debt and failing to disclose legally required Tobacco Corp., 778 F.2d 35, 42–43 (D.C. Cir. 1985) requirements elsewhere. See, e.g., Order ¶6, United financing and leasing terms); see also Complaint (finding that a disclosure in virtually illegible form, States v. Sunkey Publ’g, Inc., No: 3:18–cv–1444– ¶¶57–60, Fed. Trade Comm’n v. Stewart Fin. Co. placed in an inconspicuous corner of Barclay HNJ (N.D. Ala. Sept. 6, 2018). Holdings, Inc., No. 1:03–CV–2648 (N.D. Ga. Sept. 4, advertisements, did not eliminate deception); see 137See. e.g., Palmer v. Champion Mortg., 465 F.3d 2003) (alleging violations for failure to include the Fed. Trade Comm’n v. Cap. Choice Consumer 24, 28 (1st Cir. 2006) (applying an objective cost of required add-on products in the finance Credit, Inc., 2003 U.S. Dist. LEXIS 29086, at *5 (S.D. standard in evaluating Truth in Lending Act claim charge and annual percentage rate disclosed to Fla. June 2, 2003) (finding that, where regarding clear and conspicuous disclosure); Smith consumers).
advertisements promised a general purpose credit v. Check-N-Go of Ill., Inc., 200 F.3d 511, 515 (7th card, such as VISA or MasterCard, ‘‘fine print on Cir. 1999) (same); Zamarippa v. Cy’s Car Sales, Inc., 139See FTC Policy Statement on Deception, supra reverse side’’ of ad clarifying that the credit card 674 F.2d 877, 879 (11th Cir. 1982) (same); note 42, at 2–5 (describing application of reasonable was a ‘‘merchandise card and not a major bank Bustamante v. First Fed. Sav. & Loan Ass’n, 619 consumer standard). card’’ was inadequate to modify net impression); F.2d 360, 364 (5th Cir. 1980) (same); see also 140See, e.g., Decision and Order, JS Autoworld, Fed. Trade Comm’n v. Cyberspace.com LLC, 453 Herrera v. First N. Sav. & Loan Ass’n, 805 F.2d 896, Inc., No. C–4535 (F.T.C. Aug. 13, 2015); Decision F.3d 1196, 1200 (9th Cir. 2006) (rejecting 900 (10th Cir. 1986) (resolving question of clear and and Order, Nat’l Payment Network, Inc., No. C– defendant’s argument that truthful fine print notices conspicuous disclosure under Truth in Lending Act 4521 (F.T.C. May 4, 2015); Decision and Order, Matt on reverse side of checks, invoices, and marketing as a legal, rather than factual, matter); Dixey v. Blatt Inc., No. C–4532 (F.T.C. July 2, 2015); inserts cured deception that check/invoice was a Idaho First Nat’l Bank, 677 F.2d 749 (9th Cir. 1982) Decision and Order, Ganley Ford West, Inc., No. C– refund rather than offer for services); Fed. Trade (same). 4428 (F.T.C. Jan. 28, 2014). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 607 (e) Motor Vehicle (Finalized as cover all-terrain vehicles, go-carts, or or both.’’ Based on the following, the ‘‘‘Covered Motor Vehicle’ or ‘Vehicle’’’) snowmobiles because such vehicles are Commission is finalizing this definition not designed for use on a ‘‘public’’ in the Final Rule with modifications for The proposed rule defined the term street, highway, or road.141 clarity.
‘‘Motor Vehicle’’ as ‘‘(1) any self- A number of industry association Many stakeholders commented in propelled vehicle designed for commenters claimed that the proposed support of the proposed rule and transporting persons or property on a definition conflicts with definitions of expressed no concern over this street, highway, or other road; (2)
payments; charge for products that recreational vehicles,143should be provide no benefit; or charge consumers The proposed rule defined the term excluded from coverage, generally without express, informed consent. To ‘‘Dealer’’ or ‘‘Motor Vehicle Dealer’’ as contending that such dealerships the extent that dealers engage in such ‘‘any person or resident in the United operate differently from automobile conduct, they are in violation of the FTC States, or any territory of the United dealerships, and that these types of Act. States, that: (1) Is licensed by a State, a vehicles are used for different purposes Another commenter contended it was territory of the United States, or the than are automobiles. As explained in unclear whether all-terrain vehicles, go- District of Columbia to engage in the the section-by-section analysis of the carts, snowmobiles, scooters, electric sale of motor vehicles; (2) Takes title to, definition of ‘‘Covered Motor Vehicle’’ bicycles, and golf carts were covered by holds an ownership interest in, or takes in SBP III.B.2(e), after considering the proposed definition. In response, the physical custody of motor vehicles; and stakeholder comments, the Commission Commission has modified the first (3) Is predominantly engaged in the sale enumerated subpart of the definition to and servicing of motor vehicles, the 142Comment of Structured Fin. Ass’n, Doc. No.
refer only to vehicles designed for use leasing and servicing of motor vehicles, FTC–2022–0046–7646 at 3. on a ‘‘public’’ street, highway, or road, 143The Marine Retailers Association of the and to expressly exclude scooters, 141According to the National Highway Traffic Americas requested that transactions in excess of electric bicycles, and golf carts. The Safety Administration, ‘‘Public road means any $70,000 be excluded from coverage, as an road under the jurisdiction of and maintained by a alternative to excluding marine transactions definition of ‘‘‘Covered Motor Vehicle’ public authority and open to public travel.’’ 23 CFR altogether. See Comment of Marine Retailers Ass’n or ‘Vehicle’’’ in the Final Rule does not 1300.3. of the Ams., Doc. No. FTC–2022–046–9291 at 4. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 608 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations is removing marine, motorcycle, RV, not remove the term ‘‘servicing of motor Rule, and will assist law-abiding dealers and certain other vehicles from the vehicles’’ from the Final Rule. that presently lose business to definition in §463.2(e), and to reflect One such commenter further competitors that act unlawfully. To the this change, finalizing the defined term contended that the proposed definition extent the Rule may overlap with State as ‘‘‘Covered Motor Vehicle’ or did not cover certain entities, including law, dealers can comply with these laws ‘Vehicle,’’’ thereby excluding from the certain direct sellers or manufacturers or and also with the requirements that Final Rule entities who otherwise others not licensed in a particular State, follow from the operation, in the Rule, would have qualified as ‘‘Dealers’’ or lenders who offer add-on products of the Commission’s definition. To the solely based on their sale and servicing, such as GAP agreements and debt extent there is truly an inconsistency or leasing and servicing, of such suspension products. As previously between the provisions of the Final Rule vehicles. The Commission underscores discussed, the Final Rule applies to all and a State law, §463.9 sets out the that, regardless of the definition of dealers that meet the three parts of this Rule’s relation to State laws. ‘‘Covered Motor Vehicle’’ under the definition.146To the extent that the Thus, after careful consideration of Final Rule, unfair and deceptive definition does not apply to specific the comments, the Commission is practices remain unlawful under the entities, this reflects the scope and finalizing the definition of ‘‘‘Covered FTC Act. The Commission will continue bounds of the rulemaking authority Motor Vehicle Dealer’ or ‘Dealer’’’ with to monitor all vehicle markets to Congress delegated to the Commission modifications for clarity. The definition determine whether additional action is under the Dodd-Frank Act.147 in the Final Rule incorporates the warranted to protect consumers. Finally, some industry and dealership phrase ‘‘including any individual or Some dealership association association commenters posited that the entity’’ to confirm that the term commenters argued that, under the proposal conflicted with Federal and ‘‘person,’’ like all undefined terms in Commission’s proposal, this definition State law or duplicated the regulatory this part, is used according to its exempted dealers subject to the authority of State enforcement agencies. ordinary meaning and includes jurisdiction of the CFPB. Other such These commenters did not provide individuals and corporate entities and commenters similarly contended that, information regarding how duplicative adds the word ‘‘Covered’’ to the under the proposal, used car dealers laws prohibiting misrepresentations, definition to reflect the narrowed scope that do not engage in extensive post-sale requiring disclosures, or prohibiting of ‘‘Covered Motor Vehicle.’’148 repairs do not ‘‘service’’ vehicles or that charges for items that would not benefit
(h) GAP Agreement relating to undisclosed or unselected definition in relation to that provision.
for any of the difference between the III.E.2(b), the Commission has As stated therein, the Commission is actual cash value of the insured’s determined not to finalize §463.5(b), finalizing this definition substantively vehicle in the event of an unrecovered and as such, will refrain from examining as proposed, with a typographical theft or total loss and the amount owed this proposed definition in relation to modification to include a serial comma on the vehicle pursuant to the terms of that provision. Comments regarding the for consistency.
a loan, lease agreement, or installment proposed definition are examined in the sales contract used to purchase or lease (j) Material or Materially discussion of §463.4(a) in SBP the vehicle, or to waive the unpaid The proposed rule defined ‘‘Material’’ III.D.2(a).151As stated therein, the difference between money received or ‘‘Materially’’ as ‘‘likely to affect a Commission is finalizing this definition from the purchaser’s or lessee’s motor person’s choice of, or conduct regarding, largely as proposed, with a modification vehicle insurer and some or all of the goods or services.’’ This term appeared to clarify that dealers may, but need not, amount owed on the vehicle at the time in the prohibited misrepresentations exclude required government charges of the unrecovered theft or total loss.’’ provisions at §463.3(b) and (g), and in from a motor vehicle’s offering price. In The proposed definition also noted that addition, the definition in the Final the recordkeeping provision at this included ‘‘products or services Rule substitutes ‘‘Vehicle’’ for ‘‘motor §463.6(a). As described in detail in the otherwise titled ‘Guaranteed vehicle’’ to clarify that the term section-by-section analysis of §463.3 in Automobile Protection Agreement,’ conforms with the revised definition of SBP III.C, the Final Rule modifies the ‘Guaranteed Asset Protection ‘‘‘Covered Motor Vehicle’ or ‘Vehicle’’’ introductory paragraph of §463.3 from Agreement,’ ‘GAP insurance,’ or ‘GAP at §463.2(e).
(i) Government Charges 149Comment of Ga. Auto. Dealers Ass’n, Doc. No. FTC–2022–0046–10806 at 4.
ne • xt I c a a m r.1 c 5 u 3 rrently in discussions with exclusionary with other discounts).159 • A consumer should be able to see two dealerships for a new car. Both • While there are good honorable a price, walk into a dealership, and pay that price. Plain and simple, just like assure me there is absolutely no dealer dealerships, far too many play games. ANY OTHER RETAILER.’’163 markup, come to find out they are Rarely is the price of [a] car advertised • If I walk into Best Buy and see a adding 3/5k of ‘‘mandatory’’ add-ons online or via mail EVER the actual price they HAVE to sell it to me for that respectively once I get in the door.154 price. Far too often in the F&I office the • The last vehicle I purchased 2 years finance manager tries to [gloss] over price or cheaper. These rules are long over due.164 ago was a nightmare. Drove 5 hrs[.] to add[-]ons that they just arbitrarily added • I believe if they advertise a car, it a dealer in Southern California. I called on without telling you OR state I cannot should be available for sale—at the the dealer and confirmed the price on get your loan approved without an advertised price—just as a supermarket their website was what I was going to extended warranty as an example I can’t advertise a price for something pay. When I arrived there, they had a experienced. . . . Iw orked for a Toyota they don’t have, or add a ‘coupon list of $2500 [i]n additional charges that dealership many years ago and left the redemption fee’ to it. I believe these were not disclosed when I called and industry because it made me sick seeing rules are an extremely reasonable before I started driving. Purchasing a the games played taking advantage of approach to a long-standing problem vehicle shouldn’t be such a stressful people. Change is needed and sooner process.155 and urge you to adopt them.165 • Most recently I started looking than later.160 • I used to work in the retail auto myself for a new lease, and looked at the • I work as a salesperson at a local industry and these proposed rules will RAV 4 prime. Went to my local dealer Nissan dealership. . . . Currently, help everyone (including the dealers after seeing an ad on their site for $450 dealerships across the US, including the who are fighting them). Consumers will a month. Not only did they not honor one I work for, have made the car benefit from the transaction the deal, but wouldn’t even discuss that buying process needlessly confusing, transparency, and over the long term it was on their own site. I was told the expensive, and frustrating by engaging even the shady dealers will benefit by SE model was [$5000] over MSRP and in false advertising and hidden add-on treating consumers fairly and the XSE was [$8000] over.156 products. While these practices are very developing long term relations.166 • I have contacted 10 different car unscrupulous, they are incredibly • These regulations would be the best dealerships in the past month looking to effective at what they are designed to thing to happen for consumer protection purchase a new or used SUV. 9 out of do: drive revenue for the store. If these since the Mo[n]roney Label. I not only the 10 dealerships I contacted online or regulations are passed, they would have had to navigate and negotiate visited in-person in California changed certainly take a significant toll on my erroneous fees at dealers, but I’ve also personal finances. But the longer I work 152See Motor Vehicle Dealers Trade Regulation in my position, the more I realize that 161Individual commenter, Doc. No. FTC–2022– Rule, Comment Docket, https:// no one should be allowed to engage in 0046–3693. www.regulations.gov/document/FTC-2022-0046- 162Individual commenter, Doc. No. FTC–2022– 0001/comment. 0046–4959.
154Individual commenter, Doc. No. FTC–2022– 158Individual commenter, Doc. No. FTC–2022– 164Individual commenter, Doc. No. FTC–2022– 0046–0099. 0046–4752. 0046–0034.
155Individual commenter, Doc. No. FTC–2022– 159Individual commenter, Doc. No. FTC–2022– 165Individual commenter, Doc. No. FTC–2022– 0046–0906. 0046–5580. 0046–0005.
156Individual commenter, Doc. No. FTC–2022– 160Individual commenter, Doc. No. FTC–2022– 166Individual commenter, Doc. No. FTC–2022– 0046–1878. 0046–2378. 0046–1935.
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 611 worked at dealers whose transparency purchase a vehicle. These commenters additional remedies that will benefit and forthrightness put them at a cited several examples of consumers consumers who encounter conduct that disadvantage. Many dealers advertise being told that they could not use is otherwise already illegal under vehicles that can not [sic] be purchased outside financing, that they would not Federal law, and will aid law-abiding or leased at the advertised price due to receive a lower interest rate from an dealers that lose business to competitors deceptive adverts either not disclosed or outside financial institution, or that a that act unlawfully.170State laws may in a print so fine it can’t be read. Please particular interest rate was the best rate provide more or less specific pass this ruling. My grandma shouldn’t the consumer can get. The Rule already requirements as long as those have to pay more than someone else just covers such conduct. For example, requirements are not inconsistent with because she’s not a good negotiator.167 §463.3(a) of the Rule, which prohibits part 463, as set forth in §463.9, and in Consumer advocacy organization dealers from misrepresenting the cost or the event of an inconsistency, the Rule commenters and individual commenters terms of financing a vehicle, covers only affects such State law to the extent urged the FTC to include additional these and other misrepresentations of the inconsistency. Because dealers specific provisions in §463.3, including regarding financing, including the are already prohibited from engaging in a prohibition against misrepresentations availability of outside or ‘‘indirect’’ ‘‘deceptive acts or practices’’ under the regarding the safety, mechanical or financing terms, or the costs of such FTC Act, dealers should be able to structural condition, odometer reading, financing as compared to those of any comply with these provisions without or history of a vehicle. Similarly, dealer-provided financing. the need for a safe harbor. commenters including a municipal Two individual commenters posited Industry association commenters also regulator urged the Commission to that any language prohibiting claimed that the prohibited specifically prohibit misrepresentations misrepresentations should explicitly misrepresentation proposal ignored the regarding certification of used vehicles, include the word ‘‘omissions,’’ in order materiality prong of the Commission’s citing enforcement actions it brought to ensure that dealers do not sneak in deception standard, and further against dealers that misrepresented used additional costs without consumers’ observed that some of the prohibited vehicles as ‘‘certified pre-owned’’ or consent or understanding. The misrepresentations in the proposed rule ‘‘manufacturer certified.’’ The FTC takes Commission appreciates this concern, explicitly included a materiality seriously deception relating to the safety and notes that the Rule has many requirement,171while others did not. As or condition of a vehicle and the provisions prohibiting such misconduct, the NPRM made clear, the practice of charging consumers more including the required disclosures Commission’s proposed based on false claims or reassurances.168 regarding price, add-ons, and total misrepresentation section, at §463.3, Depending on the claim made by the amount of payments in §463.4 of the addressed misrepresentations that are dealership and the specific facts at Final Rule, as well as the requirement all material.172The Commission need issue, deceptive conduct in either of in §463.5(c) to obtain consumers’ not explicitly specify materiality in its these areas may be covered by the express, informed consent before description of these misrepresentations;
enumerated misrepresentation charging for any items.
(1978) (juxtaposition of phrases); Firestone Tire & reasonably be interpreted by consumers to contain defendant’s product). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 613 defined in this part, including those in language in the introductory paragraph any obligations upon those entities. §§463.4 and 463.5.’’ of §463.3 makes clear, its paragraphs— Nevertheless, as explained in the The Commission examines each including paragraph (a) of §463.3— analysis of the ‘‘Covered Motor Vehicle’’ paragraph of §463.3, including by prohibit misrepresentations regarding definition, §463.2(e), the Commission is examining related comments and material information. By its terms, this excluding recreational vehicle dealers Commission responses to those paragraph requires no particular from the definition of ‘‘Covered Motor comments. The Commission then affirmative disclosures, whether written Vehicle.’’ discusses the corresponding provisions or oral; rather, this paragraph obligates After carefully considering the of the Final Rule. dealers to refrain from comments, the Commission is finalizing misrepresentations regarding material paragraph (a) of §463.3 with the minor 2. Paragraph-by-Paragraph Analysis of information about the costs or terms of modification of capitalizing ‘‘Vehicle.’’ §463.3 purchasing, financing, or leasing a This provision prohibits (a) The Costs or Terms of Purchasing, vehicle.183 misrepresentations regarding ‘‘[t]he Financing, or Leasing a Vehicle The Commission received comments costs or terms of purchasing, financing, from industry associations requesting or leasing a Vehicle.’’ Proposed §463.3(a) prohibited that the Final Rule provide a safe harbor Misrepresentations of the price, misrepresentations regarding the cost or from liability stemming from dealers’ discounts, or other terms are likely to terms of purchasing, financing, or violations of the Rule to vehicle credit cause consumers to waste time pursuing leasing a vehicle. The Commission is contract assignees, who take or receive unavailable or inapplicable offers and to finalizing this provision largely as these contracts subject to all claims and spend more money on a vehicle rather proposed, with the minor modification defenses consumers could assert against than undergoing the hours-long process of capitalizing the defined term the dealer under the Commission’s to begin the vehicle search and ‘‘Vehicle’’ to conform with the revised Trade Regulation Rule Concerning shopping process anew at another definition at §463.2(e) (explained in Preservation of Consumers’ Claims and dealership. Prohibiting these SBP III.B.2(e)). As previously discussed, Defenses, also known as the ‘‘Holder misrepresentations will save consumers the addition of ‘‘material’’ to the Rule.’’184The Rule, however, does not time and money and ensure that dealers introductory paragraph of §463.3 will create liability for these entities under compete on a level playing field.185 apply to this paragraph and to all paragraphs of §463.3 that follow. the Holder Rule where it did not (b) Any Costs, Limitation, Benefit, or A number of commenters expressed previously exist; the Rule addresses Any Other Aspect of an Add-On support for this proposed provision, conduct that is unfair or deceptive Product or Service under the FTC Act. When enacting the contending, inter alia, that it would Proposed §463.3(b) prohibited Holder Rule, the Commission did not level the playing field for car buyers and misrepresentations concerning any include a safe harbor or exceptions address unfair and deceptive practices costs, limitation, benefit, or any other involving any specific deceptive or related to financing terms and material aspect of an add-on product or unfair conduct, and the Commission conditions. service. Section 463.3(b) of the Final declines to do so through this Rule.
(c) Whether Terms Are, or Transaction availability of any rebates or discounts Commission included additional Is, for Financing or a Lease that are factored into the advertised language (‘‘that are factored into the Proposed §463.3(c) prohibited price but not available to all consumers. advertised price but not available to all misrepresentations regarding whether Upon review and consideration of consumers’’) to describe the manner in the terms are, or the transaction is, for public comments, the Commission is which such misrepresentations often financing or a lease. Upon review and finalizing paragraph (d) of §463.3 occur: a dealer represents an advertised consideration of public comments, the without modification from the price which includes a discount or Commission is finalizing paragraph (c) Commission’s original proposal. rebate that is not generally available to of §463.3 without modification from the Comments in support of this proposed consumers.194The NPRM’s discussion Commission’s original proposal. provision, including those from a group of proposed §463.3(d) described both a A few industry association and of State attorneys general and from two scenario in which a dealer advertised a individual commenters posited that this United States Senators, generally rebate or discount separately, and one in proposed provision was unnecessary, contended that the proposed provision which rebates or discounts are factored either because other statutes or would increase the transparency of the into the advertised price but the rebates regulations, including TILA and some purchase transaction by requiring and discounts are not available to a State regulations, address this issue, or dealers to be honest when they advertise typical consumer. The conduct in either because vehicle manufacturers already the availability of discounts. such scenario would violate this An individual commenter suggested monitor such misrepresentations. As provision and, depending on the that the Commission modify proposed noted in SBP III.C.1, even given the circumstances, may violate other §463.3(d) to require dealers to disclose possibility of overlap between this provisions the Commission is finalizing, all representations regarding rebates or provision and existing Federal or State such as paragraph (a) of §463.3. discounts in writing, in a clear and law, there is no evidence that Enforcement actions cited in the NPRM conspicuous manner. The Commission duplicative misrepresentation provide further illustration of deceptive notes this paragraph prohibits prohibitions have harmed consumers or practices involving rebates and misrepresentations regardless of the competition. Further, given that the discounts.195The Commission declines medium. Further, this paragraph focuses conduct covered by this provision is on misrepresentations; disclosures already unlawful under the FTC Act and 192Section 463.3(d) (emphasis added). regarding price, add-ons, and total of may duplicate other laws, or be 193See, e.g., Rebate, Cambridge Dictionary, payments are addressed in the https://dictionary.cambridge.org/us/dictionary/ prohibited by manufacturer rules, it discussion of §463.4, as is a discussion english/rebate (last visited Dec. 5, 2023) (defining should not be difficult to follow this of why the Commission has determined ‘‘rebate’’ as ‘‘an amount of money that is returned provision.191 to you, especially by the government, for example not to include additional disclosure when you have paid too much tax’’ or ‘‘an amount Accordingly, after careful requirements in this Final Rule. The of money that is paid back to you after you have consideration, the Commission adopts same commenter also requested that the paid too much’’); Discount, Cambridge Dictionary, paragraph (c) of §463.3 as proposed. https://dictionary.cambridge.org/us/dictionary/ Final Rule text include examples of Misrepresentations regarding whether english/discount (last visited Dec. 5, 2023) (‘‘[A] situations where discounts or rebates reduction in the usual price’’). terms are, or a transaction is, for may not be available. The Commission 194See NPRM section IV.C, 87 FR at 42020 financing or a lease are likely to affect describes examples here rather than (proposed §463.3(d) prohibited misrepresentations a consumer’s conduct, including by adding them to the Final Rule text, as concerning ‘‘[t]he availability of any rebates or causing consumers to enter into a discounts that are factored into the advertised price it would be difficult to anticipate all but not available to all consumers,’’ and the NPRM monetary transaction for a product they such examples and the text would explained ‘‘[w]hen dealers advertise rebates and become unwieldy. Examples include discounts, or offer prices that factor in such rebates 191The FTC has alleged that misrepresentations and discounts, but in fact those rebates and where an advertised rebate or discount that particular terms are available for financing or discounts are not available to the typical consumer, for a lease violate the FTC Act. See Complaint applies only to the most expensive but only a select set of customers, such conduct ¶¶38–39, Fed. Trade Comm’n v. Tate’s Auto Ctr., version of a particular vehicle make and induces the consumer to select and transact with No. 3:18–cv–08176–DJH (D. Ariz. July 31, 2018) model or is only available to consumers the dealer under false pretenses’’). (alleging false ads touting attractive terms but with high credit scores. 195See, e.g., Complaint ¶¶6–13, Jim Burke Auto., concealing ads were for lease offers only); Inc., No. C–4523 (F.T.C. May 4, 2015) (alleging The Commission received comments Complaint ¶¶10, 13, TC Dealership, L.P., No. C– promises of prices and discounts not generally 4536 (F.T.C. Aug. 13, 2015) (same); Complaint from a dealership association and an available to consumers); Complaint ¶¶6, 9, TT of ¶¶9–12, Cowboy AG, LLC, No. C–4639 (F.T.C. Jan. individual commenter asking for Longwood, Inc., No. C–4531 (F.T.C. July 2, 2015) 4, 2018) (same); Complaint ¶¶36–38, United States additional detail about proposed (alleging promises of prices and discounts not v. New World Auto Imports, Inc., No. 3:16–cv– generally available to consumers); Complaint ¶¶8– §463.3(d), pointing to a State regulation 02401–K (N.D. Tex. Aug. 18, 2016) (alleging 9, JS Autoworld, Inc., No. C–4535 (F.T.C. Aug. 13, misrepresentation that terms were for financing that includes disclosures and asking 2015) (alleging false ads touting prices but instead of leasing); Complaint ¶¶28–37, 44, Fed. which types of rebates the provision concealing discounts with material eligibility Trade Comm’n v. Universal City Nissan, Inc., No. covers. Here, the Commission notes limitations); Complaint ¶¶7–9, TC Dealership, L.P., 2:16–cv–07329 (C.D. Cal. Sept. 29, 2016) (alleging No. C–4536 (F.T.C. Aug. 13, 2015) (alleging false that, as the language in §463.3(d) states, advertisements with key terms that were not ads touting attractive prices but concealing generally available). this provision applies to ‘‘any rebates Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 616 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations to add additional requirements, such as vehicle that does not contain such an One individual commenter disclosure requirements, to its Final offer. As under current law, dealers are recommended that proposed §463.3(e) Rule, given the already lengthy, prohibited under §463.3(d) from both be expanded to prohibit certain specific complex, and document-heavy nature of express and implied misrepresentations. misrepresentations about advertised auto transactions. If, for example, a dealer states or implies vehicle availability, including whether A number of dealership association that a discount is available on several any specific vehicle is already reserved commenters contended that the types of vehicles when, in truth, the for another consumer; whether the proposed paragraph would prohibit discount is only available on one such availability is subject to a requirement dealers from displaying beneficial type of vehicle, such conduct would that the consumer pay a deposit; and information to consumers or would violate this paragraph. If, alternatively, regarding the amount of time until the prohibit dealers from advertising rebates the dealer does not state or imply that vehicle becomes available. Another and incentives of limited availability. In a discount is available for several types individual commenter recommended addition, commenters including one of vehicles, and offers a discount for one that the Rule require disclosure of how such dealership association requested type of vehicle, this conduct would not long each vehicle has been in the that the Commission adopt an approach violate this paragraph, as long as the dealer’s inventory, to prevent dealers the commenter contended is used in dealer makes no other express or from misrepresenting that a vehicle some States: allowing dealers to display, implied misrepresentations. recently became available. Here, the below the advertised sales price, a After careful review of the comments, Commission notes that, to the extent rebate or incentive that is not available the Commission is adopting paragraph any such misrepresentations regarding to all purchasers. Moreover, a number of (d) of §463.3 as proposed. When dealers the availability of vehicles were made industry association and dealership advertise rebates or discounts in a with express or implied reference to the association commenters argued that the misleading manner, including when price of the vehicle, each would be proposed paragraph was more stringent such rebates or discounts are not prohibited by §463.3(e).199 than, and inconsistent with, the available to the typical consumer, or Furthermore, to the extent such Commission’s prior articulation of the apply only to the most expensive misrepresentations included reference deception standard, further noting the versions of the make and model,197such to the subject of another paragraph of existence of Commission orders that conduct induces consumers to select §463.3, they would be prohibited by the prohibit defendants from representing and transact with the dealer under false Final Rule. For example, if an that a price, discount, rebate, or other pretenses.198 advertisement were to make a claim incentive is available, unless it is in fact (e) The Availability of Vehicles at an about the monthly payment for a available to all or unless a defendant Advertised Price specific vehicle, but the vehicle is not provides a clear and conspicuous actually available, it would be covered disclosure of any qualifications or Proposed §463.3(e) prohibited under the bar against misrepresentations restrictions. Section 463.3(d) prohibits misrepresentations regarding the regarding costs or terms in paragraph (a) misrepresentations; it does not prohibit availability of vehicles at an advertised of §463.3. In addition, under the Final a dealer from advertising, in a truthful price. Upon reviewing the comments Rule, dealers are also subject to manner, rebates or discounts with pertaining to this provision, the disclosure requirements under §463.4, limitations. Thus, this paragraph allows Commission is finalizing paragraph (e) including the requirement at §463.4(a) for the representation of limited offers, of §463.3 largely as proposed, with the to disclose the vehicle’s offering price in as long as such representation is minor modification of capitalizing the any advertisement that references a truthful, and any limitations are clear defined term ‘‘Vehicles.’’ specific vehicle, or any monetary and conspicuous to consumers. The amount or financing term for any paragraph is also consistent with the 197See Complaint ¶¶4–5, Ganley Ford West, Inc., vehicle. And if a dealer discloses the
(1972) (additional citations omitted)); see Fed. Commission declines to adopt the Trade Comm’n v. US Sales Corp., 785 F. Supp. 737, dealers from promoting low prices for recommended safe harbor. 748 (N.D. Ill. 1992) (‘‘Apart from challenging the specific vehicles, but then later Therefore, after careful consideration, truthfulness of an advertiser’s representations, the misrepresenting, among other things, the Commission is finalizing paragraph FTC may challenge the representation as that the advertised vehicle is no longer unsubstantiated if the advertiser lacked a (f) of §463.3. Misrepresentations reasonable basis for its claims.’’); see also Fed. available or no longer available at the regarding preapproval or guarantees for Trade Comm’n v. Am. Screening, LLC, 4:20–CV– advertised price. Such a product, service, or term—as with 01021–RLW (E.D. Mo. July 14, 2022) (granting misrepresentations are likely to induce misrepresentations about availability summary judgment for the FTC upon finding that consumers to waste their time traveling American Screening’s claim that its COVID–19 and price, described previously—are protective equipment was available and would ship to a particular dealership to pursue a likely to impact consumers’ conduct quickly was false and lacked a reasonable basis); specific offer on a specific vehicle when with regard to motor vehicle sales, Fed. Trade Comm’n v. John Beck Amazing Profits, the offer or vehicle itself may not financing, or leasing transactions, LLC, 865 F. Supp. 2d 1052 (C.D. Cal. 2012) (finding actually be available. that the defendants’ representations were including by inducing consumers to unsubstantiated in violation of section 5, because (f) Whether Any Consumer Has Been or waste time pursuing illusory offers. Defendants conceded that during the time period in Will Be Preapproved or Guaranteed for which their infomercial was aired they did not have (g) Any Information on or About a evidence supporting their representations that Any Product, Service, or Term Consumer’s Application for Financing consumers who purchased their product would be Proposed §463.3(f) prohibited able to earn money easily and because survey Proposed §463.3(g) prohibited dealers misrepresentations regarding whether a results revealed that less than one percent of from misrepresenting any material consumers actually generated any revenue or consumer has been or will be information on or about a consumer’s profits); Fed. Trade Comm’n v. Elegant Sols., Inc., preapproved or guaranteed for any 8:19–cv–01333–JVS–KES (C.D. Cal., July 6, 2020) product, service, or term. Upon application for financing. After carefully (finding that defendants made false or reviewing public comments, the reviewing public comments, the unsubstantiated representations, including Commission is adopting paragraph (g) of representing that consumers would be enrolled in Commission is finalizing paragraph (f) §463.3 without substantive a repayment plan that may be forgiven after a specific number of years even though there were no judgment and finding that Defendants’ modification. As with §463.3(b), the Federal loan forgiveness programs with those representations that it had protective equipment in only adopted modification is the repayment terms). stock and would ship it to consumers within seven deletion of the term ‘‘Material,’’ which 201Fed. Trade Comm’n, ‘‘FTC Policy Statement to ten business days were material to consumers nonetheless applies to the operation of Regarding Advertising Substantiation,’’ (appended seeking such equipment during a global pandemic). each of the misrepresentation to In re Thompson Med. Co., Inc., 104 F.T.C. 648, 203This provision would not prohibit dealers 839 (1984)); Fed. Trade Comm’n v. John Beck from advertising a vehicle with limitations on paragraphs in §463.3, including Amazing Profits, LLC, 865 F. Supp. 2d 1052, 1067 availability in a truthful manner, such that any paragraph (g), through the addition of (C.D. Cal. 2012). limitations are clear and conspicuous to the the term in the introductory paragraph 202Fed. Trade Comm’n, ‘‘FTC Policy Statement consumer. For example, dealers should not of §463.3. Regarding Advertising Substantiation,’’ (appended affirmatively represent that a vehicle is available on to In re Thompson Med. Co., Inc., 104 F.T.C. 648, its lot without a reasonable basis that the vehicle 839 (1984)); see Fed. Trade Comm’n v. Am. is on the lot or without clearly and conspicuously 204Comment of Tex. Auto. Dealers Ass’n, Doc. Screening, LLC, 4:20–CV–01021–RLW (E.D. Mo., noting that the vehicle will be made available after No. FTC–2022–0046–8102 at 21; see 43 Tex. July 14, 2022) (granting FTC’s motion for summary transfer from an affiliate’s lot. Admin. Code 215.247(2) (2023). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 618 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations The Commission received a number not adequately explain the type of other ways, such conduct may mislead of comments regarding this provision, behavior this paragraph would prohibit. the consumer into thinking that it is including comments that expressed Relatedly, some dealership association proper to calculate income for auto support for prohibiting commenters contended that this retail installment contracts in a misrepresentations about a consumer’s provision lacked specific guidance particular way, and there may be a application for financing. about what a motor vehicle dealer must violation of §463.3(g). A credit union commenter requested or must not disclose. This provision, After careful review and that, in addition to this proposal, the however, utilizes terms which are consideration of the comments, the Commission consider implementing a commonly used and understood, and Commission adopts paragraph (g) of requirement to clearly and which may be interpreted according to §463.3 without substantive conspicuously disclose any potential their plain meaning. Read together with modification, prohibiting financing limitations prior to vehicle the introductory paragraph of §463.3, misrepresentations regarding material purchase negotiations, contending that §463.3(g) prohibits misrepresentation information about any information on or such a measure would better enable . . . regarding material information about a consumer’s application for consumers to choose a motor vehicle about ‘‘[a]ny information on . . . a financing. It is likely to affect a dealer and financing option that best consumer’s application for financing.’’ consumer’s choices if the consumer serves their needs. To the extent a By its terms, this prohibition includes knows a dealer is misrepresenting the dealer misrepresents a consumer’s any misrepresentations of material consumer’s income, or other aspects of financing options or limitations, information on a financing application. financing applications. If, for example, a including prior to or during the process For example, dealers would make consumer knew the truth—that the of selling, leasing, or arranging misrepresentations in violation of this dealer is inflating the consumer’s financing for a vehicle, such conduct is provision by including, on a consumer’s income such that the consumer would prohibited by this provision, and application that is submitted to a third- not otherwise obtain financing for a depending on the circumstances, may party financing institution, consumer particular vehicle—the consumer might also violate other provisions of the Rule. income information that is different opt to finance a less expensive car, For example, as discussed in this from what the consumers have stated to rather than risking repossession. paragraph-by-paragraph analysis, the dealer that the consumers actually Material misrepresentations on §463.3(a) of the Final Rule prohibits earn, or by representing a different consumers’ financing paperwork are misrepresentations regarding the cost or down payment amount than the amount also likely to cause consumers terms of financing a vehicle; this the consumer has actually provided, or substantial injury, including by causing prohibition includes misrepresentations by misrepresenting that the vehicle is them to take on debt beyond that which about available vehicle financing. being sold or leased with certain add-on the financing company would have Furthermore, this provision pertains to products.206Moreover, as described in approved, and increasing the risk of misrepresentations; comments detail with regard to other paragraphs of repossession and harmful consequences pertaining to proposed disclosures §463.3, this provision does not require to consumers’ credit. Consumers cannot regarding price, add-ons, and total of any particular affirmative disclosures, avoid the injury from dealers payments are examined in the instead obligating dealers to refrain from misrepresenting the information Commission’s discussion of §463.4, certain misrepresentations. consumers provide them, and this wherein the Commission explains its One dealership association practice provides no countervailing determination not to finalize any commenter questioned whether a dealer benefits to consumers or competition.
additional disclosure requirements not would be held responsible for a included in its NPRM. customer’s false statement about his or (h) When the Transaction Is Final or An individual commenter, while her income. If a consumer falsely states Binding on All Parties expressing support for regulation of they have a higher income, that
requiring dealers to be reasonably contingent sales, the Commission is P104811, Submission No. 558507–00112 at 4 (Apr.
certain that a consumer will qualify for 13, 2012), https://www.ftc.gov/sites/default/files/ concerned that requiring specific quoted financing terms; requiring a documents/public_comments/public-roundtables- contract provisions would obligate written disclosure that the consumer protecting-consumers-sale-and-leasing-motor- dealers that are not engaged in spot vehicles-project-no.p104811-00112/00112- must sign advising the consumer that 82927.pdf (recommending, among other rules delivery to change their contracts even financing is not final; or setting a short aimed at deterring yo-yo sales, FTC adopt rules that though their customers do not deadline by which the dealer must would require dealers to disclose the consumer’s experience harm stemming from spot either arrange financing or cancel the ‘‘right to walk away’’ if financing is rejected and, delivery practices. Before requiring any in the context of spot delivery, to disclose financing transaction. Other commenters, has not been finalized as well as the responsibilities such changes, the Commission has including a State consumer protection and potential consequences for consumers); Legal determined to continue to monitor the agency, also supported requiring the Aid Just. Ctr., Comment Letter on Public market to evaluate whether additional contractual contingency to be disclosed Roundtables: Protecting Consumers in the Sale and steps are warranted.210 Leasing of Motor Vehicles, Project No. P104811, Some commenters, including conspicuously and limiting the Submission No. 558507–00066 at 26, 29 (Jan. 30, dealership associations, requested that contingency to a short period of time. A 2012), https://downloads.regulations.gov/FTC-2022- number of these commenters, including 0036-0062/attachment_2.pdf (explaining that in a the Commission clarify how dealers yo-yo sale the dealer misrepresents to the consumer could document compliance with these consumer advocacy organizations, that credit has been finalized, when in fact the proposed provisions, such as how provided examples of how spot delivery dealer treats the sale as contingent, retaining the dealers could establish that appropriate transactions can harm consumers. ability to call off or seize the vehicle later; a ‘‘yo-yo The provision’s prohibitions and case can result in substantial distress to the person disclosures had been made. One such who has been tricked’’; and ‘‘[t]he harm to the commenter, for instance, asked whether requirements address many of these marketplace occurs when the consumer believes a written agreements required by State commenters’ concerns regarding spot credit sale has been completed and stops shopping law were sufficient to satisfy the delivery and yo-yo financing. Spot for a car on credit’’); Nat’l Consumer L. Ctr., ‘‘In delivery and yo-yo financing refer to Harm’s Way—At Home: Consumer Scams and the requirements of these provisions. As Direct Targeting of America’s Military and noted elsewhere in this paragraph-by- situations where a dealer delivers a Veterans’’ 41 (May 2003), https://filearchive.nclc.
vehicle to a consumer on the spot before org/special_projects/military/report-scams-facing- paragraph analysis of §463.3 in SBP the financing or leasing has been military.pdf (listing ‘‘Spot Delivery’’ or ‘‘yo-yo III.C.2, these provisions do not require finalized, leads a consumer to believe sales’’ among scams commonly aimed at military any particular affirmative disclosures, members). instead obligating dealers to refrain from that the transaction is final, and then 208See Orkin Exterminating Co., Inc., 108 F.T.C.
later directs the consumer to return the 263 (1986), aff’d sub nom. Orkin Exterminating Co. vehicle and engages in certain tactics, v. F.T.C., 849 F.2d 1354 (11th Cir. 1988) (finding 209Fed. Trade Comm’n, ‘‘FTC Policy Statement such as failing to return the consumer’s that defendant’s practice of unilaterally raising Regarding Advertising Substantiation,’’ (appended consumers’ annual renewal fees where the to In re Thompson Med. Co., Inc., 104 F.T.C. 648, trade-in vehicle while refusing to honor consumers’ contracts contained a ‘‘lifetime 839 (1984)); Fed. Trade Comm’n v. John Beck the finance or lease transaction, or guarantee’’ as to the amount of the fee was unfair Amazing Profits, LLC, 865 F. Supp. 2d 1052, 1067 pressuring the consumer to enter into a under section 5 of the FTC Act); see also First (C.D. Cal. 2012). Amended Complaint ¶¶59–61, Fed. Trade Comm’n 210On May 31, 2023, the Commission received a new transaction.207Paragraphs (h) and
463.6 discusses records dealers need to inconsistency would include State law occurred, they are not a systemic keep to demonstrate compliance with allowing material misrepresentations problem in the marketplace. The the requirements of the Final Rule, and regarding whether transactions are final; Commission, however, need not show enumerates five such categories of the Commission is unaware of any such that abusive spot deliveries are systemic records, including copies of finance and law. Further, to the extent dealers are in order to finalize these provisions lease documents signed by the concerned they may transgress this barring misrepresentations.213Further, consumer, whether or not final approval prohibition because courts have had these misrepresentation prohibitions do is received for a financing or lease difficulty interpreting their contracts, not alter requirements under current transaction. The Commission declines then, as they should be doing under law prohibiting dealers from making to include in this Final Rule additional current law prohibiting express or implied misrepresentations. requirements regarding any specific misrepresentations, dealers should After careful consideration of the documents dealers must keep in order carefully consider the net impression recommendations and record, the to demonstrate compliance with they are conveying with the language Commission has determined to finalize §463.3(h) or (i). they use, both in their contracts and in paragraphs (h) and (i) of §463.3 largely the context in which these contracts are as proposed, with the minor One individual commenter requested presented, as such language may modification of capitalizing the defined that the Commission include in the CFR confuse consumers as well. term ‘‘Vehicles’’ in §463.3(i). The the examples of harmful conduct related Several dealership association Commission notes, however, that it has to yo-yo financing that it published in commenters claimed that State law significant concerns about consumer the NPRM.211The Commission has already prohibits misrepresentations harm due to yo-yo financing and will determined that each such example about spot delivery transactions or continue to examine these issues even describes conduct that violates this otherwise protects consumers in such as it finalizes these prohibitions against rulemaking. Rather than adding them to transactions. One such commenter certain misrepresentations. the text of the Final Rule, the asserted that Massachusetts law Misrepresentations about when the Commission repeats those examples in prohibits spot deliveries, and cautioned transaction is final or binding on all this paragraph-by-paragraph analysis of the FTC not to create uncertainty with parties, as well as about keeping down §463.3(h) and (i), in order to avoid its Rule such that one might think spot payments or trade-in vehicles, charging voluminous modifications to the Rule deliveries are allowed in Massachusetts. fees, or initiating legal process or any text itself.
(i) prevent misrepresentations, including they would pay off outstanding balances misrepresenting that a dealer can keep a down payment when a dealer does not have a legal basis misrepresentation, this provision would not be to do so. If the dealer does not make a violated. 213See SBP I.A, n.3. VerDate Sep<11>2014 19:33 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 621 remaining on a trade-in vehicle.214 on the costs and benefits of such a if they do not, in fact, pay off the liens, Other commenters, including an proposal, the Commission declines to or do not pay them off in a timely industry association and dealership add such requirements to this Final manner. Such misrepresentations are associations, requested that the Rule. The Commission notes, however, likely to affect a consumer’s choice to Commission limit dealer responsibility that the Rule prohibits dealers from visit a particular dealership or select a under this provision for unanticipated misleading consumers regarding when particular vehicle. delays stemming from circumstances trade-in vehicles have negative equity
6. implication that they will pay off liens originating author.’’). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 622 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations measures are needed as it continues to employment or familial relationship or has positive reviews or ratings from monitor the marketplace, including after other unexpected material connection to unbiased, independent, or ordinary the Rule goes into effect. the dealership.223 consumers. Thus, after careful review of Several dealership associations asked An industry association commenter all the comments, the Commission is what type or format of reviews or ratings expressed concern that this proposed finalizing paragraph (k) of §463.3 would be covered by this proposed provision did not appear to be limited without substantive modification from provision. As proposed, §463.3(k) to misrepresentations that may occur the Commission’s original proposal. applied to all reviews or ratings, in any when a dealership, and not an unrelated
Trade Comm’n, ‘‘FTC’s Endorsement Guides: What 223One commenter conducted a study of Google arrest or that the dealer has reported the People are Asking,’’ https://www.ftc.gov/business- reviews of U.S. car dealerships from April 2008 to consumers’ vehicles as stolen. The guidance/resources/ftcs-endorsement-guides-what- September 2022. The commenter found by Commission is likewise concerned people-are-asking; Fed. Trade Comm’n, ‘‘Soliciting examining a 2% sample of these reviews that about such conduct, and notes that it and Paying for Online Reviews: A Guide for consumers gave on average 4.47 stars out of 5 stars Marketers,’’ https://www.ftc.gov/business-guidance/ and made several other conclusions about would be covered by the language in resources/soliciting-paying-online-reviews-guide- consumer satisfaction with the auto transaction this paragraph, which applies broadly to marketers; Fed. Trade Comm’n, ‘‘Disclosures 101 experience based on that methodology. Comment of misrepresentations of affiliation with, for Social Media Influencers,’’ https://www.ftc.gov/ Inst. for Regul. Analysis & Engagement, Doc. No. endorsement or approval by, or business-guidance/resources/disclosures-101- FTC–2022–0046–10164 at 2–5. The Commission social-media-influencers. notes that, consistent with its enforcement association with ‘‘any Federal, State, or 221See Complaint ¶¶73–78, Fed. Trade Comm’n experience, there is no guarantee that those reviews local government agency, unit, or v. Universal City Nissan, Inc., No. 2:16-cv-07329 are a genuine reflection of consumer experience. department,’’ including State or local (C.D. Cal. Sept. 29, 2016); see also Fed. Trade Moreover, the Commission notes that oftentimes police officials.227By misrepresenting Comm’n, Notice of Proposed Rulemaking, Trade consumers do not realize that they have been Regulation Rule on the Use of Consumer Reviews charged without their authorization. See SBP II.B. and Testimonials, 88 FR 49364, 49371–75 (July 31, Thus, such a study that relies on Google star ratings 226Individual commenter, Doc. No. FTC–2022– 2023) (to be codified at 16 CFR 465), https:// is not conclusive of consumer experience. 0046–7445 at 17. www.govinfo.gov/content/pkg/FR-2023-07-31/pdf/ 224See §463.1 (‘‘It is an unfair or deceptive act 227The Commission discussed government 2023-15581.pdf (discussing such enforcement or practice within the meaning of section 5(a)(1) of impersonation scams in its Notice of Proposed actions). the Federal Trade Commission Act (15 U.S.C. Rulemaking for a Trade Regulation Rule on 222See Complaint ¶¶73–78, Fed. Trade Comm’n 45(a)(1)) to violate any applicable provision of this Impersonation of Government and Business. See 87 v. Universal City Nissan, Inc., No. 2:16-cv-07329 part, directly or indirectly . . . .’’). FR 62741 (Oct. 17, 2022). The Commission (C.D. Cal. Sept. 29, 2016). 225See 15 U.S.C. 45b. observed, inter alia, ‘‘ongoing widespread fraud VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 623 police involvement in potential vehicle Representations about whether a comments, the Commission is finalizing repossession, such conduct would also seller or any of its personnel, products, paragraph (n) of §463.3 largely as violate paragraph (o) of §463.3 of the or services is or was affiliated with, proposed, with the minor modification Final Rule. endorsed or approved by, or otherwise of capitalizing the word ‘‘State,’’ as well A number of dealership association associated with the government are as the defined term ‘‘Vehicle’’ to commenters contended that some States likely to affect consumers’ conduct. conform with the revised definition at address this type of deception.228As Consumers are more likely to visit a §463.2(e). noted in response to similar commenter dealership and select a vehicle or The Commission received comments contentions regarding other proposed product if they believe that a specific including from dealership associations provisions, the Commission has seen no dealer or a dealer’s personnel, products, arguing that proposed §463.3(n) would harm to consumers or competition from or services have been approved by a pose issues for dealers who must duplicative misrepresentation government entity. The Commission comply with limitations imposed by prohibitions, and overlap between the thus adopts paragraph (l) of §463.3 manufacturers or distributors on the Commission’s Rule provisions and without substantive modification from export of new motor vehicles. These existing law is indicative of dealers’ the Commission’s original proposal. commenters requested clarification ability to comply with these provisions. about liability under this provision in
No. FTC–2022–0046–11223 at 9. Program.com’’ and claimed to help businesses (Aug. 2, 2011), https://www.ftc.gov/system/files/ 230See, e.g., Complaint ¶¶5–6, 9–11, 14, Traffic obtain access to coronavirus relief programs documents/public_events/52654/080211_ftc_ Jam Events, LLC, No. 9395 (F.T.C. Aug. 7, 2020) administered by the agency); Complaint ¶¶24–36, sess1.pdf (‘‘[S]ervicemembers don’t always realize if (alleging auto marketer misrepresented that it Fed. Trade Comm’n v. DOTAuthority.com, Inc., No. they buy and finance a car here in the U.S., they provided COVID–19 stimulus relief to consumers); 0:16–cv–62186 (S.D. Fla. Sept. 13, 2016) (alleging can’t take it out of the country unless they have a Complaint ¶¶14–26, Fed. Trade Comm’n v. Ponte defendants misrepresented affiliation with U.S. letter of permission from the lienholder to do so. Invs., LLC, No. 1:20–cv–00177 (D.R.I. Apr. 17, 2020) Department of Transportation by claiming to be the And some of the lienholders won’t give that (alleging misrepresentation of government ‘‘Compliance Unit’’ of ‘‘DOTAuthority’’ and permission. . . . [W]e [heard from] a JAG in affiliation by company that impersonated the U.S. providing a telephone number with a Washington, Germany saying, ‘I see a number of people who end Small Business Administration with business DC area code). Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 624 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations Based on a review of the comments already illegal under section 5 of the inform a consumer about the and for the reasons previously FTC Act to engage in deception, circumstances under which a vehicle discussed, the Commission is finalizing including regarding vehicle disablement can be repossessed or when the dealer paragraph (n) of §463.3 largely as technology, and to unfairly cause may take action. In providing proposed, with the minor modification substantial injury to consumers, such as consumers with such information, of capitalizing ‘‘State’’ and the defined by disabling a vehicle while it is being however, dealers must refrain from term ‘‘Vehicle.’’ operated on the highway.234This representing, including by implication, provision will further provide that repossession is likely when in truth (o) Whether, or Under What protection for consumers from unfair or it is not.
Circumstances, a Vehicle May Be deceptive conduct surrounding the After considering the comments, the Repossessed repossession of vehicles. Moving Commission is finalizing paragraph (o) Proposed §463.3(o) prohibited forward, the Commission will continue of §463.3 largely as proposed, with the misrepresentations regarding whether, to monitor the motor vehicle minor modification of capitalizing the or under what circumstances, a vehicle marketplace for developments in this defined term ‘‘Vehicle.’’ This provision may be repossessed. After careful area to determine whether additional prohibits dealers from making review and consideration of the restrictions are warranted. misrepresentations regarding material comments, the Commission is finalizing A number of dealership association information about repossession of a paragraph (o) of §463.3 with the minor commenters contended that this vehicle. Information about whether, or modification of capitalizing the defined provision would inhibit dealers from under what circumstances, a vehicle term ‘‘Vehicle’’ to conform with the making representations about their may be repossessed is likely to affect revised definition at §463.2(e). lawful rights to repossess vehicles, consumers’ conduct, including by A number of commenters, including positing that, upon making any such impacting military consumers’ conduct consumer advocacy organizations and a representations, this provision might regarding which payments to prioritize group of State attorneys general, require dealers to carry out while serving our country. expressed concern about electronic repossessions without exception or risk
vehicle disablement technology.233It is vehicles when consumers were not past due on payment, contrary to relevant contracts and Moreover, the Final Rule provides disclosures, including by causing the devices to additional remedies that will benefit u re p p h os a s v e i s n s g i o to n ’ d ’ o o n w t h h a e t i r y c o a u r w be o c u a l u d s c e a t l h l e ‘‘ y v o b l o u u n g t h a t r y th is s p o r u ev n e d n l t a in te g p c a o y n m su e m nt e w rs a f r r n o i m ng s t b a e r e ti p n s g a t n h d e i b r y v ehicles). consumers who encounter conduct that car, they’re excited about it, and . . . the person 234See 15 U.S.C. 45; see also, e.g., Int’l Harvester is already illegal under State or Federal who made them the loan didn’t say ‘‘Oh, by the Co., 104 F.T.C. 949, 1064–67 (1984) (finding that law, including by adding a mechanism way, if you go overseas, we’re not gonna let you manufacturer’s failure to adequately disclose that for the Commission to redress t t a h k a e t t i h t e w ir i t w h a y r o r u an .’ t ’’ y A is n n d o . g . oo . d so o m v e e t r i s m ea e s s , , e t i h t e h y e ’ r l . l ’ ’ f ) i . n d i u t n s f t a r i a r c c to o r n s d h u a c d t, a w s h e e ri r o e u t s h e sa h fe a t z y a r h d a z c a a r u d s e c d o n s s e t r i i t o u u te s d consumers injured by a dealer’s 232Comment of 18 State Att’ys Gen., Doc. No. injury to a small number of consumers, consumers violation of the rule, and will assist law- FTC–2022–0046–8062 at 13. could not have reasonably avoided the harm abiding dealers that presently lose 233See, e.g., Complaint ¶¶10–21, CFPB v. USASF because the respondent did not adequately disclose business to competitors that act Servicing, LLC, No. 1:23-cv-03433–VCM (N.D. Ga. the serious risk, and the cost of the respondent unlawfully. Furthermore, State laws Aug. 2, 2023); Consumer Fin. Prot. Bureau, disclosing the risk was very small in relation to the ‘‘Supervisory Highlights: Issue 28, Fall 2022’’ 6–7 substantial injury).
(Nov. 2022), https://files.consumerfinance.gov/f/ 235See 50 U.S.C. 3952(a). 236NPRM at 42022. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 625 may provide more or less specific D. §463.4: Disclosure Requirements the Commission emphasizes that, in requirements, as long as those accordance with the provision being
inconsistency. Accordingly, the §463.4(a) through (e)). These provisions The additional disclosures Commission adopts this provision proposed to require dealers to disclose recommended by commenters included, without modification from its original a vehicle’s offering price; an add-on list inter alia: a disclosure regarding the proposal.
adding the following sentence to the areas covered by its proposal and 239Comment of Or. Consumer Just., Doc. No. end of §463.3, at newly designated elsewhere. Regarding disclosures FTC–2022–0046–8492 at 4; cf. Individual paragraph (q): ‘‘The requirements in this covered in the proposal, for example, commenter, Doc. No. FTC–2022–0046–0144 (recommending the disclosed offering price section also are prescribed for the commenters suggested more detailed separately list MSRP, markup, all fees, and add-on purpose of preventing the unfair or requirements, including regarding costs); Comment of Legal Aid Just. Ctr., Doc. No. deceptive acts or practices defined in specific disclosure language and FTC–2022–0046–7833 at 2 (‘‘[D]ealers should be this part, including those in §§463.4 specific placement of disclosures. The required to verbally disclose and explain in a language the customer understands the material and 463.5.’’ Thus, this Rule requires Commission agrees with commenters terms of the contact [sic] (including APR, total dealers to refrain from making material that key information affecting pricing, number of monthly payments required, etc.) before misrepresentations about the topics add-ons, and costs must be disclosed customers sign[] the contract and receive the enumerated in §463.3. The prohibitions clearly and conspicuously to consumers customers’ consent that they understand these terms. After this verbal disclosure, a consent form contained in §463.3 help protect in order to address consumer deception should be required. This form should be provided consumers from deceptive and unauthorized charges during the in the language preferred by the customer, and motor vehicle buying and leasing should ensure that the customer was provided with representations and promote the ability process. To provide flexibility for accurate and agreed-upon terms prior to signing.’’); of honest dealers to compete on honest Individual commenter, Doc. No. FTC–2022–0046– dealers and room for disclosures to be terms. 1641 (‘‘Mortgage lenders are required to give a made in a manner that is clear and borrower a disclosure document prior to closing to conspicuous to consumers in particular show all costs and expenses; car dealers should circumstances, however, the have to do the same thing.’’). 237See 15 U.S.C. 57a(a)(1)(B) (the Commission Commission declines to include 240In addition to the disclosures noted, a few ‘‘may include requirements prescribed for the commenters requested additional provisions to purpose of preventing’’ such unfair or deceptive additional prescriptive language about address concerns regarding transparency in pricing, acts or practices). the form of such disclosures. Further, Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 626 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations continue to monitor the marketplace to particular circumstances of their already conveying this information evaluate the efficacy and sufficiency of transactions. clearly and conspicuously, complying the present disclosures. The Commission also received with this provision should not be comments that expressed opposition to burdensome.
including related to interest rates, and that the Rule require dealers to maintain a fiduciary relationship 242Each year since FY2002, the Small Business Other commenters, including an to customers. The Commission recognizes the Administration’s Office of the National industry association, argued that concerns regarding pricing transparency and Ombudsman has rated the Federal Trade requiring disclosures would increase the deceptive conduct related to pricing, and will Commission an ‘‘A’’ on its small business time and paperwork for consumers to continue to monitor such issues, including after this compliance assistance work. See U.S. Small Bus. provision (§463.4(a), offering price disclosure) and Admin., ‘‘National Ombudsman’s Annual Reports the misrepresentation provisions (§463.3) are in to Congress,’’ https://www.sba.gov/document/ reports/federal-trade-commission-rule-compliance- effect. report—national-ombudsmans-annual-reports- guides-small-businesses-other-small-entities- 241Comment of Nat’l Auto. Dealers Ass’n, Doc. congress (providing reports from FY2013–FY2020); commission/eighth_section_212_report_to_ No. FTC–2022–0046–8368 at 104, 122; Comment of Letter from Edith Ramirez, Chairwoman, Fed. Trade congress_july_2014-june_2015.pdf (citing Ohio Auto. Dealers Ass’n, Doc. No. FTC–2022– Comm’n, to Senator David Vitter, Chairman, Comm. Commission’s ‘‘A’’ rating for ‘‘Compliance 0046–6657 at 6, 9; see Comment of Compliance on Small Bus. and Entrepreneurship at 1 (Nov. 16, Assistance’’ by the Nat’l Ombudsman from Sys., Doc. No. FTC–2022–0046–7836 at 1. 2015), https://www.ftc.gov/system/files/documents/ FY2002–FY–2014). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 627 buy or lease a vehicle. In response, the commercial speech,’’ Zauderer supplies for its programs,’’ finding that Commission notes that the section governs.244 this information was ‘‘purely factual includes requirements for the disclosure Under that standard, a commercial and uncontroversial.’’251In another of salient, material information early in speaker’s rights ‘‘are adequately instance, a court upheld under Zauderer the process, thus eliminating the time protected as long as disclosure a rule requiring airlines to prominently consumers would otherwise spend requirements are reasonably related to disclose the ‘‘total, final price’’ of pursuing misleading offers—time which the State’s interest in preventing airfare, finding it was ‘‘reasonably can then be spent pursuing truthful deception of consumers.’’245In related to the government’s interest in offers in the absence of deception. These Zauderer, the Court upheld a rule preventing deception of consumers.’’252 measures will further allow consumers requiring attorneys who advertised on a In yet another case, a court upheld a to compare dealerships in advance contingency-fee basis to disclose that rule requiring hospitals to disclose their based on truthful terms; thus, clients who did not prevail in litigation rates to consumers, finding they were dealerships will earn business based on might nevertheless be liable for ‘‘‘factual and uncontroversial’ and the actual terms offered, and not lose significant costs.246The Court found directly relevant to ‘the terms under business to dealers who compete by that ‘‘the possibility of deception is [] which [hospitals’] services will be omitting or hiding actual terms. self-evident’’ when an advertisement available’ to consumers.’’253The Moreover, the disclosures required by discloses only one type of charge (fees) disclosure provisions the Commission is this section are limited to key without mentioning another (costs).247 finalizing in §463.4, like the provisions information affecting pricing, add-ons, In upholding the challenged rule as upheld in these cases, merely require and total of payments, needed to reasonable, the Court emphasized that factual and uncontroversial disclosures address consumer deception and the rule merely mandated disclosure of to provide consumers with accurate and unauthorized charges during the ‘‘purely factual and uncontroversial timely pricing and financing vehicle-buying and leasing process, and information about the terms under information as they consider motor are required to be in writing only where which . . . services will be available,’’ vehicle purchases and leases.254 the dealer is responding to written and that the ‘‘constitutionally protected As discussed, Zauderer applies here consumer communications or already interest in not providing [such] because §463.4 would ‘‘impose a providing consumers with information . . . is minimal.’’248 disclosure requirement rather than an representations in writing.243As As in Zauderer, §463.4 requires only affirmative limitation on speech.’’255 explained in detail in the paragraph-by- ‘‘purely factual and uncontroversial The Commission notes, however, that paragraph analysis of §463.4(e) in SBP information about the terms under disclosure requirements in §463.4 III.D.2(e), in order to avoid any which [commercial goods or services] likewise would pass muster even if, as additional written disclosure will be available.’’249These material the commenter suggested, they were requirements, the Commission is facts include the offering price of the evaluated under the intermediate declining to mandate that its required motor vehicle; that add-on products or scrutiny standard formulated in Central disclosures be made in writing in every services are not required and the Hudson Gas & Electric Corp. v. Public instance. consumer can purchase or lease the Service Commission of New York, 447 An industry association commenter vehicle without the add-on, if true; the U.S. 557 (1980), and subsequent cases argued that the proposed disclosure total amount the consumer will pay to applying that standard.256As an initial requirements in §463.4 of the NPRM purchase or lease the vehicle and, if that matter, Central Hudson applies not to violate the First Amendment. This amount assumes the consumer will disclosure requirements, such as those commenter contended that the proposed provide consideration, the amount of the commenter challenges, but to disclosures constituted compelled such consideration; and when a lower affirmative limitations on speech.257 speech; that they would be subject to monthly payment will increase the total The Central Hudson test requires intermediate judicial scrutiny were they amount the consumer will pay to restrictions on lawful, non-misleading to be challenged in court; and that, in purchase or lease the vehicle. As in speech to satisfy three remaining the event of such a challenge, the Zauderer, any ‘‘constitutionally criteria. First, there must be a Commission’s actions would fail to protected interest’’ a motor vehicle substantial governmental interest in the satisfy that standard of scrutiny, or a dealer might have ‘‘in not providing restriction; second, the restriction must less stringent one. [this] factual information . . . is directly advance that interest; and third, The Commission first addresses the minimal.’’250 the restriction may not be more applicable First Amendment standard of Courts applying Zauderer have review for this rulemaking effort in the repeatedly affirmed the constitutionality 251Ass’n of Priv. Sector Colls. & Univs. v. event of a judicial challenge. If so of regulations requiring disclosures of Duncan, 110 F. Supp. 3d 176, 199 (D.D.C. 2015), challenged, the disclosures in §463.4 complete information about the cost of aff’d, 640 F. App’x 5 (D.C. Cir. 2016). would not be subject to intermediate a purchase, which are similar to the 252Spirit Airlines, Inc. v. U.S. Dep’t of Transp., judicial scrutiny, but instead to the less required disclosures in §463.4. For 687 F.3d 403, 412–15 (D.C. Cir. 2012) (internal brackets omitted).
rigorous review standard set forth in example, courts upheld a regulation 253Am. Hosp. Ass’n v. Azar, 983 F.3d 528, 540 Zauderer v. Office of Disciplinary requiring schools to ‘‘disclose the ‘total (D.C. Cir. 2020) (quoting Zauderer v. Off. of Counsel, 471 U.S. 626, 651 (1985). cost’ of . . . tuition, fees, books, and Disciplinary Couns., 471 U.S. 626, 650–651 (1985)). When, as is the case here, a regulation 254Further, as explained in the paragraph-by- ‘‘impose[s] a disclosure requirement 244Milavetz, Gallop & Milavetz, P.A. v. United p fa a i r lu ag re ra t p o h d a is n c a l l o y s s e i s t h o i f s § in fo r .
The disclosure provisions the paragraph of §463.4 and certain of the required dealers to disclose a vehicle’s Commission is finalizing in §463.4 disclosure requirements included in its offering price in advertisements that satisfy these criteria. First, the NPRM, with some minor textual reference a specific vehicle or represent disclosure provisions serve a substantial changes. The introductory paragraph of a monetary amount or financing term for governmental interest by requiring the NPRM proposed that it would be ‘‘a any vehicle, as well as upon receipt of motor vehicle dealers to provide violation of this part and an unfair or a consumer communication about a accurate terms, and in particular, deceptive act or practice in violation of specific vehicle or any monetary accurate pricing information, in section 5 of FTC Act for any Motor amount or financing term for any advertising and sales discussions.262As Vehicle Dealer to fail to make any vehicle. The Commission proposed the Supreme Court has made clear, the disclosure required by this section, defining ‘‘Offering Price,’’ in §463.2(k), government’s ‘‘interest in ensuring the Clearly and Conspicuously.’’ The as ‘‘the full cash price for which a accuracy of commercial information in Commission is finalizing this paragraph Dealer will sell or finance the motor the marketplace is substantial.’’263And with the minor textual change of vehicle to any consumer, excluding only as explained in the paragraph-by- substituting ‘‘Federal Trade Commission required Government Charges.’’ The paragraph analysis of §463.4 in SBP Act’’ for ‘‘FTC Act’’ for clarity and Commission also proposed defining the III.D.2, the disclosure requirements set conformity with other parts of the Rule. term ‘‘Government Charges,’’ then in forth there are aimed at ensuring that The Commission is also adding the §463.2(h), to mean ‘‘all fees or charges consumers receive accurate pricing word ‘‘Covered’’ to the defined term imposed by a Federal, State or local information and other material ‘‘Covered Motor Vehicle Dealer’’ to government agency, unit, or department, transaction terms, and that dealers conform with the revised definition at including taxes, license and registration refrain from the unfair or deceptive act §463.2(f), discussed in SBP III.B.2(f). costs, inspection or certification costs, or practice of failing to provide this The Commission is finalizing the and any other such fees or charges.’’ For information.264The required specific disclosure requirements the reasons discussed in the following disclosures directly advance, ‘‘fit’’ proposed at §463.4(a), (c), (d), and (e), paragraphs, the Commission is reasonably with, and are proportionate with modifications noted in the finalizing the offering price disclosure to, their intended ends of prohibiting paragraph-by-paragraph analysis in SBP and preventing unfair or deceptive III.D.2(a), III.D.2(c), III.D.2(d), and provision at §463.4(a), as well as the conduct in motor vehicle transactions. III.D.2(e). corresponding ‘‘Offering Price’’ and They prevent dealers from luring ‘‘Government Charges’’ definitions in consumers to dealerships with unfair or 265Id. Further, the Commission has taken into §463.2 (finalized at §463.2(k) and (i), deceptive advertising tactics, from account prior enforcement work and other respectively), largely as proposed. The padding prices with unwanted add-on initiatives. See NPRM at 42022–25 (explaining Commission is including a modification rationale behind disclosure requirements and to the offering price definition to clarify extensively citing prior enforcement experience and that dealers may, but need not, exclude 258See Cent. Hudson Gas & Elec. Corp. v. Pub. record evidence); see also Lorillard Tobacco Co. v. Serv. Comm’n of N.Y., 447 U.S. 557, 566 (1980). Reilly, 533 U.S. 525, 555 (2001) (‘‘We do not . . . required government charges from a Although the Supreme Court in Central Hudson require that empirical data come accompanied by motor vehicle’s offering price, and is treated the question whether regulated speech is a surfeit of background information. We have substituting ‘‘Vehicle’’ for ‘‘motor truthful and non-misleading as one of four criteria, permitted litigants to justify speech restrictions by it has alternately treated this question as a threshold reference to studies and anecdotes . . . or even . . . vehicle’’ to conform with the revised inquiry, after which the three remaining criteria are based solely on history, consensus, and simple definition at §463.2(e), discussed in evaluated. See Fla. Bar v. Went For It, Inc., 515 U.S. common sense.’’ (internal quotation marks and SBP III.B.2(e). Additionally, the 618, 623–24 (1995). Because the government is alterations omitted)); Fla. Bar v. Went For It, Inc., Commission is including a ‘‘free to prevent the dissemination of commercial 515 U.S. 618, 628, (1995) (same); Burson v.
speech that is false, deceptive, or misleading,’’ typographical modification to the Freeman, 504 U.S. 191, 211 (1992) (finding speech Zauderer v. Off. of Disciplinary Couns., 471 U.S. restrictions justified even under strict scrutiny ‘‘Government Charges’’ definition to 626, 638 (1985), if a challenged restriction fails this based on a ‘‘long history, a substantial consensus, include a serial comma for consistency. threshold inquiry, Central Hudson does not apply.
me. . . . It has been made increasingly conducting combat operations in Iraq car without additional add[-]ons. It worse by dealerships that advertise a than go through the dealer process, as it false price to entice a buyer but ‘‘bait- incenses me that this corrupt way of would greatly reduce the work of and-switch’’ with Additional Dealer doing business is given a free pass. . . . finding the right car at the right Mark-Ups (ADM), and bogus fees and If you are a reputable and honest dealership. In each of the 3 cases, I have charges for supposedly dealer-installed dealership, then there should be no gone to multiple dealers, wanting to items tha[t] the consumer doesn’t want worry; it will be business as usual.271 purchase a specific vehicle on their lot, in the first place. . . . Unless the FTC • Think of us, the car buying public. and walked away because of the hidden passes this proposed rule, things will We are mad as hell. Please start fixing get worse before they get better.268 this crooked business model where 272Individual commenter, Doc. No. FTC–2022– 0046–5227.
268Individual commenter, Doc. No. FTC–2022– 271Individual commenter, Doc. No. FTC–2022– 275Individual commenter, Doc. No. FTC–2022– 0046–6225. 0046–5238. 0046–0900.
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 630 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations costs being added to the price of the financing company or upon qualifying not be excluded from the offering price. car.276 for any other rebate; and to prohibit the The Commission notes that, as • I work as a salesperson at a local exclusion of certain charges, including proposed, the term ‘‘Government Nissan dealership. . . . Currently, the advertisement of an offering price Charges’’ is limited to those charges dealerships across the US, including the that factors out a down payment ‘‘imposed by a Federal, State or local one I work for, have made the car amount.278 government agency, unit, or buying process needlessly confusing, To begin, the Commission notes that department.’’ The Commission specified expensive, and frustrating by engaging by the terms of the proposed ‘‘Offering in this proposed definition that such in false advertising and hidden add-on Price’’ definition, the only charges a charges need be ‘‘imposed by’’ a products. While these practices are very dealer was permitted to exclude from a government entity rather than, for unscrupulous, they are incredibly vehicle’s offering price were required instance, having merely been effective at what they are designed to government charges. Thus, under the ‘‘authorized by’’ or ‘‘allowed by’’ such do: drive revenue for the store. If these proposal, if a dealer were to charge any an entity. This language does not reach regulations are passed, they would consumer for a preinstalled add-on, or charges that are authorized by a certainly take a significant toll on my require any consumer to pay for an add- government entity but not required, personal finances. But the longer I work on to purchase or finance the vehicle, since such charges have not been in my position, the more I realize that then the charges for such add-ons would ‘‘imposed’’280by the government. This no one should be allowed to engage in be required to be included in the distinction therefore excludes from the such exploitative conduct in the course vehicle’s offering price.279In addition, definition of ‘‘Government Charges’’ of running a business. . . . Good, while the proposed provision did not fees, such as dealership document ethical dealers will not have to make prevent dealers from presenting preparation fees that State or local law any changes if these rules are put into consumers with accurate and non- does not require consumers to pay. place. I also happen to know that misleading additional information, Furthermore, the definition of ‘‘Offering several of the comments in opposition including terms of limited availability, Price’’ at §463.2(k) permits only to the proposed regulations are solicited the required offering price disclosure ‘‘required’’ government charges to be by dealerships and their management. needed to remain clearly and excluded from a vehicle’s offering price. The dealership group I work for, for conspicuously presented to consumers, Thus, charges the government does not example, sent out a company-wide and could not be based on discounts or require consumers to pay, but allows the email encouraging employees to post rebates that are not available to ‘‘any dealer to charge or to pass along to the comments on this site in opposition to consumer,’’ including rebates consumer, such as document fees, must these rules. But there’s no question: The contingent upon the use of a certain be included in the disclosed offering American people want these financing company or upon qualifying price if the dealer requires such charges regulations. They need these for any other rebate. Similarly, under of any consumer. regulations. The only ones that don’t the proposal, if the dealer required a Relatedly, an individual commenter want them are crooked auto dealerships down payment amount to sell or finance suggested that the Commission delete across the US. It’s been far too long that the vehicle, the offering price could not the phrase ‘‘inspection or certification such dealerships have run amuck with factor out such an amount. costs’’ from the definition of underhanded sales practices and With respect to the proposed ‘‘Government Charges’’ in order to avoid deception. I would urge the FTC to definition of ‘‘Government Charges,’’ confusion about the status of inspection stand strong against . . . dealership which is used in the definition of or certification charges that ‘‘are NOT groups[]or any lobbyists and get these ‘‘Offering Price,’’ a number of consumer imposed by the Government,’’ as well as rules passed! I know there will be stiff advocacy organization commenters explicitly state in the definition that the resistance but it’s of the utmost contended the definition should be term does ‘‘not include dealer document importance to good dealerships, narrow to accomplish the Commission’s or document processing fees (‘‘doc transparent salespeople, and, most goal of ensuring that consumers have fees’’), or electronic titling and importantly, the average American access to accurate pricing information registration fees, which are not imposed consumer!277 before they enter a dealership, by the Government.’’281Regarding the A number of commenters supported emphasizing that only charges that are phrase ‘‘inspection or certification the offering price disclosure imposed by, and payable to, a costs,’’ such costs that are not requirement and associated definitions; government entity should be permitted ‘‘imposed’’ by the government are some expressed support while urging to be excluded from a vehicle’s offering excluded from the definition of additional protections. A number of price, and that document fees that some ‘‘Government Charges,’’ as the plain commenters, including consumer States allow dealers to charge should language makes clear. Similarly, as noted, dealer document or document advocacy organizations as well as individual commenters, requested that 278A number of these commenters further processing fees and any other fees that requested that the term ‘‘Offering Price’’ include are not imposed by the government are the Commission require a vehicle’s additional dealer fees that are known to the dealer excluded from the definition, as the offering price to include additional at the time they are advertised and imposed by the plain language states.
items, such as charges for add-ons dealer rather than a government entity. These attached to the vehicle when it is requests are addressed in the discussion of the Some commenters, including a group Commission’s definition of ‘‘Government Charges’’ of State attorneys general, likewise offered, and charges for add-ons in SBP III.B.2(i). recommended that a vehicle’s offering required by the dealer to be sold with 279If a dealer does not require any consumer to price include ‘‘anticipated’’ or the vehicle; to exclude rebate pay for an add-on, current law, as well as information, including rebates provisions in this Rule, require dealers to refrain contingent upon the use of a certain from deception in this regard. See, e.g., §463.3(a), 280See, e.g., Impose, Cambridge Advanced
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 631 ‘‘estimated’’ government charges.282The including the offering price disclosure, costs to consumers and competition. Commission agrees that consumers be presented clearly and conspicuously. The Commission may consider would benefit from knowing this As previously discussed, the proposed additional such restrictions or information early on in their shopping disclosure provisions were directed at additional guidance in the future, based experience, and notes that dealers are addressing unlawful conduct while on stakeholder experience with part 463 permitted under this Final Rule to providing dealers with flexibility to and whether it effectively remediates provide additional, truthful information present such disclosures in a manner unlawful conduct. along with a vehicle’s offering price. that is clear and conspicuous to their Other individual commenters Rather than requiring that anticipated consumers under the particular proposed that the Commission impose government charges be included in the circumstances. Thus, the Commission limitations on the price of the vehicle— offering price, the Commission is has determined not to adopt further for example, prohibiting dealers from modifying the definition from its formatting, posting, or presentation charging more than MSRP for the original proposal to make clear that requirements for its offering price vehicle—or prohibit or limit particular dealers need not exclude any such disclosure. charges, such as dealer fees, document charges from the offering price. The Some commenters, including fees, and destination charges. The Commission will evaluate whether the consumer advocacy organizations and a Commission notes that several Rule definition, as finalized, as well as its consumer protection agency, proposed provisions will prohibit hidden charges associated disclosure, effectively that the Commission adopt an and deception related to pricing, address deceptive and unfair market additional requirement providing that including §463.4(a) (offering price conduct, and will consider future dealers must accept an offer from a disclosure) and §463.3(a) (prohibition modifications as market practices buyer of the offering price. In response, against misrepresenting the costs or evolve. the Commission notes that, under its terms of purchasing, financing, or Thus, the Commission is finalizing a proposal, if a dealer were requiring any leasing a vehicle). Before including definition of ‘‘Offering Price’’ that consumer to pay a price that was higher additional provisions, the Commission clarifies that dealers may, but need not, than the disclosed offering price, or will continue studying the market, exclude required government charges adding other conditions—such as including after the Rule is in effect, to from a vehicle’s offering price that requiring the use of a particular finance determine whether additional steps are meets the requirements of §463.2(k). In company or the purchase of an add-on— needed. particular, the Commission is finalizing to obtain the vehicle at the offering Other commenters opposed the a definition of ‘‘Offering Price’’ that price, such practices would violate part offering price disclosure and related removes the phrase ‘‘excluding only’’ 463, including the offering price definitions. Commenters including an and adds the phrase ‘‘provided that the provision, which requires disclosure of industry association contended that, by Dealer may exclude only’’ in its place. the full cash price for which the dealer defining ‘‘Offering Price’’ in §463.2(k) The definition also substitutes will sell or finance the vehicle to any as the price ‘‘for which a Dealer will sell ‘‘Vehicle’’ for ‘‘motor vehicle’’ to consumer,283and the related or finance the motor vehicle to any conform with the revised definition of requirement the Commission is consumer,’’ the Commission would ‘‘‘Covered Motor Vehicle’ or ‘Vehicle’’’ finalizing under §463.3(p), which prohibit dealers from changing vehicle at §463.2(e), such that the definition prohibits misrepresentations regarding prices as market conditions change, reads as follows: ‘‘Offering Price means the required disclosures in part 463.284 thereby making vehicle pricing less the full cash price for which a Dealer An individual commenter proposed dynamic than under current industry will sell or finance the Vehicle to any that the Commission adopt additional practice. consumer, provided that the Dealer may requirements requiring dealers to Section 463.4 and the offering price exclude only required Government itemize and disclose each sub- definition in §463.2(k), however, do not Charges.’’ component of the offering price, alter the current status quo on pricing Other commenters, including including any applicable document fee. accuracy or pricing changes. Consistent consumer advocacy organizations, The Commission notes that it has not with the law, the offering price—as with proposed additional requirements to the been presented with any evidence that a presently advertised price—must be disclosure at §463.4(a): prescribing the benefits of such additional truthful and non-misleading. If the formatting, posting, and presentation disclosure requirements outweigh the offering price is only available for a requirements for offering price certain period of time, the information, such as attaching a written 283See §463.2(k) (defining ‘‘Offering Price’’ as advertisement must convey that fact offering price to each vehicle, providing ‘‘the full cash price for which a Dealer will sell or clearly and conspicuously, and if it is written offering price information in finance the Vehicle to any consumer, provided that no longer available, the dealer must response to consumer communications the Dealer may exclude only required Government cease advertising the offering price.285 Charges’’).
regardless of whether the 284Some commenters described situations in Some commenters expressed a related communications are written, and which a dealer may decline to sell or finance a concern that the Commission’s offering requiring offering price to be the most vehicle to a particular consumer, including due to price disclosure requirement could conspicuous piece of information legal requirements, irrespective of whether the require dealers to change their practices dealer otherwise intends to honor its offering price displayed to consumers. Regarding the disclosures. These situations include, for example, when an advertised vehicle is no longer manner in which the offering price must a consumer who presented identity theft indicia available. For example, one industry be presented, the Commission proposed under the Commission’s Red Flags Rule, 16 CFR commenter asked whether, under such that all disclosures under §463.4, 681; a consumer on the Specially Designated circumstances, a dealer would somehow Nationals List maintained by the Office of Foreign be obligated to sell some other vehicle Assets Control; a consumer who cannot produce the 282See, e.g., Comment of 18 State Att’ys Gen., required proof of insurance or license to complete Doc. No. FTC–2022–0046–8062 at 7; Comment of the transaction; or a consumer who is abusive or 285As is the case under current law, under part Consumer Att’ys & Advocs., Doc. No. FTC–2022– violent at the dealership. The Commission’s 463, any qualifying information necessary to 0046–7695 at 2–3 (requesting that the vehicle’s offering price provision is a pricing disclosure; it prevent deception regarding a material fact must be offering price include ‘‘an estimate of government will not otherwise alter the status quo on whether conveyed clearly and conspicuously. See FTC fees and charges such as sales tax and registration a given sale or financing transaction must be Policy Statement on Deception, supra note 42, at 1 based on the dealer’s location’’). consummated. n.4, 4. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 632 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations to that consumer at the offering price. disclosure were to give consumers a net disclosure prohibits dealerships from Here, the offering price disclosure pricing impression that is contrary to conveying accurate additional requirement does not alter the status that which is actually available, then the information to consumers, including quo: Under §463.4(a), as under current disclosure would violate §463.4(a), and information about rebates, discounts, or law, if an offer is limited to a particular the related requirement under other limited-availability incentives. period of time, the offer must convey §463.3(p).287 Relatedly, some dealership that fact, and once a price is no longer Some commenters, including association commenters contended available, the dealer must cease dealership associations, generally there are areas of overlap, or potential advertising that price. Regarding which concluded the Commission’s proposed conflict, with State law. Pursuant to vehicles to sell at an advertised offering offering price definition, or its §463.9 of part 463, where it is possible price, under the Commission’s proposal, associated disclosure provision, were for dealers to comply with both State the dealer must disclose the offering unnecessary, confusing, burdensome, or law and the provisions of this price for the vehicles advertised. If the likely to hinder comparison shopping. regulation, or where State law affords dealer charges a different price, then the Some commenters, for instance, greater consumer protection, part 463 dealer has not disclosed the offering contended that their respective States will not displace existing State pricing price for which the dealer will sell or already prohibit misrepresenting price or disclosure regimes. This addresses finance the vehicle, and the dealer has terms, rendering the Commission’s many of the commenters’ concerns misrepresented the price of the vehicle, proposal redundant. The Commission about State law. Some dealership in violation of several provisions, notes, however, that a simple disclosure associations, for instance, contend that including §§463.3(b) and (p) and of the offering price, using the same their respective States require dealers to 463.4(a). For example, if a dealer definition across States, addresses separately disclose a dealer document conveys that all vehicles of a certain multiple issues, including: the fee and not represent that the fee is nature or in a certain category are promotion of prices based on dealer required by the State, or that they allow available at a particular offering price, discounts, rebates, or other price dealers, with certain limitations, to but charges a higher offering price for reductions when such benefits are in incorporate rebates into an advertised any vehicle of that nature or in that fact subject to hidden or undisclosed price. Regarding document fees, dealers category, the dealer has violated the restrictions that render them can simultaneously comply with part Rule. unavailable to typical customers; the 463, which requires document fees to be Other comments, including from a concealment or omission of additional included in the offering price unless member of Congress and from dealer charges, such as for document they are ‘‘required’’ government charges, dealership associations, raised concerns preparation fees, amounting to several and with State law that permits but does that the Commission’s proposal would hundred dollars; the advertisement of a not require document fees to be limit dealers from advertising rebates, price without disclosing material excluded from a vehicle’s advertised discounts, or incentives of limited limitations or additional charges price, or that requires disclosure of the availability, including when required by the dealer that are fixed and amount of the document fee and that qualifications for such rebates, thus can be readily included in the price such a fee is not required by the State, discounts, or incentives are identified in at the outset; and the inducement to by disclosing the offering price and any the advertising, further contending that pursue pricing offers that are not additional State-required information, such a result would contradict prior actually available or to pay more for a such as the amount of the dealer FTC practice. Relatedly, commenters vehicle due to inadequate or document fee. Similarly, regarding including an industry association nonexistent disclosures. Moreover, this rebates, in addition to the offering price, questioned whether the Commission’s disclosure and the associated dealers may provide consumers with proposal prohibited dealers from definitions should produce the corollary additional pricing information, advertising additional vehicle prices, benefit of increasing price competition including regarding rebates or other contending that such a result would among dealers, who will be able to incentive pricing, so long as the offering conflict with the longstanding compete on truthful, standard terms.288 price remains clear and conspicuous, obligation under Federal law to disclose The Commission also concludes that the and any additional information is a vehicle’s Manufacturer’s Suggested claim that its offering price disclosure truthful and non-misleading and Retail Price, or MSRP. The Commission requirement would limit comparison otherwise complies with part 463 and notes, however, that the offering price shopping appears to follow from the existing law. disclosure requirement does not prevent mistaken notion that the offering price Another dealership association dealers from presenting accurate and commenter urged the Commission to non-misleading additional information, competition across both price and quality metrics, consider using an existing definition, including terms of limited availability, including providing consumers with truthful, including a State-law definition of nondeceptive advertising. See, e.g., Cal. Dental so long as the required offering price ‘‘sales price’’ or the definition of ‘‘cash Ass’n v. Fed. Trade Comm’n, 526 U.S. 756, 766–68 disclosure remains clearly and (1999) (affirming Commission exercise of law price’’ under the Truth in Lending Act’s conspicuously presented to enforcement authority against industry guidelines Regulation Z, in lieu of its proposed consumers.286If, however, a dealer’s that unlawfully restricted both price advertising offering price definition.289The and advertising relating to the quality of dental Commission notes that its offering price services). As noted, the offering price disclosure 286A number of dealership associations expressed requirement does not prevent dealers from definition overlaps substantially with a related concern that the Commission, through its presenting accurate and non-misleading additional the commenter’s suggested State-law offering price proposal, was somehow seeking to information, including information about any such ‘‘sales price’’ definition, which, restrict competition between dealers to being only distinguishing characteristics, so long as the about the price of vehicles. The associations offering price is presented clearly and according to the commenter, requires described other areas, beyond vehicle price, by conspicuously. that a vehicle’s advertised price be one which dealerships currently distinguish themselves 287For reference, §463.3(p), which the at which ‘‘the dealer must be willing to (e.g., their range of products and services; their Commission is finalizing, see SBP III.C.2(p), sell the motor vehicle . . . to any retail service availability; the convenience of their prohibits dealers from making material locations; and the nature of their sales staffing and misrepresentations regarding ‘‘[a]ny of the required process). In response, the Commission notes that it disclosures’’ under the Final Rule. 289Comment of Tex. Auto. Dealers Ass’n, Doc. has long recognized the importance of protecting 288See NPRM at 42023. No. FTC–2022–0046–8102 at 29–30. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 633 buyer’’; which ‘‘must’’ include certain requirement, however, is consistent to the extent a dealer imposes such additional charges that are fixed and with these existing legal obligations and allowable charges on any consumer, thus can be readily included in the price does not disturb them; dealers can and such fees must be included in the at the outset, including ‘‘[d]estination should make the disclosures required offering price. Were the Commission to and dealer preparation charges’’; and under TILA and other laws as well as categorize such allowed, but not which permits only certain categories of the offering price disclosure required by required, amounts as ‘‘Government costs and charges to be excluded.290 the Final Rule. The provision requires Charges,’’ dealers would be allowed to Based on the commenter’s description, dealers to disclose simple and highly exclude them from a vehicle’s offering unlike the Commission’s definition, this material pricing information under price but then require consumers to pay State-law definition permits the certain circumstances.293Providing them anyway, thereby allowing dealers exclusion of fees ‘‘allowed’’ by law or consumers with accurate and timely to lure consumers to their lots based on those which the law has pricing and financing information is a price that is not actually the price the ‘‘prescribed.’’291Again, the Rule critical, especially in the context of dealer would require the consumer to permits only charges that the motor vehicle sales.294 pay—a fact that consumers would not government requires the consumer to Several commenters requested learn until they have spent time pay to be excluded from a vehicle’s modifications to limit or expand the traveling to the dealership and time on offering price, by defining ‘‘Offering proposed definition of ‘‘Government the lot, if they learn this fact at all.297 Price’’ to allow only ‘‘required Charges,’’ or clarification regarding this Further, under such circumstances, Government Charges’’ to be excluded. term’s application to certain fees. For dealerships that choose to advertise the This difference from the State law example, commenters, including a price truthfully would be at a described by the commenter, however, dealership association, urged the competitive disadvantage. The creates no conflict—a dealer governed Commission to modify this proposed Commission therefore declines to by that State law will be able to comply definition to include charges that are finalize the definition with such a with both requirements by disclosing an ‘‘allowed to be charged but not required modification. offering price that excludes only or imposed by a Federal, State, or local Commenters, including a number of required government charges and government agency, unit, or dealership associations, contended there includes allowable government charges. department.’’295One such commenter were burdens associated with the Similarly, commenters have not provided the example of certain Commission’s offering price disclosure demonstrated any actual conflicts registration and title charges, which it requirement, claiming it would cause between the proposed offering price described as ‘‘not necessarily imposed dealers to require documenting every definition and TILA’s definition of or mandatory fees’’ and for which ‘‘the contact with a consumer in which a ‘‘cash price.’’292Dealers can comply amount may vary, depending on the specific vehicle was mentioned, thereby with both requirements by disclosing an county’’ and the dealership, and within lengthening the sales process and offering price that excludes only a governmentally determined range.296 increasing the recordkeeping burden. required government charges. And the Regarding registration and title charges, Comments regarding recordkeeping Rule’s definition addresses specific to the extent such charges are required requirements, including records that unfair and deceptive conduct in the by a government agency, unit, or must be created and maintained under auto marketplace. Were offering prices department, then they fall within the this Rule, are addressed in the section- to exclude additional categories, the ‘‘Government Charges’’ definition as by-section analysis of §463.6. Here, the resulting disclosure provision at charges ‘‘imposed by’’ such agency, Commission notes that accurate pricing §463.4(a) would permit dealers to lure unit, or department. If, however, there communication is already required by consumers to dealership lots based on a are title, registration, or other fees, law. Section 463.4(a) does not require a price that is not actually the price the beyond any title and registration fees complex or lengthy disclosure, is based dealer would require the consumer to required by the government, that dealers on similar provisions already in pay, a result that would require are allowed, but not required, to charge, operation in certain States,298will consumers to spend time traveling to such fees do not fall within the operate as a key safeguard in States the dealership and time on the lot to ‘‘Government Charges’’ definition, and without such provisions, and, as attempt to discover the true price, and discussed in the following paragraphs, that would place dealerships that 293The industry association commenter further addresses deceptive and unfair conduct. choose to advertise the price truthfully contended that this provision would apply to Further, this offering price requirement at a competitive disadvantage. dealers based on whether they have a service Relatedly, commenters including an department, but this is incorrect, as explained in will save consumers time when industry association contended that no the analysis of the definition of ‘‘‘Covered Motor additional regulation of pricing or credit Vehicle Dealer’ or ‘Dealer’’’ in SBP III.B.2(f). 297Indeed, as the Commission also noted in its 294See, e.g., Buckle Up, supra note 63, at 5 NPRM, an entity that induces the first contact and lease advertising was necessary (noting consumer confusion about how the vehicle through false or misleading representation is liable beyond that provided by existing price they were offered was determined and that under the FTC Act, regardless if the buyer later practice or by the Truth in Lending Act, consumers did not understand they could negotiate becomes fully informed. See, e.g., Resort Car Rental the Consumer Leasing Act, and their price); id. at 9 (observing add-on products or Sys., Inc. v. Fed. Trade Comm’n, 518 F.2d 962, 964 services, which typically increase a vehicle’s (9th Cir. 1975); Fed. Trade Comm’n v. Gill, 71 F. implementing Regulations Z and M, and purchase price, were ‘‘the single greatest area of Supp. 2d 1030, 1046 (C.D. Cal. 1999), aff’d, 265 relatedly, that the Commission’s offering confusion’’ in the study); Att’ys Gen. of 31 States F.3d 944 (9th Cir. 2001). price disclosure requirement & DC, Comment Letter on Public Roundtables: 298For example, California and Wisconsin have duplicated, modified, or ignored such Protecting Consumers in the Sale and Leasing of similarly enacted laws that make it unlawful for existing law. The disclosure Motor Vehicles, Project No. P104811, Submission dealerships to advertise a total price without
(b) (2023). consumers-sale-and-leasing-motor-vehicles-project- (2023); Wis. Admin. Code. Trans. 139.03(3) (2023). 291Comment of Tex. Auto. Dealers Ass’n, Doc. no.p104811-00112/00112-82927.pdf. In Louisiana, the advertised price must be the full No. FTC–2022–0046–8102 at 29–30; see also 43 295Comment of Tex. Auto. Dealers Ass’n, Doc. cash price for which a vehicle will be sold to any Tex. Admin. Code 215.250(b)(3) (2023). No. FTC–2022–0046–8102 at 14. and all members of the buying public. La. Admin. 292See 12 CFR 226.2(a)(9). 296Id. Code tit. 46, pt. V, 719 (2023). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 634 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations shopping for a vehicle by requiring the to a vehicle’s MSRP or by factoring out to disclose an offering price, so long as provision of salient, material pricing altogether. As previously the dealer’s reply does not reference information early in the process and discussed, these concerns appear to either (1) a specific vehicle or (2) a eliminating time otherwise spent misunderstand either existing legal monetary amount or financing term for pursuing misleading offers. For dealers requirements or the fact that an offering any vehicle, whether a specific vehicle already disclosing accurate pricing price disclosure would operate or a group of vehicles.301If, however, information upfront, this provision consistent with those requirements. The the dealer chooses to respond by allows them to compete on an even Commission’s requirement simply discussing a specific vehicle—whether playing field. requires dealers to disclose an offering by describing that vehicle, referring to a Another industry association price and does not alter the current stock or VIN number, or using other commenter contended that, by requiring status quo on pricing accuracy. To the means—the dealer is required to offering price to be disclosed when an extent there is a concern that requiring disclose the offering price for that advertisement references a specific accurate pricing information limits specific vehicle. If the dealer chooses to vehicle or represents a monetary dealers to advertising MSRP or forgoing respond by discussing several specific amount or financing term ‘‘by advertising pricing information vehicles, the offering price disclosure implication,’’ the Commission’s altogether, such concerns apply equally requirement applies for each such disclosure requirement could apply to under current law—including in States vehicle. Finally, the offering price advertisements that merely list a with pricing disclosure requirements disclosure requirement applies if the dealer’s website, on which specific that resemble the Commission’s offering dealer’s response references a monetary vehicles and their prices appear. Under price disclosure requirement. The amount or financing term, such as a the Commission’s proposal, an Commission, however, has not been down payment or monthly payment advertisement that does not expressly presented with evidence suggesting that amount, for a specific vehicle or a group reference a specific vehicle or expressly dealers will not want to distinguish of vehicles. This requirement applies refer to a monetary amount or financing themselves from other dealers on price, only to the dealer’s first response term would not do so ‘‘by implication’’ and will instead default to advertising a regarding the specific vehicle. It does solely by referring to a website, price that is offered by all of their not apply to subsequent document, or other destination where competitors. communications about that specific such information may otherwise be Another concern raised by this same vehicle. available, absent evidence that the net industry association commenter was The failure to disclose a vehicle’s impression of a reasonable consumer is that, by requiring an offering price ‘‘in offering price in an advertisement or that the advertisement implicitly the Dealer’s first response’’ to a other communication that references a references such terms.299The phrasing consumer communication that specific vehicle, or a monetary amount references a specific vehicle or a or financing term for any vehicle, is in the Commission’s requirement— monetary amount or financing term for likely to cause substantial injury to ‘‘expressly or by implication’’—refers to any vehicle, the requirement would consumers who waste time and effort the nature of the claims conveyed by a prohibit dealers from explaining the pursuing offers that are not actually dealer’s advertisement (i.e., whether offering price and why it is being available or end up paying more for a such claims are made expressly or by provided, and that as a result, vehicle than they expected or being implication). For more than three consumers may understand the offering subject to hidden charges. decades, the Commission has explained price to be non-negotiable. Under Buying or leasing a vehicle is time- express and implied claims as follows:
Fed. Trade Comm’n v. N. Am. Auto. Servs., Inc., as illustrated by the Commission’s law 1690 (‘‘It was only after five hours at the dealership No. 1:22–cv–01690 (N.D. Ill. Mar. 31, 2022) that we discovered the dealer had added on a $3000 (alleging defendants charged thousands of enforcement efforts, it can be difficult market adjustment and $3100 in other add-ons consumers hundreds to thousands of dollars each for consumers to uncover the actual (nitrogen-filled tires, LoJack, paint protection) to for unauthorized add-ons, totaling in aggregate over price for which a dealer will sell an MSRP.’’). The average transaction price of a new $70 million since 2017); Complaint ¶¶59, 61, Fed. advertised vehicle until visiting the vehicle exceeded the average manufacturer’s Trade Comm’n v. Universal City Nissan, Inc., No. suggested retail price (MSRP) for twenty 2:16–cv–07329 (C.D. Cal. Sept. 29, 2016) (alleging dealership and spending hours on the consecutive months between 2021 and 2023. See unauthorized add-on charges costing thousands of Cox Auto., ‘‘After Nearly Two Years, New-Vehicle dollars). Trade Comm’n v. N. Am. Auto. Servs., Inc., No. Transaction Prices Fall Below Sticker Price in 305According to public reports, 81% of new 1:22–cv–01690 (N.D. Ill. Mar. 31, 2022) (alleging March, According to New Data from Kelley Blue motor vehicle purchases, and nearly 35% of used that defendants buried charges for add-ons in Book’’ (Apr. 11, 2023), https:// vehicle purchases, are financed. See Melinda voluminous paperwork, making it difficult to www.coxautoinc.com/market-insights/kbb-atp- Zabritski, Experian Info. Sols., Inc., ‘‘Automotive detect). march-2023/; see also Edmunds, ‘‘8 Out of 10 of Car Industry Insights: Finance Market Report Q4 2020’’ 307See, e.g., Fed. Trade Comm’n. v. Windward Shoppers Paid Above Sticker Price for New at 4, https://www.autofinancenews.net/wp-content/ Mktg., Inc., 1997 WL 33642380, at *10 (N.D. Ga. Vehicles in January, According to Edmunds’’ (Feb. uploads/2021/03/2020-Q4-Auto-Finance-News- Sept. 30, 1997)) (‘‘[A]ny representations concerning 15, 2022), https://www.edmunds.com/industry/ Industry-Pulse.pdf. the price of a product or service are presumptively press/8-out-of-10-of-car-shoppers-paid-above- 306See, e.g., Complaint ¶¶17–19, 44, Fed. Trade material.’’); Thompson Med. Co., Inc., 104 F.T.C. sticker-price-for-new-vehicles-in-january-according- Comm’n v. Liberty Chevrolet, Inc., No. 1:20–cv– 648, 817 (1984); see also Fed. Trade Comm’n v. to-edmunds.html; iSeeCars, ‘‘10 New Cars Priced 03945 (S.D.N.Y. May 21, 2020) (dealers inflated the Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321 the Highest Over MSRP, Even as Peak Pricing car price on paperwork in the middle of the sale (S.D.N.Y. 2001) (‘‘Information concerning prices or Eases’’ (Mar. 19, 2023), https://www.yourerie.com/ without the consumer’s knowledge or charges for goods or services is material, as it is news/10-new-cars-priced-the-highest-over-msrp- authorization, a practice they internally referred to ‘likely to affect a consumer’s choice of or conduct even-as-peak-pricing-eases/ (finding the average as adding ‘‘air money’’); Complaint ¶¶24–27, Fed. regarding a product.’’’). new car price was 8.8% over MSRP). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 636 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations Thompson Med. Co., Inc., 104 F.T.C. to add language clarifying that the list. Some commenters raised concerns 648, 817 (1984)); see also Fed. Trade provision is also prescribed for the that, without significant modification, Comm’n v. Crescent Pub. Grp., Inc., 129 purpose of preventing unfair or the Commission’s proposal to allow for F. Supp. 2d 311, 321 (S.D.N.Y. 2001) deceptive acts or practices defined in the disclosure of price range (‘‘Information concerning prices or this Rule. The Commission is finalizing information where the price of an add- charges for goods or services is material, the corresponding ‘‘Offering Price’’ and on varies based on the specifics of the as it is ‘likely to affect a consumer’s ‘‘Government Charges’’ definitions in transaction would allow for significant choice of or conduct regarding a §463.2 largely as proposed, with abuses, including by permitting dealers product.’’’).309 modifications to the ‘‘Offering Price’’ to disclose ranges so broad they would Thus, it is an unfair or deceptive act definition to conform with the defined be meaningless. Such commenters urged or practice for dealers to fail to disclose term ‘‘Vehicle’’ and to clarify that the Commission to modify its definition the offering price in an advertisement or dealers may, but need not, exclude of ‘‘Add-on List’’ to require, where a other communication that references, required government charges from a price range is listed for a given add-on, expressly or by implication, a specific vehicle’s offering price, and a the add-on list further indicate the low, vehicle or any monetary amount or typographical modification to the median, and high prices charged to financing term for any vehicle. ‘‘Government Charges’’ definition to consumers for each such add-on over Furthermore, this provision also include a serial comma for consistency. the preceding two years; or that the serves to prevent the misrepresentations Commission require dealers to create
received on this proposed provision, the 312See NPRM at 42044 (noting, in the definition The Commission also emphasizes that, Commission is finalizing the offering of ‘‘Add-on List’’ at proposed §463.2(b) that ‘‘[i]f the Add-on price varies, the disclosure must in addition to the Rule’s prohibitions, price provision at §463.4(a) with include the price range the typical consumer will industry guidance and effective self- modifications to capitalize the defined pay instead of the price’’); see also Fed. Trade regulatory efforts can serve a role in term ‘‘Vehicle’’ in its singular, plural, Comm’n v. Five-Star Auto Club, Inc., 97 F. Supp. helping prevent problematic dealer and possessive forms, to correspond to 2d 502, 528 (S.D.N.Y. 2000) (‘‘at the very least it would have been reasonable for consumers to have behavior in this area. The Commission the revised definition at §463.2(e), and assumed that the promised rewards were achieved will continue to monitor the motor by the typical Five Star participant’’); Complaint vehicle marketplace for issues 309Even if some consumers were not misled by ¶¶28–50, Fed. Trade Comm’n v. Universal City pertaining to add-ons and will consider the failure to disclose the offering price, to show Nissan, Inc., No. 2:16–cv–07329 (C.D. Cal. Sept. 29, deception under the FTC Act, ‘‘the FTC need not 2016) (alleging unlawful deception where a dealer’s implementing additional measures in prove that every consumer was injured. The ads list prominent terms not generally available to the future if it determines such existence of some satisfied customers does not consumers, including where those terms are subject measures are warranted to address constitute a defense. . . .’’ Fed. Trade Comm’n v. to various qualifications or restrictions); Complaint deceptive or unfair acts or practices Amy Travel Serv., Inc., 875 F.2d 564, 572 (7th Cir. ¶¶8–10, Progressive Chevrolet Co., No. C–4578 1989), vacated in part on other grounds, Fed. Trade (F.T.C. June 13, 2016) (alleging advertised offer was related to add-on products or services. Comm’n v. Credit Bureau Ctr., LLC, 937 F.3d 764 deceptive because the typical consumer would not
Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321 (S.D.N.Y. 2001) (‘‘Information concerning prices or 324See 15 U.S.C. 57a(a)(1)(B) (the Commission 325Individual commenter, Doc. No. FTC–2022– charges for goods or services is material, as it is ‘‘may include requirements prescribed for the 0046–1216. ‘likely to affect a consumer’s choice of or conduct purpose of preventing’’ unfair or deceptive acts or 326Individual commenter, Doc. No. FTC–2022– regarding a product.’’’). practices). 0046–3693.
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 640 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations As an average consumer who has bought monthly payment so that they can vehicle including any assumed 3 vehicles with financing and 2 without, stretch out the term and hammer you consumer-provided consideration, and I can see the obvious benefit these with hidden fees and other expenses only when making a representation proposed regulations would have on the you won[’]t be able to see right away.332 about the vehicle’s monthly payment car buying process. The vast quantities • Dealerships always want you to amount; it would not require a complex of paperwork and add [-]ons make it come in so they can manipulate you or lengthy disclosure. Consumers shop easy for car dealers to switch things into a car you can[’]t afford and pay for for vehicles and interact with online around to their benefit. I had one things you don’t need by hiding them in interfaces, and other advertising in dealership . . . change the term of my a monthly payment.333 many different ways; thus, it is auto loan from 72 to 84 months in the • If we had to do our grocery important for this simple disclosure to middle of reprinting the final sales sheet shopping the same way dealers want us accompany a monthly payment because of another obvious error in the to buy a car, most Americans would representation however a consumer first copy. In the midst of all the starve before sunset. ‘‘What kind of might encounter it. Moreover, the distractions and misdirection going on, monthly payment are you looking for in Commission has taken into account [I] didn’t notice [‘]til[l] after the fact. I a banana?’’ is a conversation I should existing disclosure obligations.338 felt powerless and cheated. . . .327 never be forced to have. . . .334 Monthly payment amounts for motor • There is no reason that buying a car One individual commenter requested vehicle sales or leases constitute so- has to be a chore and so ambiguous on that the Commission make clear that called ‘‘triggering terms’’ under the price. The dealer was also so twisted up handwritten negotiation notes made by Truth in Lending Act, the Consumer on getting me to focus on the monthly a dealer would trigger the requirement Leasing Act, and their implementing payment and not the total price of the that this proposed disclosure be made in Regulations Z and M. As such, dealers car and that is where they were able to writing.335In response, the Commission currently providing such information, sneak the price up. Practices like this affirms such representations have been including on their websites or other are also why people have such a disdain made ‘‘in writing,’’336and thus, where online interfaces, are bound by existing for purchasing a new/used car.328 dealers represent a monthly payment in laws that require providing consumers • I have experienced many of the such notes, this provision requires them with additional terms in a clear and ‘‘typical’’ tactics that one hears about to provide the disclosures in §463.4(d) conspicuous way: in the case of vehicle when negotiati[ng] with an automobile in writing. credit transaction offers, this includes dealership, like the salesperson always Other commenters, including industry the terms of repayment, which reflect wanting to talk about the monthly associations and individual the repayment obligations over the full payment and never the actual trade-in commenters, questioned whether the term of the loan;339in the case of price and sales price. . . . I agree that proposal would require a disclosure in vehicle lease offers, this includes the the whole car buying process could be every place a monthly payment appears number, amounts, and due dates or made easier and I see no reasons that on a dealer’s website, or otherwise periods of scheduled payments under any fair and honest car dealership would be difficult or infeasible given the lease.340The Commission’s would object to these proposed changes/ the frequency with which dealers disclosure requirement takes into rules as they, in my estimation are all provide consumers with monthly account these existing obligations, things that a fair and honest car dealer payment information, suggesting that requiring, specifically: the total amount should be doing anyway. The only car such a requirement could either the consumer will pay to purchase or dealers that should be objecting to these overwhelm consumers or dissuade lease the vehicle at a represented new rules should be the unscrupulous dealers from providing monthly monthly payment amount including any dealers.329 payment information, or arguing337that assumed consumer-provided • When buying a car dealers try to the proposal overlapped with other laws consideration. Similarly, regarding the negotiate the monthly payment, so the such as the Truth in Lending Act or the feasibility of providing this disclosure actual total cost is hidden from the Consumer Leasing Act. Regarding as often as dealers provide consumers buyer until they get into the ‘‘financing monthly payment amounts appearing with monthly payment information: office’’ where all kinds of unexpected more than once or in multiple places, once dealers choose to make a add-ons are sprung on the consumer.330 the Commission notes that, as proposed, representation about a monthly • I am trying to buy a new car, from this section would require disclosure of payment, they are capable of disclosing the factory, with no modifications or the total purchase or lease amount for a a total of payments for the consumer alterations, is it so much to ask for? The based on the same inputs needed to process of figuring out the price of the 332Individual commenter, Doc. No. FTC–2022– arrive at that voluntary monthly car is impossible. The sales people are 0046–8847. payment representation. all about the monthly payment, when I 333Individual commenter, Doc. No. FTC–2022– The Commission further notes that, in 0046–6405. the event a monthly payment is already asked them what the car price is the 334Individual commenter, Doc. No. FTC–2022– being disclosed, the associated total of answer is always what payment are you 0046–3860.
information in writing before providing ‘‘indirectly’’ from this proposed (finding that company’s advertisements would consumers with the contract, if they are reasonably be interpreted by consumers to contain disclosure provision. To begin, one already providing monthly payment an implied claim that POM products treat, prevent, dealership association commenter information in writing prior to the or reduce the risk of certain health conditions and suggested deleting these terms from the for some ads that these effects were clinically contract, would do so. proven); Kraft, Inc. v. Fed. Trade Comm’n, 970 F.2d regulatory text, but did not explain the Some dealership associations 311 (7th Cir. 1992) (affirming finding of deception nature of its specific concern regarding described certain elements of the where Kraft advertisements juxtaposed references to its use of the term ‘‘any,’’ instead proposal as vague or unclear, requesting the milk contained in Kraft singles and the calcium claiming generally that the terms with content of the milk, the combination of which that the Commission clarify its use of which the commenter took issue were implied that each Kraft single contained the same the term ‘‘by implication’’ with regard to amount of calcium as five ounces of milk). Further, ‘‘broad,’’ ‘‘vague,’’ and ‘‘imprecise.’’ As a monthly payment, or alternatively, to be considered reasonable, the interpretation or proposed, the Commission’s total that the Commission omit the terms reaction does not have to be the only one; when a payments disclosure would be required seller’s representation conveys more than one ‘‘any’’ (as it pertains to ‘‘any meaning to reasonable consumers, one of which is when a dealer makes ‘‘any representation’’), ‘‘by implication,’’ and false, the seller is liable for the misleading representation . . . about a monthly ‘‘indirectly’’ from the proposed interpretation. See FTC Policy Statement on payment for any vehicle.’’ These Deception, supra note 42, at 3. Further, an disclosure provision.342Regarding the disclosure circumstances are markedly interpretation will be presumed reasonable if it is use of the term ‘‘by implication’’ with the one the respondent intended to convey. Id. similar to those under Regulation Z and regard to a monthly payment, as 344See, e.g., Telemarketing Sales Rule, 16 CFR Regulation M: Regulation Z requires the discussed in the section-by-section 310.3(a)(2) (prohibiting ‘‘[m]isrepresenting, directly disclosure of additional payment terms analysis of §463.3 in SBP III.C with or by implication, in the sale of goods or services’’ when ‘‘any’’ of a number of terms is set a list of ten categories of material information); 16 respect to the prohibition on express or CFR 310.2(o) (defining ‘‘debt relief service’’ as any forth, including ‘‘[t]he amount of any implied misrepresentations, the program or service ‘‘represented, directly or by payment’’;346Regulation M similarly Commission notes that such language is implication, to renegotiate, settle, or in any way requires the disclosure of additional consistent with longstanding law, and alter’’ certain terms); 16 CFR 310.5(a)(2) (requiring terms when ‘‘any’’ of a number of items telemarketers to keep records of certain prize and given that representations can mislead prize-recipient information ‘‘for prizes that are is stated, including ‘‘[t]he amount of any reasonable consumers even without represented, directly or by implication, to have a payment.’’347The use of the term ‘‘any’’ making express claims, the provision value of $25.00 or more’’); Business Opportunity is consistent with existing law, and thus Rule, 16 CFR 437.1(c) (defining a ‘‘(b)usiness could be rendered meaningless without is not confusing or impracticable. opportunity’’ as a commercial arrangement in it.343Variations of the phrase ‘‘expressly which, among other criteria, ‘‘[t]he seller, expressly Furthermore, as with representations or by implication, orally or in writing, represents made ‘‘by implication,’’ the Commission 341As is currently the case under Federal law and that’’ it will provide, inter alia, business locations, has a longstanding practice of regulating outlets, accounts, or customers); Disclosure the Final Rule, the terms must be the terms representations made ‘‘indirectly’’ in the Requirements and Prohibitions Concerning available to the typical consumer. See, e.g., Fed. Franchising, 16 CFR 436.1(e) (defining ‘‘(f)inancial same manner as those made directly,348 Trade Comm’n v. Five Star Auto Club, 97 F. Supp.
payments as scheduled, inclusive of • I just want to walk in to a clarifying that the requirements in assumed consideration. Further, this dealership, find a car that fits my needs §463.4(e) ‘‘also are prescribed for the provision also addresses the and buy it. And what is up with these purpose of preventing the unfair or misrepresentations prohibited by RIDUCULOUSLY [sic] long loan terms? deceptive acts or practices defined in §463.3—including misrepresentations 72 MONTHS? If someone cannot afford this part, including those in §§463.3(a)
regarding material information about the a car dealers shouldn’t extend the loan, and 463.5(c).’’ costs or terms of purchasing, financing, A number of institutional commenters they should steer them to a more or leasing a vehicle—by requiring supported such a provision, affordable car!360 consumers to be provided with the total emphasizing that it would provide an The Commission received numerous payment amount associated with any appropriate amount of helpful comments relating to the scope and represented monthly payment amount.
by §463.5(c).354To address these unfair the Commission’s proposal: 357Individual commenter, Doc. No. FTC–2022– or deceptive acts or practices, the • My car buying experience involving 0046–1652. Commission is requiring dealers to dealers has include [sic] many of the 358Individual commenter, Doc. No. FTC–2022– issues identified, such as: . . . 0046–7569.
at the lower monthly payment under Thus, after careful review of the the failure to disclose that the lower discussion. Regarding the proposal to comments, the Commission has monthly payment will increase the total require particular, uniform disclosure determined to finalize §463.4(e) largely language, the Commission did not as proposed. When making any 362Depending on the circumstances, a dealer may need to take additional measures, such as disclosing receive, in the course of public comparison between payment options, the specific basis for any increase in total costs, or comment, evidence sufficient to expressly or by implication, directly or amount of any such increase, in order to avoid conclude that uniform formatting for the indirectly, that includes discussion of a deceiving consumers. delivery of such disclosures would be lower monthly payment, the failure to 363See, e.g., Fed. Trade Comm’n v. Windward necessary to make them effective. The disclose that the lower monthly M 33 k 6 t 4 g 2 ., 3 I 8 n 0 c , . , a N t * o 1 . 0 C i ( v N .A .D . . 1 G :9 a 6 . – S C ep V t – . 6 3 1 0 5 , F 1 , 9 1 9 9 7 9 ) 7 (‘ ‘ W [A L ] ny Commission currently lacks information payment will increase the total amount representations concerning the price of a product or to evaluate whether any particular form the consumer will pay to purchase or service are presumptively material.’’); Removatron disclosure would effectively lease the vehicle, if true, is likely to Int’l Corp., 111 F.T.C. 206, 309 (1988) (‘‘The communicate the required information Commission presumes as material express claims and implied claims pertaining to a product’s . . .
to consumers in a manner that in all 361As previously indicated, some such cost.’’ (citing Thompson Med. Co., Inc., 104 F.T.C. circumstances obviates deceptive or association commenters contended generally that 648, 817 (1984)); see also Fed. Trade Comm’n v. unfair conduct. Moreover, regarding the the proposed total of payments disclosures at Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321 proposal to require that the monthly §463.4(d) and (e) overlapped with the Truth in (S.D.N.Y. 2001) (‘‘Information concerning prices or Lending Act or other laws. The Commission charges for goods or services is material, as it is payment comparison disclosure responds to this point in the context of the ‘likely to affect a consumer’s choice of or conduct additionally require dealers to disclose discussion of §463.4(d), in SBP III.D.2(d). regarding a product.’’’). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 645 amount the consumer will pay to monthly payment. It also helps prevent without substantive modification and purchase or lease the vehicle, if true, is dealers from failing to obtain the has determined not to finalize §463.5(b) likely to cause substantial injury to express, informed consent of the regarding undisclosed or unselected consumers who waste time and effort consumer for charges, as addressed by add-ons. The Commission also is pursuing offers that are not actually §463.5(c), including charges relating to making minor textual edits to the available at the total payment amount the financing or lease of a vehicle.364 introductory language in §463.5 for they expect; or who pay more for a Thus, the Commission is requiring clarity and consistency: substituting vehicle sales or lease transaction than dealers to disclose, when making any ‘‘Federal Trade Commission Act’’ for they expected by being subject to comparison between payment options, ‘‘FTC Act’’; adding ‘‘Covered’’ to ‘‘Motor hidden charges or an unexpected down expressly or by implication, directly or Vehicle Dealer’’ to conform with the payment or trade-in requirement; or indirectly, that includes discussion of a defined term at §463.2(f) (‘‘‘Covered who are subject to the higher financing lower monthly payment, that the lower Motor Vehicle Dealer’ or ‘Dealer’’’), and costs and greater risk of default monthly payment will increase the total capitalizing ‘‘Vehicles’’ to conform with associated with an unexpectedly amount the consumer will pay to the defined term at §463.2(e) lengthy loan term. purchase or lease the vehicle, if true. As (‘‘‘Covered Motor Vehicle’ or Furthermore, the injury caused by with a vehicle’s price, when cost ‘Vehicle’’’). withholding this information is not information in the market is distorted or In the following analysis, the reasonably avoidable by consumers. concealed—especially in document- and Commission examines each proposed During negotiations, if dealers agree to time-intensive vehicle transactions— provision in §463.5; the substantive a lower monthly payment, consumers consumers are unable to effectively comments relating to each provision; have no reason to expect that this differentiate between sellers, and sellers responses to these comments; and the apparent ‘‘concession’’ in fact means an trying to deal honestly with consumers Commission’s final determination with increased total vehicle cost due to an are put at a competitive disadvantage. regard to each proposed provision. increased payment term or annual For the foregoing reasons, and having percentage rate. Under such considered all of the comments that it 2. Paragraph-by-Paragraph Analysis of circumstances, dealers can also add received on this proposed provision, the §463.5 unwanted, undisclosed, or even Commission is finalizing the required (a) Add-Ons That Provide No Benefit fictitious add-on charges more easily, by disclosure at §463.4(e) largely as Section 463.5(a) of the proposed rule increasing the payment term enough proposed, with the minor modifications prohibited motor vehicle dealers from that including add-on charges would of capitalizing the defined term charging for add-ons if the consumer still result in a lower monthly payment ‘‘Vehicle’’ additional language clarifying would not benefit from such an add-on, as a ‘‘concession’’ to the consumer. The that the requirements in §463.4(e) ‘‘also including a pair of enumerated injury to consumers from a lack of price are prescribed for the purpose of examples. For the following reasons, the information is not outweighed by any preventing the unfair or deceptive acts Commission is finalizing this provision benefits to consumers or competition or practices defined in this part, largely as proposed, with modifications from withholding this basic including those in §§463.3(a) and to correct a misplaced hyphen; add the information. Instead, information about 463.5(c).’’ word ‘‘that’’ before ‘‘are duplicative of increased cost protects consumers from
costs or terms of purchasing, financing, associations, stated that products that or leasing a vehicle—by requiring provide no benefit to the consumer consumers to be given accurate 364See 15 U.S.C. 57a(a)(1)(B) (the Commission should not be sold in connection with ‘‘may include requirements prescribed for the information that the total payment will the sale or financing of vehicles. Many purpose of preventing’’ unfair or deceptive acts or increase when presented with a lower practices). commenters that supported the VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 646 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations provision stated, inter alia, that the the vehicle the night before and there charging for an add-on unless it examples the Commission enumerated was still plastic factory coverings on the provides a ‘‘substantial, material in this paragraph were obvious365and seats and strips of plastic on the benefit’’ to consumers.375Another particularly helpful for less-experienced vehicles body protecting certain areas. commenter contended that there are a buyers who may be led to believe that This time they mumbled some excuse number of add-ons not meeting such a particular product or service would be about the addendum added to the price standards being sold in connection with beneficial.366Some individual is put on the vehicle as soon as it arrives the sale or financing of vehicles, commenters, for instance, noted that and they hadn’t had ‘‘time’’ to apply all including future servicing packages for they had no way to confirm whether the the overpriced add[-]ons.370 vehicle tune-ups and oil changes that ‘‘nitrogen-filled’’ tires they purchased • I’m a former carsalesperson are sold to remote or out-of-State with their vehicle actually had more [sic]. . . . Dealers should be banned consumers who are exceedingly nitrogen than naturally exists in the air, from selling . . . special paints to unlikely to return to the dealership for even though they were told the protect from rust . . . . Noc oatings are such services; tracking devices that are purchase of this service was added.371 used almost exclusively for electronic mandatory.367At least one individual • I worked at a Dodge/Ram dealership repossession; and ‘‘vendor’s single commenter described requesting to see for three years at the make ready interest’’ or ‘‘VSI’’ insurance, which the nitrogen tank after such a purchase (carwash) department. When new protects the financing entity, but not the and being denied by the dealer. vehicles arrived their tires were rarely consumer, in the event that the vehicle Examples of public comments about deflated and then filled with nitrogen. It is damaged or destroyed.376 add-ons include the following: is my understanding that the The Commission acknowledges the • I would argue that this does not go manufacture initially paid for the considerable consumer harm that results far enough but it [is] a good start. As nitrogen fill and the customer was later from the sale of such add-ons and notes someone who is trying to purchase a charged.372 that several provisions in the Rule it is new vehicle, there is a[n] endless • [O]ne of my previous purchases finalizing will address misconduct supply of ‘‘perk packages’’ or ‘‘Family almost ended . . . with GAP that was so related to these and other add-ons, deals’’ that I ‘‘must purchase’’ if I would unnecessary, the lender called us a few including many of the practices like to acquire a car from a dealer. These days later after we already had the car described by those commenters include a variety of dubious products and told us we’d be experiencing a recommending further action. For such as insurance policies that pay out lower monthly payment unless we example, to the extent that dealers make $3,500 if your car is stolen (and can’t be wanted the price of the product back in misrepresentations about any benefit of found) in the first 90 days of ownership, a check because of the price we an add-on, such conduct would violate if your car is totaled by your insurance negotiated and the sizable down §463.3(b) of the Final Rule. Thus, were company in the first 90 days they’ll pay payment, it was impossible for GAP to a dealer, for instance, to promote the $3,500. Nitrogen in the tires (A $196 ever be required.373 sale of an add-on—such as a tracking value). Vin Etching on the windows, A number of individual commenters device that is used almost exclusively plastic stickers on the door handles to indicated they did not consider nitrogen for electronic repossession—based on its prevent scratches. These items are a tires a valuable purchase and expressed supposed benefit to the consumer, when requirement to bundle with the vehicle no desire to purchase them. Many the product primarily benefits another and a deal that provides ‘‘over $7,000 in commented that, when they informed party, such conduct would violate the value’’ for $2,995. These tricks ignore their respective dealers that they did not Rule even if the product otherwise the obvious, such as your car can not be want these add-ons, the dealers would provides an ancillary or marginal both stolen (unrecovered) AND totaled represent, inter alia, that nitrogen tires benefit to consumers. And if the add-on so it’s impossible to collect on both were required by law, that their provided no benefit to the consumer policies so the cumulative ‘‘value’’ of insurance premium would increase and only a benefit to another party, this package is overstated.368 without the add-on, that new foreign §463.5(a) would prohibit the dealer • One of the latest scams is to force vehicles coming into the country must from charging the consumer for it. you to buy a $1,000 gps unit so they can have nitrogen-filled tires under the law, Further, to the extent that dealers charge recover the car if you miss payments. or that the consumer needed to for add-ons without express, informed This shouldn’t be allowed.369 purchase nitrogen tires to meet fuel consumer consent for the charge, such • Second vehicle I purchased had a economy standards. conduct would violate §463.5(c). $1,650 ‘‘protection pkg’’ plus the usual Other commenters supported this The Commission recognizes that there nitrogen in the tires BS. This time I proposed provision while also may be significant consumer benefits asked to be shown the nitrogen tank recommending that the Commission from implementing additional they fill the tires with, they refused broaden its scope to prohibit the sale of restrictions on the sale of add-on saying due to insurance rules customers add-on products or services that provide products or services. However, without aren’t allowed in the shop. I asked them only ‘‘minimal’’ benefit to additional information on costs and to take off the paint and fabric consumers.374One such commenter, for benefits to consumers or competition associated with such restrictions, the protection charge also, they declined at instance, suggested the provision be Commission has determined not to first until I reminded them they just got expanded to prohibit dealers from implement such restrictions in this Final Rule. The Commission will 365See, e.g., Individual commenter, Doc. No. 370Individual commenter, Doc. No. FTC–2022– FTC–2022–0046–1608 at 6. 0046–0854. continue to monitor the motor vehicle 366See, e.g., Comment of 18 State Att’ys Gen., Doc 371Individual commenter, Doc. No. FTC–2022– No. FTC–2022–0046–8062 at 9. 0046–1393. 375Comment of Legal Action Chi., Doc. No. FTC– 367See, e.g., Individual commenter, Doc. No. 372Individual commenter, Doc. No. FTC–2022– 2022–0046–8097 at 10. FTC–2022–0046–0565. 0046–5493. 376See also Consumer Fin. Prot. Bureau, ‘‘What 368Individual commenter, No. FTC–2002–0046– 373Individual commenter, Doc. No. FTC–2022– Is Vendor’s Single Interest (VSI) insurance?’’ (Aug. 0565. 0046–6816. 16, 2016), https://www.consumerfinance.gov/ask- 369Individual commenter, No. FTC–2002–0046– 374See, e.g., Legal Aid Just. Ctr., Doc. No. FTC– cfpb/what-is-vendors-single-interest-vsi-insurance- 4552. 2022–0046–7833 at 3. en-731/.
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 647 marketplace to gather additional information regarding the costs and provision restricts sales of GAP information on this issue and will benefits to consumers and competition agreements where the consumer would consider whether to modify or expand of such a restriction.377 not benefit. If there are benefits to the §463.5(a) in the future, including on the A number of industry association consumer, dealers must abide by other basis of stakeholder experience with commenters claimed the provision was provisions in the Final Rule, including this provision and whether it effectively vague and requested the Commission set the requirements that the dealer addresses unlawful conduct. forth how to calculate the loan-to-value represents the extent of those benefits Commenters also urged the (‘‘LTV’’) ratio at which a GAP agreement accurately (§463.3(b)) and obtains Commission to adopt a number of would be non-beneficial, given that express, informed consent from the additional measures regarding the sale there could be fluctuation of the vehicle consumer for the charges for this item of such add-ons. A consumer advocacy value in the future. Some suggested that (§463.5(c)). organization, for instance, proposed that the Commission adopt a presumption or The Commission also received some the Commission require dealers to list safe harbor that dealers complying with industry association comments claiming coverage limitations for add-ons that an LTV calculation set by the that each State imposes differing may overlap with a vehicle’s warranty Commission be deemed in compliance requirements as to coverage, coverage, observing that consumers with the portion of the proposal related disclosures, exceptions, and product commonly are not aware of important to GAP agreements. terms of GAP agreements. One such limitations until the add-on, such as a Other industry association commenter asked for guidance on how warranty or service contract, is needed, commenters argued against adopting a a bright-line, State-law rule on LTV and only then does the consumer learn set LTV ratio as the basis for ratios would interact with the FTC’s the add-on does not provide the determining whether a consumer would proposal. Another such commenter anticipated benefits. A State consumer benefit from a GAP agreement, claiming requested the FTC reconcile different protection agency recommended that that the vehicle financing entity is best State-law approaches to the sale of GAP the Commission require affirmative positioned to determine whether such agreements, particularly regarding how disclosures for the sale of add-ons that an add-on would be beneficial. this proposed provision would interact may provide only ‘‘nominal’’ benefit, Relatedly, some industry association with a State law that, according to the offering a list of what they characterized commenters contended that certain GAP commenter, only requires a dealer to as such products for the Commission to agreements sold on a low-LTV loan, or have a reasonable belief that the consider in conjunction with this that limit benefits based on a customer may be eligible for a benefit. recommendation. consumer’s LTV ratio, could still In response, the Final Rule does not In response, the Commission notes provide additional benefits. disturb State law unless it is that other provisions in part 463 address A financing association commenter inconsistent with part 463, and then misconduct relating to these issues, contended that any final rule should not only to the extent of the inconsistency. including by prohibiting create rules around the calculation of Where, for example, State laws restrict misrepresentations regarding material the LTV ratio. Another financing group the sale of GAP agreements if the LTV information about add-ons, by requiring proposed that the Commission require ratio for the transaction is below a disclosures about optional add-ons, and dealers to provide disclosures that certain threshold, or require that dealers by requiring dealers to obtain the would inform consumers of any have a ‘‘reasonable belief’’ that the GAP express, informed consent of the potential value gap between a vehicle’s agreement would benefit the consumer, consumer for add-on charges. Thus, purchase price and its appraised value. dealers in that State can, and must, misrepresenting the coverage limitations With regard to establishing LTV ratio comply with the State law and with the of an add-on; making representations parameters for the sale of GAP Rule. Pursuant to such State law, regarding an optional add-on without agreements, without further information dealers would be prohibited from disclosing that it is not required and from commenters regarding the costs selling the product if the LTV ratio is that the consumer can purchase or lease and benefits of establishing a particular below the established threshold or if the vehicle without the add-on; and LTV ratio as the basis for determining they do not reasonably believe the GAP charging for an add-on under false whether a consumer would benefit from agreement would benefit the consumer pretenses or without the consumer’s a GAP agreement, or a particular and, pursuant to the Final Rule, if the express, informed consent would violate method for calculating the LTV ratio, LTV ratio would result in the consumer other provisions the Commission is and given the Commission’s previously not benefitting financially. To the extent finalizing. The Commission is stated information saliency concerns there is an actual conflict between the concerned that requiring additional about finalizing additional disclosures Commission’s Final Rule and a State disclosures may have the effect of in an already lengthy transaction, the law—and the Commission is skeptical reducing the saliency of key information Commission has determined not to that there is such a State law that in what is already a lengthy, paperwork- establish in this Final Rule a particular explicitly allows for the sale of a heavy transaction. Accordingly, the numeric threshold or calculation product that does not benefit the Commission has determined not to regarding the sale of GAP agreements to consumer—the Commission refers adopt additional such disclosure consumers, or to require additional commenters to §463.9, which sets forth measures in this Final Rule. associated disclosures. Regarding the the Rule’s relation to State laws. In addition, at least one consumer benefits of certain GAP agreements, this With respect to the proposed protection agency commenter asked the definition of ‘‘GAP Agreement,’’ an Commission to consider deeming it an 377One consumer attorney commenter requested industry association commenter unfair or deceptive act or practice to sell that the Commission clarify that warranty contended that the phrase ‘‘the actual disclaimers are not a valid defense to common law any add-on product for a price greater cash value of the insured’s vehicle in fraud and statutory consumer fraud, and that, if than the value of the product itself. The fraud is proven, warranty disclaimers are not an the event of an unrecovered theft or Commission declines to restrict the sale allowable defense to UCC actions. In response, the total loss’’ meant the value of the of add-on products at a price higher Commission notes that none of the provisions the vehicle at some point in the future, and Commission is finalizing state that warranty than the value of the product itself, asserted that future vehicle values disclaimers are a defense to common law fraud or absent additional information, including in UCC actions. cannot be accurately determined at the VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 648 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations time of sale. The proposed definition, Commission’s proposed provision was One association commenter argued however, did not prescribe how dealers vague and required more research. Some that the phrase ‘‘nitrogen-filled tire must calculate a vehicle’s cash value; industry association commenters related-products or services that contain rather, it explains that the term ‘‘GAP expressed concern regarding how the no more nitrogen than naturally exists Agreement’’ means an agreement to Commission would determine whether in the air’’ in proposed §463.5(a)(1) indemnify a vehicle purchaser for any an item would not benefit the consumer. would create a standard with which it difference between such value, however In response, the Commission provides may be impossible to comply because determined, in the event of an the following information. Proposed ‘‘no individual set of tires could have a unrecovered theft or total loss, and the §463.5(a) included enumerated higher total quantity of nitrogen than amount owed, regardless of what that examples of add-ons from which that in ‘the air’ that stretches around the difference may be. Upon examination of consumers would not benefit: (1) planet.’’381This commenter requested this phrase, however, the Commission nitrogen-filled tires that contain no that the Commission clarify to avoid has determined to remove the term more nitrogen than normally found in this possible reading. Here, the ‘‘insured’s’’ because it is extraneous and the air, and (2) products or services that Commission notes that the phrase does does not affect the operation of this do not provide coverage for the vehicle, not prohibit such tires if they do not definition: with or without the term, the the consumer, or the transaction, or are contain a ‘‘higher total quantity of phrase describes the manner in which a duplicative of warranty coverage for the nitrogen than that in the air’’; instead, qualifying GAP agreement determines vehicle, including a GAP agreement if charging for a nitrogen-filled tire would the amount to indemnify a vehicle the consumer’s vehicle or neighborhood fail by this standard if it contains ‘‘no purchaser or lessee. In context in this is excluded from coverage or the LTV more nitrogen than’’ the proportion that definition, it is clear without the term ratio would result in the consumer not ‘‘naturally exists in the air.’’ ‘‘insured’s’’ that the applicable benefitting financially.379As these One industry association commenter ‘‘Vehicle’’ is the one covered by the examples illustrate, determining that a requested more explanation from the GAP agreement. Omitting this consumer would not benefit from an Commission regarding what would be unnecessary term thus avoids confusion add-on involves analyzing objective considered ‘‘duplicative of warranty without substantively changing this standards under the circumstances, coverage’’ under proposed §463.5(a)(2), definition. such as whether the add-on provides while another contended that vehicle One industry association commenter benefits; whether the consumer is service contracts that overlap with a argued that reference to ‘‘GAP eligible to use the add-on; whether the manufacturer’s warranty may still insurance’’ should be removed from the add-on’s coverage excludes the vehicle provide additional, beneficial coverage, definition of ‘‘GAP Agreement’’ because at issue; and whether the add-on is such as after the manufacturer’s of the McCarran-Ferguson Act’s reverse- incompatible with the vehicle at issue. warranty expires. In response, the preemption of certain Federal laws that Thus, additional examples of add-ons Commission notes that this provision ‘‘invalidate, impair, or supersede’’ State that would be prohibited by this prohibits the sale of warranties that are laws enacted ‘‘for the purpose of provision include the following: duplicative. A dealer may offer a regulating the business of purported rust-proofing add-ons that do warranty add-on that has some overlap insurance.’’378As previously discussed not actually prevent rust; purported in coverage with existing warranty with regard to the definition of ‘‘Add- theft-prevention or theft-deterrent add- coverage for the vehicle, but the add-on on,’’ however, commenters have ons that do not prevent or deter theft; must provide additional protection. provided no evidence that the proposed and add-ons that the vehicle itself Moreover, other provisions of the Final or Final Rule would invalidate, impair, cannot support, including engine oil- Rule address misconduct relating to or supersede State laws enacted for the change services for a vehicle, such as an warranties, including by prohibiting purpose of regulating insurance. Rather electric vehicle, that does not use engine misrepresentations regarding material than affecting any State’s regulation of oil, or software or audio subscription information about any costs, limitation, insurance, the Final Rule prohibits services for a vehicle that cannot benefit, or any other aspect of the dealers from making misrepresentations support the software or utilize the warranty product or service. For regarding add-ons, from failing to subscription.380 example, under the Final Rule, a dealer disclose when add-ons are not required, may not mislead a consumer as to the and from charging for add-ons that 379See Consumer Fin. Prot. Bureau, ‘‘Supervisory benefits or conditions of the warranty, provide no benefit or for which the Highlights: Issue 19, Summer 2019’’ 3–4 (Sept. including amount or length of coverage consumer has not provided express, 2019), https://files.consumerfinance.gov/f/ (§463.3(b)). In addition, under informed consent. The Commission documents/cfpb_supervisory-highlights_issue-19_ §463.5(c), the dealer must obtain the therefore finalizes the definition of 092019.pdf (finding instances in which auto lenders sold ‘‘a GAP product to consumers whose low LTV express, informed consent of the ‘‘GAP Agreement’’ largely as proposed meant that they would not benefit from the consumer for the charge for the in its NPRM with minor modifications product’’). warranty (§463.5(c)). to correct a misplaced period, substitute 380See, e.g., Shannon Osaka, ‘‘Electric vehicles Other commenters, including an ‘‘Vehicle’’ for both ‘‘vehicle’’ and are hitting a road block: Car dealers,’’ Wash. Post industry association, asserted that this ‘‘motor vehicle’’ to conform with the (Nov. 9, 2023), https://www.washingtonpost.com/ climate-solutions/2023/11/09/car-dealerships-ev- proposed provision would cause dealers revised definition at §463.2(e), and sales (describing a dealership salesperson offering to stop offering beneficial products or remove an extraneous term— an electric vehicle-buyer a plan for oil changes and services. The Commission notes that its ‘‘insured’s’’—without changing the an extended warranty for a gas-powered car); see proposal did not require such a result definition’s operation. also Consumer Fin. Prot. Bureau, ‘‘Supervisory Highlights: Issue 24, Summer 2021’’ 3–4 (June and emphasizes that this provision While acknowledging that products or 2021), https://files.consumerfinance.gov/f/ would prevent charges to consumers for services that provide no benefit to documents/cfpb_supervisory-highlights_issue-24_ products or services that provide them consumers should not be sold, 2021-06.pdf (finding servicers added and commenters including an industry maintained unnecessary collateral protection insurance (CPI) when consumers had adequate insurance protection was provided after association also argued that the insurance and thus the CPI provided no benefit to repossession). the consumers, and also when consumers’ vehicles 381Comment of Competitive Enter. Inst., Doc. No. 37815 U.S.C. 1012(b). had been repossessed even though no actual FTC–2022–0046–7670 at 6. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 649 no benefit. To the extent that a deception or unfairness, the consumers knew that a dealership was prohibition against charging consumers Commission is finalizing this provision charging them for items from which for items that provide no benefit to the with minor modifications, including they would not benefit, such knowledge consumer may cause some dealers to one to correct a typographical error in likely would affect their commercial discontinue offering beneficial products, the placement of a hyphen in a phrase choices, including whether to continue consumers would be free to instead visit in proposed §463.5(a)(1). In the NPRM, with, or ultimately consummate, the other dealerships or to seek the same or the relevant phrase appeared as, ‘‘(1) vehicle sale or financing transaction.384 similar offerings from other providers. Nitrogen-filled tire related-products or Such charges are also unfair. When Dealers, of course, continue to be free services’’; in the Final Rule, the charges for any add-on accompany the under the Final Rule to offer beneficial corrected phrase will now read as add-ons to consumers—consistent with follows: ‘‘(1) Nitrogen-filled tire-related already lengthy and complex car-buying existing law and with other provisions products or services.’’ For clarity, the process, it is difficult to obtain consent of this Rule. Commission is also adding the word that is truly express and informed.385 Some commenters, including industry ‘‘that’’ before ‘‘are duplicative of Rather than prohibiting all such charges associations and a dealership warranty coverage;’’ capitalizing the or taking other measures, as specifically association, raised concerns about defined term ‘‘Vehicle’’ to conform with contemplated in the NPRM,386however, compliance administrability for this the revised definition at §463.2(e); and this provision focuses on charges for proposed provision in the case of adding language clarifying that the add-ons that would not benefit the products attached to a vehicle by requirements of §463.5(a) also are consumer. Charges for add-ons that manufacturers that may provide no ‘‘prescribed for the purpose of would not benefit the consumer can cost benefit, questioning whether, if this preventing the unfair or deceptive acts consumers thousands of dollars and proposal went into effect, dealers would or practices defined in this part, significantly increase the overall cost to be prohibited from charging for such including those in §463.3(a) and (b) and the consumer in the transaction, products. In response, the Commission paragraph (c) of this section.’’ including by increasing the amount refers commenters to the definition of Dealerships charging consumers for financed and total of payments, thereby ‘‘Add-on’’ or ‘‘Add-on Product(s) or add-ons from which the consumers increasing the risk the consumer will Service(s)’’ in §463.2(a). Notably, ‘‘Add- would not benefit involves deceptive ultimately default on repayment on’’ is defined, in relevant part, as any conduct. When a dealer charges ‘‘product(s) or service(s) not provided to consumers for add-ons that would not the consumer or installed on the Vehicle and implied claims pertaining to a product’s . . . benefit the consumers, the dealer either by the Vehicle manufacturer . . .’’ cost.’’ (citing Thompson Med. Co., Inc., 104 F.T.C.
388See, e.g., Auto Buyer Study, supra note 25, at §463.5(b)(1) applied before the dealer view and sign additional documentation 13–15, 17–18. referenced any aspect of financing for a during the purchase, finance, or lease 389See Removatron Int’l Corp. v. Fed. Trade specific vehicle, aside from the offering process, in what is already a document- Comm’n, 884 F. 2d 1489, 1497 (1st Cir. 1989) price, or before consummating a non- heavy, time-consuming, and (‘‘Disclaimers or qualifications . . . are not adequate to avoid liability unless they are financed sale. Proposed §463.5(b)(2) complicated transaction. The sufficiently prominent and unambiguous to change required similar steps before charging Commission further notes that, as a the apparent meaning of the claims and to leave an for any optional add-on in a financed matter of existing law, dealers are accurate impression. Anything less is only likely to transaction, including that the dealer already prohibited from engaging in cause confusion by creating contradictory double meanings.’’). disclose, and offer to consummate the misrepresentations regarding add-ons 390Even in the hypothetical scenario where some transaction for, a vehicle’s cash price and from charging for add-ons without consumers could have avoided the injury because without optional add-ons plus the express, informed consent—conduct they understood that an add-on would not benefit finance charge for such transaction, which the Final Rule prohibits as well. them but wanted to pay extra for the add-on separately itemizing the components of Accordingly, the Commission has anyway, the dealer’s conduct in selling non- beneficial add-ons would still be unfair because it the offer. This proposed provision also determined not to include this provision substantially injures other consumers who do not required a written, dated, time-stamped, in its Final Rule. wish to pay for items that would not benefit them and signed declination. Finally, The Commission will continue to and, as discussed in the SBP text, cannot reasonably proposed §463.5(b)(3) required dealers monitor the motor vehicle marketplace avoid the harm, and no countervailing benefits outweigh the costs. See FTC v. Amazon.com, Inc., to disclose the cost of the transaction, for issues pertaining to unselected or 2016 U.S. Dist. LEXIS 55569, *15, *18–21 (W.D. whether financed or not, without any undisclosed add-ons, and will consider Wash. Apr. 26, 2016) (finding unfairness even optional add-ons, as well as the charges implementing additional measures in though some consumers could have avoided the for the optional add-ons selected by the the future if it determines such charge). Additionally, consumers who truly wish to purchase add-ons that do not benefit them may still consumer, separately itemized. Each measures are necessary to address be able to do so directly from the add-on provider. proposed provision required clear and deceptive or unfair practices relating to 391See Nat’l Auto. Dealers Ass’n et al., conspicuous disclosure of specific add-ons. ‘‘Voluntary Protection Products: A Model information relating to optional add-ons Dealership Policy’’ 5 (2019), https://www.nada.org/ and their associated costs.
regulatory-compliance/voluntary-protection- 393See, e.g., Comment of Nat’l Consumer L. Ctr. products-model-dealership-policy (explaining that As discussed in the following et al., Doc. No. FTC–2022–0046–7607 at 30–31. when determining which voluntary protection paragraphs, the Commission has Instead, advocates recommended that the products to offer to customers, ‘‘the dealership determined not to finalize the proposed Commission require a cooling-off period for add- should have confidence in the value that the ons, similar to that required by the Commission for provisions at §463.5(b) regarding product offers to customers,’’ including that the door-to-door and other off-premises sales, which dealership should understand ‘‘whether its would grant consumers time to review the coverage is already provided by another product 392See 15 U.S.C. 57a(a)(1)(B) (the Commission paperwork after the transaction, and to cancel being purchased by the customer,’’ and stating ‘‘[i]t ‘‘may include requirements prescribed for the unexpected or otherwise unwanted add-ons for a is essential that customers have a clearly defined purpose of preventing’’ unfair or deceptive acts or full refund. Id. This comment is addressed when path to receiving such benefits.’’). practices). discussing §463.5(c) in SBP III.E.2(c). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 651 (c) Any Item Without Express, Informed consumers substantial sums of money Commission’s law enforcement Consent through various common deceptive and experience, consumers have paid fraudulent practices ranging from unauthorized charges on years-long Section 463.5(c) of the proposed rule altering documents, concealing contracts without learning of the prohibited motor vehicle dealers, in documents, having consumers sign charges.398Accordingly, the connection with the sale or financing of vehicles, from charging consumers for blank documents, lying about the Commission will continue to monitor any item unless the dealer obtains the material terms of the deal, altering the the market to determine whether, after express, informed consent of the prices, adding on other contracts or adoption of this Rule, it appears that a consumer for the charge. Upon careful items never discussed and selling cooling-off period or other measures review and consideration of the vehicles with undisclosed damages and would be warranted. comments, the Commission is finalizing defects.396 Other commenters, including • I have worked in the automotive consumer advocacy organizations, this provision with one modification business for many year[s]. I realize there emphasized the importance of having from its original proposal: the addition of language to the end of §463.5(c) are plenty of dealers around the US that disclosures and other documents clarifying that the requirements in have deceptive business practices, available in the language used to §463.5(c) ‘‘also are prescribed for the however this isn’t the case for all negotiate the sale or lease. Here, the purpose of preventing the unfair or dealers. I believe there can be laws that Commission notes that a dealer does not deceptive acts or practices defined in can be put in place to help prevent obtain the express, informed consent of this part, including those in §§463.3(a) dealers from adding additional backend the consumer if the consumer’s assent to and (b), 463.4, and paragraph (a) of this products without consent or a charge is ambiguous or based on a section.’’ In addition, the Commission is knowledge.397 disclosure the consumer does not easily finalizing the corresponding definition Others supported the proposed understand.399Thus, if a dealer uses of ‘‘Express, Informed Consent,’’ now at provision and urged the Commission to one language during negotiations and a §463.2(g). include additional measures, such as a different language in its contracts, and Many commenters favored the thirty-day ‘‘cooling-off’’ period within the consumer does not understand and proposed provision and expressed the which consumers would be able to assent to the charges, the dealer is need for such a provision. For example: receive a full refund for any add-ons. A violating §463.5(c). Furthermore, the • In one instance a salesman who number of commenters, including Commission notes that the definition of appeared busy and trying to help me consumer advocacy organizations, ‘‘Express, Informed Consent’’ it is efficiently navigate the process rushed contended that such an additional time finalizing at §463.2(g) requires, inter me to sign a small paper, ‘‘just sign this frame to review, and potentially cancel, alia, a clear and conspicuous disclosure quickly and we’ll be on our way,’’ I was any add-ons would counter the high- of what the charge is for and the amount told, without disclosure that they were pressure, confusing environment of the of the charge, and the Commission’s selling me something that I did not dealership F&I office and undermine definition of ‘‘Clear(ly) and want. I found it later and felt cheated.394 any efforts to misrepresent add-on Conspicuous(ly),’’ at §463.2(d)(5), • They made me sign the sales bill on charges and coverage. Such commenters requires disclosures to appear ‘‘in each an electronic device, but the finance guy also indicated that such a provision language in which the representation never pointed to me any number I was would allow consumers the opportunity that requires the disclosure appears.’’ Other commenters, including a getting charge[d] for, and never pointed to compare prices and providers, and consumer advocacy organization and a to me the total amount I was getting ultimately help increase competition in consumer protection agency, billed for. He seem[ed] to be in a hurry the marketplace. A few individual recommended the Commission and he even told me he had people commenters requested that the prescribe additional requirements for waiting for him to see. I think it was all Commission provide a cooling-off obtaining express, informed consent for planned to push the buyer to blindly period not only for add-ons, but for the charges, such as boxes for signatures sign the bill of sale without explaining full vehicle purchase, and a prohibition and date-and-time recordings, and a anything because he was scrolling the on charging non-refundable deposits. requirement that dealers comply with electronic pages in a hurry and going The Commission agrees that a the E-Sign Act. Other commenters also straight to the sign box line. I thought ‘‘cooling off’’ provision could offer discussed obtaining consent through I signed the agreed amount, I trust them, consumers additional protection from electronic signatures. Commenters but, instead, they charge me for things unwanted add-ons; however, additional including consumer advocacy I never agreed on. I went back to the information would assist the organizations, for instance, reported dealer in less than 48 hours when I Commission in evaluating the potential cases wherein documents that were discovered the fraud and asked them to benefits of such a provision. Such signed and supposedly provided remove the extra fees they charged me information might include, for example, electronically to consumers, were never for, they refused and they forced me to what length a cooling-off period would actually delivered to the consumer, or pay for it, I asked them and requested need to be in order to offer adequate delivered days later. According to these them to take the car back, they refused protection to consumers and to commenters, some consumers would it again, at the end, they gave me a little competition, or how consumers would sign on a small signature pad where bit of a discount, but, not compared to most effectively be made aware of such they could not see the terms of the what I got charged for. . . .395 a cooling-off period in the course of the • I am an attorney in private practice complicated, lengthy, and document- document being signed. Other practitioner commenters reported that in NY representing consumers for 33 heavy vehicle sale or financing years. It never ceases to amaze me how transaction. Such information would be 398See discussion in SBP II.B.2.
car dealers defraud honest trusting particularly relevant given that, in the 399See §463.2(g) (defining ‘‘Express, Informed Consent’’ to include an affirmative act 394Individual commenter, Doc. No. FTC–2022– 396Individual commenter, Doc. No. FTC–2022– communicating ‘‘unambiguous assent to be 0046–0794. 0046–0073. charged’’); §463.2(d) (defining ‘‘Clear(ly) and 395Individual commenter, Doc. No. FTC–2022– 397Individual commenter, Doc. No. FTC–2022– Conspicuous(ly)’’ to include a manner that is 0046–0671. 0046–9917. ‘‘easily understandable’’).
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 652 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations consumers’ electronic signatures were consent to charges, contending that statutes and rules enforced by the applied to contracts with very different additional detail was needed, or that the Commission include express, informed terms from what the consumers believed provision and associated definition of consent requirements for consumer they were accepting. An individual ‘‘Express, Informed Consent’’ were too purchases,409and similar provisions commenter recommended that dealers vague. The Commission notes, however, have appeared in Commission orders be required to provide paper documents that the phrase ‘‘Express, Informed resolving charges that motor vehicle where requested and consumers be Consent’’ is consistent with existing dealers or other sellers have levied allowed to consent on paper documents legal standards.401Commission unauthorized charges on consumers.410 only, noting that elderly consumers or enforcement actions over the years have In short, the prohibition in §463.5(c) those for whom English is a second challenged as deceptive or unfair the against charging consumers for products language may have difficulty with failure to get express, informed consent or services without their express, electronic signatures. Another to charges, including in actions informed consent, and the individual commenter expressed the involving motor vehicle dealers and corresponding definition of ‘‘Express, view that anyone needing assistance others: Informed Consent’’ in §463.2(g) are understanding the sales price or • Rushing consumers through stacks consistent with existing law in disclosures should be provided of auto paperwork more than 60 pages articulating what motor vehicle dealers independent legal counsel at the deep and requiring over a dozen must do—and already should be doing. dealership’s expense. signatures, where the paperwork The Commission further notes that While the Commission agrees that included charges for unwanted add- the proposed definition of ‘‘Express, additional measures to promote express, ons.402 Informed Consent’’ provided informed consent could reduce the • Double charging certain fees information regarding what was incidence of unauthorized charges and without consumers’ knowledge or required by §463.5(c): an affirmative act aid with enforcement efforts, the consent in highly technical documents by the consumer communicating Commission has determined not to presented at the close of a long unambiguous assent to be charged, include in this Final Rule provisions financing process after an already made after receiving and in close that would require new forms during lengthy process of selecting a vehicle proximity to a clear and conspicuous the vehicle sale or financing transaction. and negotiating over its price.403 disclosure, in writing, and also orally This way, law-abiding dealers would • Presenting consumers with for in-person transactions, of the not have to change their practices for preprinted sales and financing forms following: (1) what the charge is for; and obtaining express, informed consent. that included add-ons consumers had (2) the amount of the charge, including, Thus, the Commission declines to add not requested, and rushing consumers if the charge is for a product or service, further requirements, including those through the closing process while all fees and costs to be charged to the involving signature boxes or date-and- directing them where to sign forms, consumer over the period of repayment time recordings. Regarding the E-Sign including forms that were blank.404 with and without the product or service. Act, nothing in the Rule modifies • Charging consumers more for a As is evident from this language, there compliance obligations under this Act. product or service than they agreed to Instead, the Final Rule requires that, pay.405 Inc21.com Corp., 745 F. Supp. 2d 975, 1005 (N.D. regardless of whether any given • Charging consumers for more Cal. 2010), aff’d, 475 F. App’x 106 (9th Cir. 2012). 40915 U.S.C. 8402(a)(2), 8403(2) (Restore Online signature may have been obtained products than they requested.406 Shoppers’ Confidence Act); 16 CFR 310.4(a)(7) through electronic or other means, the • Cramming charges onto consumers’ (Telemarketing Sales Rule). dealer must obtain the express, bills for services that the consumers did 410The Commission has required express, informed consent of the consumer to not request without the consumers’ informed consent provisions in orders against motor vehicle dealers and others. See Stipulated any item for which the dealer charges knowledge or consent.407 Order at Art. IV, Fed. Trade Comm’n v. Passport the consumer. Furthermore, the Courts have found the failure to Auto. Grp., Inc., No. 8:22–cv–02670–TDC (D. Md. Commission notes that a dealer has not obtain express, informed consent to be Oct. 18, 2022); Stipulated Order at Art. II, Fed. a violation of the FTC Act.408Other Trade Comm’n v. North Am. Auto. Servs., Inc., No. obtained express, informed consent if a 1:22–cv–01690 (N.D. Ill. Mar. 31, 2022) Stipulated dealer has consumers sign an electronic Order at Art. II, Fed. Trade Comm’n v. Liberty keypad without seeing and 401See, e.g., Fed. Trade Comm’n v. Amazon.com, Chevrolet, No. 1:20–cv–03945 (S.D.N.Y. May 22, Inc., 71 F. Supp. 3d 1158, 1163 (W.D. Wash. 2014). 2020); Stipulated Order at Art. III, Fed. Trade understanding the terms, or applies 402Complaint ¶¶24–25, 29–49, 76, Fed. Trade Comm’n v. Consumer Portfolio Servs., No. 14–cv– their electronic signatures on contracts Comm’n v. North Am. Auto. Servs., Inc., No. 1:22– 00819 (C.D. Cal. June 11, 2014). Similarly, the with terms different from those to which cv–01690 (N.D. Ill. Mar. 31, 2022). Commission has required such provisions in orders the consumer agreed.400In such 403Complaint ¶¶17–19, 44, Fed. Trade Comm’n in other contexts. See, e.g., Stipulated Order at Art. circumstances, the consumer has not v. Liberty Chevrolet, No. 1:20–cv–03945 (S.D.N.Y. III, Fed. Trade Comm’n v. Yellowstone Cap. LLC, May 21, 2020). No. 1:20–cv–06023–LAK (S.D.N.Y. May 4, 2021); demonstrated informed consent, or 404Complaint ¶¶59–64, 91, Fed. Trade Comm’n Stipulated Order at Art. IV, Fed. Trade Comm’n v. unambiguous assent to be charged, v. Universal City Nissan, No. 2:16–cv–07329 (C.D. Prog. Leasing, No. 1:20–cv–1668–JPB (N.D. Ga. Apr. including because the signatures are not Cal. Sept. 29, 2016). 22, 2020); Decision and Order at Art. VI, Bionatrol Health, LLC, No. C–4733 (F.T.C. Mar. 5, 2021);
in close proximity to clear and 405See, e.g., Complaint ¶¶29, 47, Fed. Trade Stipulated Order at Art. I.E, Fed. Trade Comm’n v.
conspicuous disclosures regarding the Comm’n v. Yellowstone Cap. LLC, No. 1:20–cv– BunZai Media Grp., Inc., No. CV 15–4527–GW 06023–LAK (S.D.N.Y. Aug. 3, 2020).
charges. (PLAx) (C.D. Cal. June 27, 2018); Stipulated Order 406See, e.g., Complaint ¶¶11–14, 21, Bionatrol Other commenters, including industry Health, LLC, No. C–4733 (F.T.C. Mar. 5, 2021). at Art. I, Fed. Trade Comm’n v. T-Mobile USA, Inc.,
and dealership associations, claimed 407See, e.g., Complaint ¶¶8–9, 42, Fed. Trade Stipulated Order at Art. I, Fed. Trade Comm’n v. that the Commission did not provide Comm’n v. T-Mobile USA, Inc., No. 2:14–cv–00967– AT&T Mobility, LLC, No. 1:14–cv–03227–HLM enough information regarding what JLR (W.D. Wash. July 1, 2014); Complaint ¶¶9, 49, (N.D. Ga. Oct. 8, 2014); Decision and Order at Art. would constitute express, informed Fed. Trade Comm’n v. AT&T Mobility, LLC, No. I, Google, Inc., No. C–4499 (F.T.C. Dec. 2, 2014); 1:14–cv–03227–HLM (N.D. Ga. Oct. 8, 2014). Consent Order, Apple Inc., No. C–4444 (F.T.C. Mar. 408See, e.g., Fed. Trade Comm’n v. FleetCor 27, 2014); cf. Fed. Trade Comm’n v. Kennedy, 574 400See §463.2(g) (defining ‘‘Express, Informed Techs., Inc., 620 F. Supp. 3d 1268, 1333–38 (N.D. F. Supp. 2d 714, 720–21 (S.D. Tex. 2008) Consent’’ to include requiring clear and Ga. 2022); Fed. Trade Comm’n v. Amazon.com, (consumers charged without express, informed conspicuous disclosures of what the charge is for Inc., No. C14–1038–JCC, 2016 WL 10654030, at *8 consent for web services could not reasonably avoid and the amount of the charge). (W.D. Wash. July 22, 2016); Fed. Trade Comm’n v. harm when told that websites were ‘‘free’’). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 653 must be an affirmative act that itself made after receiving, and in close topics to the specifics of their business conveys the consumer’s unambiguous proximity to, a clear and conspicuous operations. assent to the specific charge: it must disclosure of what the charges are for Some dealership association clearly and expressly communicate both and the amount of the charges. commenters expressed concern that that the consumer has been informed Some industry association such a provision would be inconsistent about the charge and consents to the commenters argued that the proposed with State laws and would complicate charge. This act cannot be susceptible to definition was too prescriptive, and the car buying experience. While the alternative interpretations, i.e., that the would require, for instance, video Commission is not aware of any laws consumer meant to communicate records to demonstrate compliance, or that allow dealers to charge consumers something other than the consumer’s that the proposed language was without their express, informed consent, authorization to be charged for the overreaching, and requiring express, and thus is not aware of any specific add-on or other item in informed consent for every item on a inconsistences with this provision, question. For example, a consumer contract would be complicated and §463.9 of the Final Rule specifies what might ask, ‘‘how much would it cost to time-consuming. The Commission notes dealers must do in the case of actual get the car with [a specific add-on]?’’ again that, under current law, conflicts with State law. State laws may Such a statement does not convey dealerships are already required to provide more or less specific unambiguous assent to be charged for obtain consumers’ express, informed requirements—including requirements the mentioned add-on; rather, it could consent to charges. If dealers are already that provide greater protection—as long merely convey curiosity, interest, or a obtaining such consent, as is required as they do not conflict with the Final desire to evaluate options. Similarly, if by law, they need not take additional Rule, as set forth in §463.9. The a consumer responds to a salesperson’s steps, such as by using a separate Commission also notes that to the extent description of an add-on by saying disclosure form or videos, or by there is overlap with existing law, there ‘‘OK,’’ this response may merely spending additional time during the is no evidence that duplicative transaction to comply with this prohibitions against deceptive and confirm that the consumer had heard or provision. unfair conduct, including prohibitions understood information and does not A dealership association commenter against charging consumers without indicate the consumer’s unambiguous requested examples of recordkeeping express, informed consent, have harmed assent to purchase, let alone be charged and best practices evidencing oral consumers or competition. for, such an item.
act. The Commission notes that the definition of ‘‘Clear(ly) and is beyond what is required under the extent to which these, or other, acts Conspicuous(ly)’’ at §463.2(d)(7), Truth in Lending Act. The Commission indicate ‘‘Express, Informed Consent’’ dealers are prohibited from responds as follows: Consistent with its depends on circumstances and context. contradicting information that is plain meaning, the term ‘‘item’’ is A consumer signing a lengthy document required to be disclosed; thus, for broader than, and thereby encompasses, with pre-checked boxes does not, by example, dealers’ oral representations the term ‘‘Add-on Product(s) or itself, demonstrate express, informed must be consistent with the written Service(s),’’ which is limited by its consent. This is particularly so at the disclosure required for obtaining definition in §463.2 of the Final end of an hours-long transaction, at express, informed consent. Best Rule.411As proposed, §463.5 addressed which point actions that, under other practices for satisfying the requirement ‘‘Dealer Charges for Add-ons and Other circumstances, may indicate assent are to obtain express, informed consent Items.’’412It did so in recognition of the increasingly less likely to do so include presenting key information and fact that add-ons are one type of ‘‘item,’’ unambiguously, given that at the close finalizing actual terms early in the but that ‘‘Other Items’’ for which a of a transaction, consumers expect to be transaction—for example, by including dealer might charge exist as well. Thus, finalizing previously agreed-upon terms full cost information, such as estimated as proposed, §463.5 applied to charges instead of discussing new products or taxes, costs of any selections made by generally, whether such charges were services hours into the deal. For the consumer, and any other for an add-on or for another item. As express, informed consent to be components of cost, on dealer previously discussed, charging effective, the consumer must websites—and maintaining records that consumers without their express, understand what a charge is for and the this was done. The Commission notes informed consent to the charge has long amount of the charge, including all costs that, as a transaction progresses, been an unfair or deceptive practice and fees over the length of the payment consumers expect to be finalizing under the FTC Act. This has been the period. A signed and dated document previously agreed-upon terms instead of case regardless of what the charge is for. would not satisfy the requirement for discussing new charges and new Accordingly, dealers already should be express, informed consent, for example, products or services. In lieu of finalizing obtaining consumers’ express, informed if the consumer was directed to sign the additional formal mandates in the Rule final page of a contract or an electronic regarding recordkeeping and best 411See NPRM at 42046. The term ‘‘item’’ includes signature pad and the signed and dated practices evidencing express, informed ‘‘a distinct part in an enumeration, account, or document did not reflect the terms to consent, the Commission recognizes series’’ as well as ‘‘a separate piece of news or which the consumer had agreed. In such that industry members and other information.’’ See Item (defs. 1, 3), Merriam- Webster.com Dictionary, https://www.merriam- cases, the signed and dated document stakeholders will have significant room webster.com/dictionary/item (last visited Sept. 14, does not represent the consumer’s to develop self-regulatory programs and 2023). unambiguous assent to be charged, guidance tailoring these and other 412See NPRM at 42046 (emphasis added). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 654 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations consent for charges, whether it is for an such charges influence the total of authorization or sees that charges for a Add-on or any other item, regardless of payments for the transaction. particular item are occurring what may be required under other laws. An industry association comment substantially more frequently at a given stated that, were the Commission’s dealership than at others, the financing Commenters, including this same proposal to become final, the company can take steps to make sure industry association commenter, also Commission would be able to obtain the dealer is obtaining express, questioned how a dealership would monetary relief from dealers for harmed informed consent. Further, if a financing calculate ‘‘the amount of the charge . . .
413This commenter also contended that this Trade Regulation Rule Concerning Preservation of provision would result in many disclosures when Consumers’ Claims and Defenses (May 3, 2012), 417See Complaint ¶¶29–32, Fed. Trade Comm’n combined with proposed §463.5(b). Comment of https://www.ftc.gov/system/files/documents/ v. Tate’s Auto Ctr. of Winslow, Inc., No. 3:18-cv- Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022– advisory_opinions/16-c.f.r.part-433-federal-trade- 08176–DJH (D. Ariz. July 31, 2018) (alleging a 0046–8368 at 98–99. As discussed previously, the commission-trade-regulation-rule-concerning- financing entity ceased business with Tate’s Auto Commission declines to finalize proposed preservation-consumers-claims/ Center after concerns about loan falsification and §463.5(b). 120510advisoryopinionholderrule.pdf (last visited substantial losses). 414See NPRM at 42045. Dec. 5, 2023). 418See SBP II.B.2. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 655 dealer. There are no countervailing they would not benefit; consumers comments, and the provisions the benefits to consumers or to competition typically do not provide informed, Commission is finalizing. that outweigh this injury. To the unambiguous assent to be charged for Section 463.6(a) of the proposed rule contrary, if all dealers obtained express, additional products from which they required motor vehicle dealers to create informed consent to charges, they could not benefit unless they are led to and retain, for a period of twenty-four would not lose business to dealers who believe, directly or by omission, that months from the date the record is do not do so. these products would be beneficial.
Ga. Aug. 9, 2022); Fed. Trade Comm’n v. Inc21.com ‘‘vehicle.’’ In the following paragraphs, recordkeeping provisions, explaining Corp., 745 F. Supp. 2d 975, 1001–03 (N.D. Cal. the Commission discusses each that these proposed provisions were Sept. 21, 2010). proposed recordkeeping requirement, needed to address ‘‘bait and switch’’ 420See 15 U.S.C. 57a(a)(1)(B) (the Commission the comments the Commission received tactics, provide evidence of whether ‘‘may include requirements prescribed for the on each such requirement as well as the required disclosures are made, and purpose of preventing’’ unfair or deceptive acts or practices). Commission’s responses to such identify consumers harmed by illegal VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 656 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations practices.421Here, the Commission vehicle financing contracts, in order to commenters contended that the notes that record retention requirements minimize burdens. In the event the proposed requirements were new are necessary to preserve written Commission subsequently determines obligations that went beyond specific materials that reflect the transactions that a twenty-four-month retention State recordkeeping requirements. Some between the dealer and purchasing period is insufficient to ensure dealership associations argued that consumers, and to assist the compliance with this Rule, the existing State recordkeeping Commission to enforce its Rule by Commission may consider other requirements are sufficient and that a enabling it to ascertain whether dealers measures in the future. Commission rule was unnecessary. One are complying with its requirements; to In addition, a number of commenters, such commenter argued that the identify persons who are involved in including consumer advocacy existence of overlapping, but different, any challenged practices; and to identify organizations, recommended additional State and Federal standards may make consumers who may have been injured. provisions, including an explicit compliance difficult for motor vehicle Such requirements are particularly requirement to retain language- dealers. important in the case of complicated, translated versions of required records, In response, the Commission notes lengthy, and document-heavy vehicle and a requirement to make retained that the recordkeeping requirement is sale or financing transactions, in which records available to consumers upon necessary to ensure motor vehicle dealer law violations may be more difficult for request. Regarding language-translated compliance with the Final Rule, and consumers and others to detect. Indeed, versions of required records, therefore may have different the Commission routinely includes §463.6(a)(3), (a)(4), and (a)(5) require requirements than State standards. To recordkeeping requirements in its dealers to retain copies of ‘‘all’’ listed provide dealers with flexibility and to rules.422 records, while §463.6(a)(1) mandates minimize burden, however, the Several commenters, including that dealers retain ‘‘Materially different’’ proposed rule permitted dealers to consumer advocacy organizations, copies of records. Thus, for the records retain records ‘‘in any legible form,’’ consumer protection agencies, a group listed in §463.6(a)(3), (a)(4), and (a)(5), including ‘‘the same manner, format, or of State attorneys general, and any translations are required to be place’’ in which records are kept in the individual commenters, urged the retained; in the case of §463.4(a)(1), the ordinary course of business. To the Commission to consider expanding the Rule requires materially different extent dealers have fashioned their proposed twenty-four-month record translations to be maintained.423The ordinary record retention practices retention period, noting that the Commission therefore has determined around State recordkeeping standards, contract period for most retail not to add to the recordkeeping section the proposed rule thus allowed for installment contracts is much longer of the Rule a standalone requirement to record retention in the form required by than twenty-four months, and that State retain translated versions. The State recordkeeping standards.
limitations periods for claims relating to Commission will continue to monitor Additionally, as discussed in the the subject matter of the Commission’s the marketplace to determine whether following paragraphs, the Commission proposed rule often extend well beyond additional action or protections are is not finalizing recordkeeping this proposed timeframe. Numerous warranted.
of the consumer’s financing contract. retained records to consumers upon The Commission understands that request. Such a requirement may be One industry association commenter there would be benefits to a longer beneficial; however, it is not clear to suggested that this requirement would period, especially given that vehicle what extent dealers currently refuse to increase risks of identity theft and raise financing repayment terms are often far provide consumers with such records, privacy concerns. The Commission longer than twenty-four months, and and there is insufficient information in notes that many dealers already have that many dealers likely already the rulemaking record to assess the obligations to retain customer records maintain, in the ordinary course of impact of—or need for—such a under State law.425Dealers are required business, the types of records set forth modification of the existing requirement to have systems in place to protect this in proposed §463.6. The Commission, to retain and preserve materials in the information, given that the failure to however, is also mindful that other Rule. The Commission will continue to adequately protect such information commenters raised concerns about the monitor the motor vehicle marketplace, violates existing law, including section costs associated with record retention, including issues relating to information 5 of the FTC Act and the Commission’s including costs that would increase access, to determine whether additional Standards for Safeguarding Customer with any extension of the retention action or protections are warranted. Information, also known as the period. Rather than limiting the types of Other commenters—particularly auto records to be maintained, and thus industry participants—objected to the preventing unfair or deceptive acts or practices. See hampering the Commission’s ability to proposed recordkeeping 15 U.S.C. 57a(a)(1)(B). The Commission routinely includes recordkeeping requirements in rules, see, ensure compliance with the Final Rule, requirements.424Several such e.g., Telemarketing Sales Rule, 16 CFR 310.5; the Commission has determined to Business Opportunity Rule, 16 CFR 437.7, and adopt a retention period that is shorter 423See §463.2(j). courts have ordered companies to maintain records than the time period of many motor 424One industry commentor questioned the in FTC orders, see, e.g., Final Judgment at 20–21, utility of records in FTC actions. This commenter Fed. Trade Comm’n v. Elegant Sols., Inc., No. 8:19– also stated that the FTC is not a supervisory agency cv–01333–JVS–KES (C.D. Cal., July 17, 2020); Order 421Comment of Nat’l Consumer L. Ctr. et al., Doc. and thus should not be seeking to create a records for Permanent Injunction and Monetary Judgment at No. FTC–2022–0046–7607 at 48–49; see also inspection scheme. As noted previously, 27–28, Fed. Trade Comm’n. v. Consumer Defense, Comment of N.Y.C. Dep’t of Consumer and Worker recordkeeping requirements are necessary here to LLC, No. 2:18–cv–00030–JCM–BNW (D. Nev. Dec. 5, Prot., Doc. No. FTC–2022–0046–7564 at 6 (noting prevent unfair and deceptive practices by 2019). retention requirements are vital to investigations, mandating preservation of written materials that 425See, e.g., Va. Code sec. 46.2–1529 (requiring particularly with respect to mandatory disclosures). reflect dealer transactions and to enable effective retention for five years of ‘‘all dealer records’’ 422See, e.g., Telemarketing Sales Rule, 16 CFR enforcement of the Rule. The Commission has the regarding, among other things, vehicle purchases, 310.5; Business Opportunity Rule, 16 CFR 437.7. authority to prescribe rules for the purpose of sales, trades, and transfers of ownership). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 657 Safeguards Rule.426Thus, to the extent in the vehicle-buying or -leasing contended that retaining materially the Final Rule requires dealers to collect process, and often contain key different add-on lists would be difficult, personal information beyond that which representations about pricing, given the scope of the term ‘‘Add-on’’ they are already collecting, they should payments, and other terms. Scripts and and the consequent size of the list as already have systems in place to protect training materials are important well as its dynamic nature. One such information. evidence of a dealer’s compliance dealership association commenter Some commenters raised concerns program regarding the Final Rule’s argued that the proposed requirement to about the requirement in proposed requirements, including of the retain add-on lists was unnecessary, §463.6(a)(1) to preserve, inter alia, information and instructions that contending that concerns could be materially different advertisements, dealership staff are given with respect to addressed as they arise, and requesting sales scripts, and marketing materials. the areas that are addressed by the Final to replace this proposed requirement One such dealership association Rule. Furthermore, regarding the with a requirement to retain a master commenter argued that dealers should contention that advertisements are copy of each insurance product, service not be required to retain sales scripts, available publicly or could be requested contract, or other add-on in the dealer’s training materials, and marketing separately, a core purpose of the general business file. After carefully materials, while another dealership recordkeeping requirement is to ensure considering the comments, the association commenter argued that that disseminated representations are Commission has determined not to dealers should not be required to preserved for a sufficient period of time finalize the proposed requirement at maintain advertisements, positing that to allow for compliance concerns to be §463.4(b) to disclose an add-on list, and these materials are publicly available addressed. A compliance regime that, consequently will not be finalizing the and could be requested from advertisers contrary to the Commission’s proposal, proposed requirement at §463.6(a)(2) as concerns arise with respect to allowed the destruction of that dealers retain materially different particular ads. Commenters including advertisements after they have been add-on lists. two dealership organizations argued publicly presented, or that requires the Several commenters, including that digital advertisements would be Commission to try to obtain materials industry associations, argued that difficult to retain, with one such from advertisers or third parties, would certain of the proposed requirements to commenter urging the Commission to not serve this purpose. preserve written material, including adopt an approach that would permit With respect to the scope of written communications under dealers to retain a representative advertisements that must be retained, proposed §463.6(a)(3) and written example of a vehicle advertisement and the recordkeeping requirement does not consumer complaints, and inquiries and the underlying data used to populate differ with respect to the form of the responses about vehicles referenced in vehicle ads. The other such commenter advertisement, since the same §463.4, under proposed §463.6(a)(5), suggested that the proposed enforcement concerns are raised would be unduly burdensome. recordkeeping requirement could be regardless of whether an ad is presented Generally, these commenters contended unduly burdensome because ‘‘all in digital, hardcopy, email, audio, that the various ways consumers may materials’’ related to its online televised, or other format. The communicate with dealers—including inventory ‘‘could be deemed some recordkeeping requirement does not chat features on a dealer’s website, version of materially different require all advertisements to be emails and text messages with advertisements and marketing materials retained, however, as §463.6(a)(1) salespersons, and social media posts— regarding price or financing of a motor specifically includes the proviso that ‘‘a would require the development of new vehicle.’’ Another dealership typical example of a credit or lease and onerous preservation systems. A organization commenter raised a similar advertisement may be retained for dealership organization commenter concern about website listings and advertisements that include different raised concerns about retaining text questioned whether the term Vehicles, or different amounts for the messages and emails, contending that ‘‘advertisement’’ includes television ads same credit or lease terms, where the salespeople may use their personal and email campaigns. advertisements are otherwise not phones and email addresses, even if the After considering these comments, the Materially different.’’ Regarding the dealership has policies against such use. Commission has determined that the commenter’s proposal to allow dealers One industry association commenter proposed recordkeeping requirements in to retain a ‘‘representative’’ example of argued that third parties might have §463.6(a)(1) strike an appropriate an advertisement with digital data that records related to add-ons and that this balance by requiring the retention of can recreate different versions of the provision should only apply to materials needed to enable effective advertisement, this provision, as ‘‘complaints’’ relating to add-ons enforcement while only requiring such proposed, permitted dealers to preserve instead of ‘‘inquiries’’ relating to add- records to be retained for twenty-four typical examples of advertisements in ons. One dealership association months and in any legible form. this manner so long as such records are commenter argued that dealers should Advertisements and marketing materials already kept in in the ordinary course of not be required to retain consumer regarding the price, financing, or lease business, capture all differences that complaints, contending it should be the of a motor vehicle are critical to would be material to consumers, and businesses’ decision whether to accurately show how the offers have maintain such materials, and also determining compliance with virtually been presented to consumers. Materially arguing that the Rule should not require, every provision in the Final Rule, as different website listings, television under proposed §463.6(a)(4), the they are often consumers’ first contact advertisements, and email campaigns preservation of materials such as pricing must be preserved, consistent with the options presented to consumers, 42615 U.S.C. 45; 16 CFR 314; see also Decision and Order, LightYear Dealer Techs., LLC, No. C– plain meaning of the terms used in the contending that such materials should 4687 (F.T.C. Sept. 3, 2019) (consent order); FTC section. be limited to the two parties to the Business Guidance, ‘‘FTC Safeguards Rule: What With respect to proposed agreement. Your Business Needs to Know,’’ https:// §463.6(a)(2)’s requirement to maintain After considering these comments, the www.ftc.gov/business-guidance/resources/ftc- copies of all materially different add-on Commission has determined to finalize safeguards-rule-what-your-business-needs-know (last visited Dec. 5, 2023). lists, an industry association commenter requirements to retain written materials VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 658 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations under §463.6(a)(3), (4), and (5), with a of vehicles, as with any business, terms of actual violations, and the vast limiting modification to §463.6(a)(4). dealers should ensure that their majority of consumers who are These requirements are necessary to employees are communicating with subjected to unlawful practices in this address unfair and deceptive practices consumers through appropriate area may not realize they are being by mandating that dealers preserve channels that can be monitored and victimized.431Further, the Commission written materials that reflect the controlled by the dealership. has limited law enforcement resources transactions between the dealer and Some commenters, including an and jurisdiction over a broad range of purchasing consumers, and to assist the industry association and a dealership commerce.432The number of actions it Commission in its enforcement of the organization, also raised concerns about brings relating to motor vehicle Rule.427Such materials are particularly how to determine what would dealers—as with actions in any area—is important given that the vast majority of constitute ‘‘written consumer necessarily limited by these resource consumers do not file a complaint, and complaints’’ under proposed constraints, even when there are with hidden charges, many consumers §463.6(a)(5). For purposes of the Rule, ongoing, chronic problems that cause never know about the illegal conduct in the Commission refers commenters to substantial consumer harm. Despite the first place.428For instance, as the plain meaning of the terms used in these constraints, the Commission and explained in SBP II.B, a survey of one the phrase, which terms are commonly its law enforcement partners have taken dealership group’s customers showed used and understood.430 significant action aimed at addressing that 83% of the respondents were Two industry association commenters unfair and deceptive practices in the subject to the dealer’s unlawful argued that the proposed requirement to motor vehicle marketplace, as explained practices related to add-ons. This equals retain written communications would in SBP II.C. Given that problems with 16,848 consumers—far more than the be particularly burdensome for bait-and-switch advertising, add-ons, 391 complaints received against the recreational vehicle dealers, contending and other aspects of vehicle-buying and dealer over the time period covered by that that this was particularly so given -leasing have continued to be a source the survey. that many RV dealers are small of consumer harm despite this action, To minimize burden, as previously businesses. In response, the additional measures are warranted. And noted, the retention requirements are for Commission notes that, as explained in the Commission has taken steps to a period of twenty-four months. Further, the paragraph-by-paragraph analysis of minimize burden, including by as stated previously, §463.6(b) permits §463.2(e) and (f) in SBP III.B.2(e) and declining to finalize the add-on list dealers to retain records ‘‘in any legible (f), it has determined not to finalize the disclosure requirements in proposed form,’’ which could, for example, Rule with respect to dealers §463.4(b), as well as the itemized include using the backup and export predominantly engaged in the sale, disclosures required in proposed features that already exist in many leasing, or servicing of RVs, but it will §463.5(b) and their corresponding social media services, email platforms, continue to monitor the marketplace to proposed recordkeeping requirements. chat platforms, and text systems, instead determine whether modifications or Moreover, the recordkeeping provisions of creating entirely new systems. revisions may be warranted in the permit dealers to retain records in any Regarding dealers that use third parties future. legible form, providing a flexible to administer add-ons, commenters did Finally, one industry association standard that permits the use of not explain why they cannot access commenter argued that the proposed ordinary and standard forms of data and records related to add-ons from these recordkeeping requirements and costs document retention. parties.429Further, altering the language were unwarranted given that the The Commission adopts in the Final in the provision to apply to Commission has brought an average of Rule recordkeeping requirements largely ‘‘complaints’’ rather than ‘‘inquiries’’ fewer than four enforcement actions a as they were set forth in the proposed related to add-ons could invite year against motor vehicle dealers in the rule, with two substantive arguments that consumer statements, past decade. In response, the modifications. After careful such as, ‘‘Why was I charged for this Commission notes that its experience consideration, the Commission is add-on that I did not know about?’’ are indicates that the number of removing the requirements to retain not ‘‘complaints,’’ but simply enforcement actions is not remotely copies of add-on lists required by ‘‘inquiries.’’ With respect to the use of reflective of the total violations of law proposed §463.6(a)(2) and records salespeople’s personal devices to in the auto marketplace. To uncover showing compliance with the cash price conduct motor vehicle dealer activities, misconduct and bring actions, law without optional add-ons disclosures including the sale, financing, or leasing enforcement agencies and officials often and declinations required by proposed rely on complaints from affected parties. §463.6(a)(4). These changes will reduce 427As noted previously, a dealership association As previously discussed, however, record creation and retention burdens commenter argued that dealers should not be consumer complaints typically for dealers. As previously described, the required to preserve complaints and certain add-on represent just the ‘‘tip of the iceberg’’ in Final Rule also contains one materials, contending that it should be a business decision whether to retain such records. The typographical modification of adding a Commission declines to substantively modify these 430The term ‘‘written’’ means ‘‘made or done in serial comma and conforming edits for requirements from the Commission’s original writing.’’ See Written, Merriam-Webster.com consistency with the defined terms in proposal, given the importance of these materials in Dictionary, https://www.merriam-webster.com/ §463.2(e) and (f).
ensuring compliance with the other requirements of dictionary/written (last visited Dec. 5, 2023). The the Rule. term ‘‘consumer’’ includes ‘‘one that utilizes The Commission adopts these 428See SBP II.B (discussing how complaints economic goods.’’ See Consumer (def. a), Merriam- recordkeeping requirements to promote represent the tip of the iceberg in terms of actual Webster.com Dictionary, https://www.merriam- effective and efficient enforcement of consumer harm). webster.com/dictionary/consumer (last visited Dec. the Rule, thereby deterring and 429This is consistent with the Commission’s prior 5, 2023). The term ‘‘complaint’’ includes an enforcement order practice. See, e.g., Stipulated ‘‘expression of grief, pain, or dissatisfaction,’’ preventing deception and unfairness. As Order at 25, Fed. Trade Comm’n v. N. Am. Auto. ‘‘something that is the cause or subject of protest discussed throughout this SBP, the Servs., Inc., No. 1:22–cv–0169 (N.D. Ill. Mar. 31, or outcry,’’ and ‘‘a formal allegation against a rulemaking record, including the 2022) (requiring retention of ‘‘records of all party.’’ See Complaint (defs. 1, 2a, 3), Merriam- consumer complaints and refund requests, whether Webster.com Dictionary, https://www.merriam- received directly or indirectly, such as through a webster.com/dictionary/complaint (last visited Dec. 431See SBP II.B. third party, and any response’’). 5, 2023). 432See 15 U.S.C. 45(a). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 659 Commission’s law enforcement vehicle dealer practices.436The with’’ the Rule, ‘‘and then only to the experience, indicates that there are Commission concludes that this extent of the inconsistency.’’ Proposed chronic problems confronting provision is necessary to prevent §463.9 further provided that, for consumers in the motor vehicle sales, circumvention of the Rule, and, after purposes of this provision, a State financing, and leasing process, which review of the comments, adopts this statute, regulation, order, or include advertising misrepresentations prohibition as it was originally interpretation is not ‘‘inconsistent’’ if and unlawful practices related to add- proposed. the protection such statute, regulation, ons and hidden charges.433The H. §463.8: Severability order, or interpretation affords any recordkeeping requirements in the Final consumer ‘‘is greater than the protection Rule will assist the Commission in Proposed §463.8 provided that the provided under’’ the Rule. After investigating and prosecuting law provisions of the Final Rule ‘‘are carefully considering the comments, the violations and help the Commission separate and severable from one Commission adopts §463.9 largely as another. If any provision is stayed or proposed in the Final Rule. identify injured consumers for paying determined to be invalid, it is the Numerous State regulator commenters consumer redress. The recordkeeping Commission’s intention that the contended that the proposed rule would requirements are flexible, allowing remaining provisions will continue in create a uniform baseline of protection dealers to retain materials in any legible effect.’’ This proposed provision was that would complement State standards.
form, and are limited to a period of modeled on similar provisions in other A comment from a group of eighteen twenty-four months from the date the rules, including the Commission’s State attorneys general contended that record is created. The recordkeeping Telemarketing Sales Rule and the MARS many of the Proposed rule’s requirements are consistent with, and Rule.437A number of commenters, requirements were similar to, or the similar to, the recordkeeping including dealership associations, same as, requirements that currently requirements in other Commission raised general concerns that the exist under State laws or regulations, rules, as tailored to individual proposed provisions may be too and highlighted the benefit to law industries and markets.434 integrated with each other for enforcement from establishing a severability to be possible. Such G. §463.7: Waiver Not Permitted consistent Federal baseline while commenters, however, did not provide providing States with flexibility to Proposed §463.7 prohibited waiver of examples of any such instances wherein impose heightened consumer the requirements of the Final Rule by they believed certain provisions could protections.438 not remain in effect if other provisions providing that it constituted a violation One municipal licensing entity were stayed or determined to be invalid.
of the Rule ‘‘for any person to obtain, or commenter that expressed general Upon consideration of the comments, attempt to obtain, a waiver from any support of the Commission’s proposed the Commission concludes that consumer of any protection provided by rule also posited that the Commission severability is possible in the event any or any right of the consumer under’’ the should broaden proposed §463.9 to provision is stayed or determined to be Rule. Comments that addressed this expressly include municipalities. With invalid. The Rule the Commission is proposed provision generally either respect to the applicability of the finalizing includes prohibitions against supported it or expressed no opinion on provision to municipalities, the misrepresentations regarding material it. Comments in support noted that the Commission notes that State political information (§463.3), required provision would help provide subdivisions exercise delegated power disclosures (§463.4), and prohibitions consistency in the protection it would of their State, and as such, §463.9 against charging for add-ons that provide to consumers and emphasized applies to municipal standards as provide no benefit or any item without that it would prohibit unscrupulous well.439 express, informed consent (§463.5)— dealers from causing consumers to sign each of which dealers are capable of Other commenters, including away their rights. This proposed abiding by independently, as well as by dealership associations, referred provision was modeled on a similar the provisions that independently generally to potential conflicts between provision in the Mortgage Assistance support their operation, including the Commission’s proposed rule and Relief Services (‘‘MARS’’) Rule, which Authority (§463.1), Definitions State laws, but such commenters was originally promulgated by the (§463.2), Recordkeeping (§463.6), typically did not point to any specific Commission and subsequently Waiver not permitted (§463.7), and purported conflicts with State law. To republished by the CFPB.435Moreover, Relation to State laws (§463.9). Thus, the extent some such commenters at least one State has a similar waiver the Commission has determined to argued that certain proposed provisions would conflict with State laws, such provision in its rule covering motor adopt this provision in the Final Rule as arguments are addressed in the SBP’s it was originally proposed.
FTC. Complaint ¶¶42–45, Fed. Trade Comm’n v. Rule does not supersede, alter, or affect of State laws that allow dealers to make Norm Reeves, Inc., No. 8:17–cv–01942 (C.D. Cal. ‘‘any other State statute, regulation, misrepresentations regarding material Nov. 3, 2017) (alleging dealer failed to keep records of previous advertisements needed to demonstrate order, or interpretation relating to Motor information; prohibit the disclosure of compliance with prior order); Complaint ¶¶32–35, Vehicle Dealer requirements, except to Fed. Trade Comm’n v. New World Auto Imports, the extent that such statute, regulation, 438Comment of 18 State Att’ys Gen., Doc. No. Inc., No. 3:16–cv–22401 at (N.D. Tex. Aug. 18, FTC–2022–0046–8062 at 11. order, or interpretation is inconsistent 2016) (same). 439See City of Columbus v. Ours Garage & 434See, e.g., 16 CFR 310.5 (Telemarketing Sales Wrecker Serv., Inc., 536 U.S. 424, 433 (2002) (‘‘The Rule); 16 CFR 437.7 (Business Opportunity Rule); 436See, e.g., Wis. Admin. Code Trans. 139.09 principle is well settled that local governmental 16 CFR 453.6 (Funeral Industry Practices Rule); 16 (similar waiver prohibition clause in Wisconsin’s units are created as convenient agencies for CFR 301.41 (Fur Products Labeling Rule). Motor Vehicle Trade Practices rule). exercising such of the governmental powers of the 435See MARS Rule (Regulation O), 12 CFR 437See MARS Rule, 16 CFR 322.8 (Commission State as may be entrusted to them in its absolute 1015.8, previously published by the Commission at Rule), 12 CFR 1015.11 (CFPB Rule); Telemarketing discretion.’’) (quoting Wis. Pub. Intervenor v. 16 CFR 322.1. Sales Rule, 16 CFR 310.9. Mortier, 501 U.S. 597, 607–08 (1991)). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 660 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations accurate information regarding a Rule’s prohibition against charging for paragraph-by-paragraph analysis of vehicle’s offering price, optional vehicle the product if the consumer would not §463.5 in SBP III.E.2, the Commission add-ons, or total payment information; benefit from it. Similarly, has determined not to finalize the or permit dealers to charge consumers notwithstanding a commenter’s claims written disclosures requirement under for add-ons that provide no benefit to that the proposed rule’s definition of this provision. the consumer or to charge for items ‘‘Dealer or Motor Vehicle Dealer’’ would After carefully considering the without consumers’ express, informed conflict with analogous State standards, comments regarding proposed §463.9, consent. To the extent there truly are the commenter did not identify any the Commission is finalizing this conflicts, as discussed in the following actual conflicts; nevertheless, to the section largely as proposed, with one paragraphs, §463.9 establishes the extent State and Federal standards cover minor modification: the Commission is framework for addressing any such independent areas or actors, each actor adding ‘‘Covered’’ to the term ‘‘Motor inconsistencies. must comply with the standards— Vehicle Dealer’’ in §463.9(a) to conform Commenters including dealership whether State, Federal, or both—under with the revised definition in §463.2(f). associations also argued that existing which the actor is covered.440Further Section 463.9 provides a uniform floor State standards are sufficient and discussion of how State laws interact of protection with the Commission’s identified State requirements that the with specific sections of the Rule are Final Rule, while also permitting States commenters argued would be redundant explained in the corresponding section- to enact stronger protections, using a with, or superior to, one or more by-section analysis for the relevant standard that has been applied in other provisions in the Commission’s sections. laws and regulations for several proposed rule. To the extent the Rule Some such commenters also decades.441This provision is necessary prohibits conduct that is already questioned whether more coordination to address unfair and deceptive prohibited by State laws, the with States and Federal agencies was practices and to enable the Commission Commission has not seen evidence that needed, without explaining what to enforce the Rule.
State and Federal standards prohibiting coordination was needed. In any event, the same misconduct has harmed the Commission coordinates regularly IV. Effective Date consumers or competition. Moreover, with States and Federal counterparts. The Final Rule becomes effective on such overlap is indicative of dealers’ Many commenters’ concerns focused July 30, 2024. One industry association ability to comply with the relevant on the written disclosures proposed in commenter objected that the NPRM did provisions in the Rule. To the extent §463.5(b), which the Commission has not include an effective date or inquire State laws have additional requirements determined not to include in this Final into the timing for feasibly that provide greater protections or are Rule. For instance, a substantial number implementing the Rule. Another such not otherwise inconsistent with part of commenters, including industry commenter requested at least 18 months 463, dealers must continue to follow associations, argued that proposed for stakeholders to prepare for Rule those laws. §463.5(b) would have created different compliance, but did not explain why it Several dealership association Federal and State requirements for would take 18 months to refrain from commenters expressed concern written disclosures that would result in conduct that is already illegal, such as regarding how to determine whether a duplicative paperwork. A dealership making misrepresentations. Rules are State statute, regulation, order, or association specifically argued that generally required to be published 30 to interpretation affords ‘‘greater proposed §463.5(b) may have conflicted 60 days before their effective date, protection’’ than a provision in the with a State pre-contract disclosure though in some circumstances, agencies Commission’s proposed rule. One such requirement pertaining to six categories may cite good cause for the rule to commenter, for example, raised of add-ons because it would have become effective sooner than 30 days concerns that proposed §463.5(a) may required an additional disclosure about from publication.442Given the conflict with a pending California bill a broader category of add-ons. An significant harm to consumers and law- that would prohibit the sale of GAP industry association similarly pointed to abiding dealers from deceptive or unfair when a vehicle has less than a 70% this State’s pre-contract disclosure acts or practices; and the fact that, for loan-to-value ratio. An industry requirement as a reason that additional dealers already complying with the law, association commenter claimed that the disclosures under this Rule, including compliance with the Rule the Commission’s proposed definitions of those required by proposed §463.5(b), Commission is finalizing should not be ‘‘Dealer or Motor Vehicle Dealer’’ would could result in consumer confusion. At onerous; the NPRM did not propose or conflict with analogous State least four commenters, including contemplate any additional delay.
definitions. In response, the industry associations and a dealership Nevertheless, after a review of Commission emphasizes that §463.9 organization, argued that the proposed comments, the Commission is providing would be triggered only if there were an rule’s requirement under §463.5(b) to dealers until July 30, 2024 to make actual inconsistency between State law create new documentation may conflict and the Final Rule, and in the event of with the ‘‘single document’’ an inconsistency, the Rule only affects requirements, in effect in many States, 441See, e.g., 10 U.S.C. 987(d)(1) (Military Lending such State law to the extent of the which mandate that the entire motor Act); 15 U.S.C. 1692n (Fair Debt Collection Practices Act); 12 CFR 1006.104 (Regulation F); 15 inconsistency. The commenter vehicle sale, financing, or lease U.S.C. 1693q (Electronic Funds Transfer Act); see examples did not present any such agreement—including any add-on also 21 U.S.C. 387p(a)(1) (Family Smoking inconsistencies because it is possible to products or services—be within one Prevention and Tobacco Control Act). comply with both the cited State law document. As discussed in the 442See 5 U.S.C. 553(d) (requiring publication of examples and with the Final Rule. For a substantive APA rule ‘‘not less than 30 days before its effective date’’ except ‘‘as otherwise instance, a dealer operating in a State 440See, e.g., Pirouzian v. SLM Corp., 396 F. Supp. provided by the agency for good cause found and that prohibits the sale of a GAP 2d 1124, 1131 (S.D. Cal. 2005) (reasoning that the published with the rule’’). Significant rules defined agreement when a vehicle transaction more inclusive definition of ‘‘debt collector’’ under by Executive Order 12866 and major rules defined involves a loan-to-value ratio below California law is not ‘‘inconsistent’’ with the Fair by the Small Business Regulatory Enforcement Debt Collection Practices Act because by ‘‘enlarging Fairness Act are required to have a 60-day delayed 70% would need to abide by the ratio the pool of entities who can be sued’’ the State law effective date. See E.O. 12866, 58 FR 51735 (Oct. set forth by State law and also by the offered greater protection). 4, 1993); 5 U.S.C. 801(a)(3)). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 661 changes to their operations, if needed, the proposed cash price without the Commission bases its estimate of the in light of the Rule’s requirements. optional add-ons disclosure entities covered by the Final Rule on the requirement; (3) other proposed same North American Industry V. Paperwork Reduction Act provisions prohibiting certain Classification System (‘‘NAICS’’)449 On July 13, 2022, the Commission misrepresentations and requiring certain categories—‘‘new car dealers’’ and submitted the NPRM and an disclosures; (4) the proposed ‘‘used car dealers’’—as it did in the accompanying Supporting Statement to recordkeeping provisions; and (5) NPRM.450As with other figures in this the Office of Management and Budget estimated capital and other non-labor section, the NAICS data assembled by (‘‘OMB’’) for review under the costs. As previously discussed, after the U.S. Census Bureau have been Paperwork Reduction Act (‘‘PRA’’), 44 carefully reviewing the comments, the revised since the publication of the U.S.C. 3501–3521. On July 29, 2022, Commission has made certain changes Commission’s NPRM with more recent OMB directed the Commission to to the relevant provisions in the Final data. Based on these revisions, the resubmit its request when the proposed Rule. Specifically, the Commission has Commission now estimates that the rule was finalized.443 determined not to finalize requirements, Final Rule’s disclosure and The Commission is now submitting pursuant to proposed §463.4(b), that recordkeeping requirements will impact the Final Rule and a Supplemental dealers disclose an add-on list or, approximately 47,271 franchise, new Supporting Statement to OMB. The pursuant to proposed §463.5(b), that motor vehicle and independent/used disclosure and recordkeeping dealers refrain from charging for motor vehicle dealers in the United requirements of the Rule constitute optional add-ons unless enumerated States.451 ‘‘collection[s] of information’’ for requirements relating to the vehicle’s The estimated overall annual hours purposes of the PRA.444The associated cash price without optional add-ons are burden for the Final Rule’s collections burden analysis follows.445 met. of information is 1,595,085 hours. The In the NPRM, the Commission In the NPRM, the Commission estimated overall annual labor cost for provided estimates and solicited estimated that the disclosure and the Final Rule’s collections of comments regarding the proposed rule, recordkeeping requirements would information is $51,904,537. The including regarding (1) the proposed impact approximately 46,525 franchise, estimated overall annual capital and add-on list disclosure requirement; (2) new motor vehicle and independent/ other non-labor cost for the Final Rule’s used motor vehicle dealers in the collections of information is 443OMB assigned the rulemaking control number U.S.446In the NPRM, the Commission $14,181,300. 3084–0172 for PRA review purposes.
B. Disclosures Relating to Cash Price proposed misrepresentation commenter also contended that the Without Optional Add-Ons prohibitions would be de minimis.453 number of required offering price Section 463.5(b) of the proposed rule One industry association commenter disclosures would obligate dealers to required motor vehicle dealers that argued that a bar on misrepresentations incur additional training costs. As the charge for optional add-on products or in the Final Rule would require Commission explained in its NPRM, services to provide certain itemized increased training and compliance costs vehicle pricing activities and disclosures regarding pricing and cost and result in longer transaction times representations are usually and information without such add-ons. In and costs related to working with customarily performed by dealers in the response to the Commission’s estimates vehicle manufacturers about online course of their regular business with respect to this proposed provision, advertisements. This section, however, activities. While this provision may one industry association argued that the does not require any additional increase the importance of those Commission did not provide adequate disclosures or information collection. activities, or alter when in the course of explanation of the assumptions it used Thus, while dealers might elect to business they are undertaken, the to arrive at its cost estimates for this enhance their training and Commission estimates that any proposed provision, and contended that compliance,454refraining from making additional attendant costs are de the Commission underestimated the misrepresentations does not require minimis.457 costs associated with developing, additional training or compliance costs Section 463.4(d) of the Final Rule printing, and presenting the proposed or transaction time. The Commission require dealers, when making any disclosures. This commenter also therefore affirms its prior estimate that representation about a monthly payment contended that the proposed any additional costs associated with the for any vehicle, to disclose the total requirement would have required prohibitions in §463.3 against making amount the consumer will pay to significant training costs; that multiple misrepresentations would be de purchase or lease the vehicle at that forms would have been required for minimis. monthly payment after making all each motor vehicle transaction; and that Section 463.4(a) of the Final Rule aspects of the required disclosures requires dealers to clearly and 455Some commenters suggested that providing an would be duplicative of information conspicuously disclose a vehicle’s Offering Price may be difficult due to pricing already provided by dealerships in the offering price in advertisements and changes over time. As explained in SBP III.D.2(a), ordinary course of business. The other communications that reference a limited-time offers should be clearly disclosed as such. Advertising prices without disclosing commenter estimated that developing a material limitations that would mislead consumers disclosure form for this proposed 453NPRM at 42033, 42039. is a deceptive or unfair practice. provision would cost dealers at least 454The Commission produced and considered 456As stated in SBP III.B.2(k) and SBP III.D.2(a), $750 and suggested that other attendant alternative cost estimate scenarios for the Rule the Commission is finalizing this Offering Price costs would be in the hundreds of provisions in its preliminary regulatory analysis, definition at §463.2(k) largely as proposed, with a see NPRM at 42036–44, and its final regulatory modification to clarify that dealers may, but need millions or billions of dollars, without analysis in section VII. The Commission also not, exclude required government charges from a explaining how it arrived at such invited comments on the accuracy of its PRA vehicle’s offering price. In addition, this definition estimated figures. burden estimates, including the validity of the in the Final Rule substitutes ‘‘Vehicle’’ for ‘‘motor As explained in the section-by-section methodology and assumptions used, see NPRM at vehicle’’ to clarify that the term is consistent with 42035. The Commission provides a single estimate the revised definition of ‘‘‘Covered Motor Vehicle’ analysis of §463.5 in SBP III.E, after per Rule provision for this separate Paperwork or ‘Vehicle’’’ at §463.2(e). The Commission also careful consideration, the Commission Reduction Act burden analysis in conformity with added language to the end of §463.4(a) clarifying has determined not to include in this the PRA. See 44 U.S.C. 3506(c)(1)(A)(iv) (providing, that the requirements in §463.4(a) ‘‘also are Final Rule the itemized disclosure for each collection of information, including those prescribed for the purpose of preventing the unfair arising from rules published as final rules in the or deceptive acts or practices defined in this part, provisions at proposed §463.5(b). The Federal Register, that agencies shall conduct a including those in §§463.3(a) and (b) and review that includes ‘‘a specific, objectively §463.5(c).’’ 452NPRM at 42032–33, 40235, 42040. supported estimate of burden’’). 457See NPRM at 42033, 42039–40. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 663 payments as scheduled, as well as the hours).459After a review of comments, consent of the consumer for the amount of consideration to be provided the Commission is adding ongoing charge.462In response to the by the consumer if the total amount training costs. Specifically, the Commission’s estimates with respect to disclosed assumes the consumer will Commission estimates annual ongoing these proposed provisions, some provide consideration. Section 463.4(e) costs of 1 hour of training time for sales commenters generally discussed of the Final Rule requires dealers, when and related employees per year, for an burdens, as addressed in the section-by- making any comparison between annual hours burden of 417,110 (1 hour section analysis in SBP III, that they payment options that includes × 417,110 sales and related employees). contended would accompany this discussion of a lower monthly payment Applying labor cost-rates of $29.43 per proposed provision, but none provided to disclose, if true, that a lower monthly hour, the total estimated ongoing labor sufficient detail for cost estimates. The payment will increase the total amount cost burden is $12,275,547.30 across the Commission notes that this provision the consumer will pay to purchase or industry (417,110 sales and related addresses the unfair or deceptive lease the vehicle. employees × 1 hour × $29.43). practice of charging consumers for items These provisions have been adopted Further, §463.4(c) of the Final Rule they do not know about or to which largely as proposed.458In response to requires dealers that sell optional add- they have not agreed, or in amounts the Commission’s estimates with respect on products or services to disclose to beyond those to which the consumer to these proposed provisions, one consumers that these add-ons are not has agreed. As dealers must currently commenter raised concerns that these required, and that the consumer can have policies in place to prevent charges disclosures would intrude on existing purchase or lease the vehicle without without consent in order to comply with disclosures, and that any associated these add-ons. This requirement has current law, the Commission anticipates paperwork burden would be confusing, been adopted largely as proposed, and that any burdens associated with this duplicative, and unnecessary. The is necessary to address deceptive and provision will be de minimis.463 commenter also argued that these unfair practices regarding these disclosures would add time to the products or services, including D. Recordkeeping transaction process and require misrepresentations that these products Section 463.6 of the Final Rule additional staff training. No commenters are required when they are not, and requires dealers to create and retain, for provided alternative estimates of the charging consumers for such products a period of twenty-four months from the costs associated with this provision. without the consumers’ express, date the record is created, all records Failing to disclose information about informed consent.460It requires a necessary to demonstrate compliance the total of payments for a vehicle when simple disclosure of information that is with the Rule, including with its representing monthly payment known to the dealer, and the disclosure requirements. This provision information is deceptive or unfair, as set Commission anticipates that the has been adopted with revisions to forth in SBP III.D.2(d). Dealers already information collection burdens account for other changes in the Final generate the required information associated with this requirement is de Rule, as explained in SBP III.F.464These during the normal course of business, minimis.461 recordkeeping provisions are necessary and disclosing this total of payments Similarly, §463.5(c) of the Final Rule to promote effective and efficient information provides consumers with requires dealers to refrain from charging enforcement of the Rule, thereby fundamental information that is readily consumers for any item unless the deterring dealers from engaging in available to the dealer when making dealer obtains the express, informed deceptive or unfair acts or practices. representations regarding monthly In the NPRM, the Commission payments, at which time such 459The estimates throughout this section have provided cost estimates and solicited disclosures are required. Nevertheless, been updated with more recent data since the comment on its recordkeeping burden there may be upfront labor costs publication of the NPRM. Labor rates are based on analysis.465The Commission associated with developing procedures new data from the Bureau of Labor Statistics. See anticipated that dealers would incur to provide these disclosures consistently U.S. Bureau of Labor Statistics, ‘‘May 2022 National Industry-Specific Occupational Employment and certain incremental costs related to: (i) at the appropriate point in the Wage Estimates NAICS 441100—Automobile recordkeeping systems; and (ii) transaction and with training Dealers’’ (Apr. 25, 2023), https://www.bls.gov/oes/ calculations of loan-to-value ratios for employees. The Commission estimates current/naics4_441100.htm. The number of contracts with GAP agreements.
such upfront costs as follows: 8 dealerships has been updated to reflect new data from Census County Business Patterns. See U.S. Several commenters, including compliance manager hours per dealer Census Bureau, ‘‘All Sectors: County Business industry associations, dealership on implementing a template disclosure Patterns, including ZIP Code Business Patterns, by organizations, and a dealership script that contains the required Legal Form of Organization and Employment Size information and on ensuring sales staff Class for the U.S., States, and Selected Geographies: 2021,’’ https://data.census.gov/table?q= 462See SBP III.E.2(c). consistently deliver the disclosure at an CB2100CBP&n=44111:44112&tid=CBP2021. 463In its NPRM, the Commission noted that it appropriate time during the transaction, CB2100CBP&nkd=EMPSZES∼001,LFO∼001. anticipated this section would require dealers to for an upfront hours burden of 378,168 460This provision in the Final Rule capitalizes provide readily available information to consumers (8 hours × 47,271). Applying labor cost- the defined term ‘‘Vehicle’’ to conform with the in direct communications with customers, and that rates of $31.21 per hour yields revised definition of ‘‘‘Covered Motor Vehicle’ or dealers complying with existing law have policies $11,802,623.28 ($31.21 × 378,168 ‘ a V d e d h e i d c l l e a ’ n ’’ g a u t a § ge 4 6 to 3 . t 2 h ( e e ) e . n T d h o e f C § o 4 m 6 m 3.4 is ( s c i ) o c n l a a r l i s f o y ing i t n h e p r l e a b c y e e t s o t i p m re a v ti e n n g t m ch i a n r i g m e a s l w a i d t d h i o t u io t n c a o l n r s e e s n u t l , t ing that the requirements in this paragraph ‘‘also are costs. See NRPM at 42033, 42036–44. The 458These provisions in the Final Rule capitalize prescribed for the purpose of preventing the unfair Commission did not receive comments discussing the defined term ‘‘Vehicle’’ to conform with the or deceptive acts or practices defined in this part, attendant burdens in sufficient detail for revised revised definition of ‘‘‘Covered Motor Vehicle’ or including those in §§463.3(a) and (b) and cost estimates, and thus affirms its prior estimate ‘Vehicle’’’ at §463.2(e). The Commission also §463.5(c).’’ regarding additional costs associated with substituted a period for a semi-colon and the word 461As with §463.3, §463.5(a) does not require §463.5(c). ‘‘and’’ at the end of §463.4(d)(1), and added any additional disclosures or information 464The Final Rule also contains one language to the end of §463.4(d) and (e) clarifying collection. Thus, while dealers might elect to typographical modification to §463.6—adding a that the requirements in these paragraphs ‘‘also are enhance their training and compliance policies, or serial comma—and minor textual changes to ensure prescribed for the purpose of preventing the unfair to take steps to document compliance with consistency with the defined terms at §463.2(e) and or deceptive acts or practices defined in this part, §463.5(a), any such additional measures are not (f). including those in §§463.3(a) and §463.5(c).’’ required by this provision. 465NPRM at 42033–34, 42043. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 664 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations association, generally contended that systems for record storage and create the hour. The Commission estimates that the Commission underestimated the templates necessary to accommodate covered motor vehicle dealers sell burdens of compliance relating to the retention of all relevant materials, as approximately 31,562,959 vehicles each changes dealers would need to make to follows: 8 hours of time for a year, and that approximately 17% of their existing recordkeeping systems. programmer, at a cost-rate of $40.24 per such sales include GAP agreements, for These commenters, however, did not hour; 5 hours of additional clerical staff an estimated total of 5,444,502 covered provide the Commission with work, at a cost-rate of $20.16 per hour; vehicle sales.469While the number of alternative estimates regarding such 1 hour of sales manager review, at a motor vehicles sold will vary by burdens. As explained in the section-by- cost-rate of $80.19 per hour; and 1 hour dealership, this yields an average sales section analysis of the Recordkeeping of review by a compliance officer, at a volume of 115 sales transactions per section, §463.6, in SBP III.F, this cost-rate of $31.21 per hour.467 average dealership per year that include provision gives dealers the flexibility to Applying these cost-rates to the a GAP agreement (5,444,502 covered retain materials in any legible form, estimated per-dealer hours burden vehicle sales/47,271 dealerships). This including in the same manner, format, described previously, the total estimated yields an estimated annual hours and place as they may already keep initial labor cost burden is $534.12 per burden for all dealers of 90,742 hours such records in the ordinary course of average dealership (($40.24 per hour × (5,444,502 covered transactions × 1/60 business. The Commission nonetheless 8 hours) + ($20.16 per hour × 5 hours) hours). Applying the associated labor has determined, in response to + ($80.19 per hour × 1 hour) + ($31.21 rates yields an estimated annual labor comments, to revise its estimates per hour × 1 hour)), totaling cost for all dealers of $2,577,980.22 regarding incremental storage expenses $25,248,386.52 across the industry (90,742 hours × $28.41 per hour). that may be associated with the ($534.12 per average dealership ×
The Commission anticipates that Specifically, the Commission 469In response to comments, the Commission has programming, administrative, revised the number of transactions across the anticipates that dealers will expend one compliance, and clerical staff are likely industry from the NPRM to exclude private party minute per sales or financing and fleet transactions. The estimated percentage of to perform the tasks necessary to transaction for a salesperson to perform sales including GAP agreements is derived from comply with the recordkeeping the calculation contemplated by this data provided by an industry commenter. Comment requirements in §463.6 of its Rule. In of Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022– requirement, at a cost rate of $28.41 per particular, the Commission estimates 0046–8368 at 12.
this 15-hour per-dealer labor hours 470One commenter claimed generally that the 467Applicable wage rates are based on data from Commission underestimated these costs, referring burden to design, implement, or update the Bureau of Labor Statistics. See U.S. Bureau of to arguments the commenter made with respect to Labor Statistics, ‘‘May 2022 National Industry- the Commission’s burden analysis of specific 466In its NPRM, the Commission estimated costs Specific Occupational Employment and Wage disclosure and recordkeeping provisions. The to create and implement a loan-to-value calculation Estimates NAICS 441100—Automobile Dealers’’ Commission has responded to those arguments in process. NPRM at 42034. Such costs are already (Apr. 25, 2023), https://www.bls.gov/oes/current/ the foregoing analysis, with the exception of accounted for in the Commission’s estimates for the naics4_441100.htm. recordkeeping storage costs, which are addressed in time required to modify existing recordkeeping 468These arguments are addressed in the section- the following discussion. systems, and thus are not separately itemized here. by-section analysis of §463.5. See SBP III.E. 471NPRM at 42034. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 665 information that must be provided with the recordkeeping requirements in an IRFA, stated its belief that the during the transaction process, the Final Rule to add such proposal will not have a significant depending on a dealer’s current recordkeeping storage costs to its economic impact on small entities, and business operations, the Commission estimate. The Commission previously solicited comments on the burden on anticipates that these changes will not noted, and continues to believe, that any small entities that would be require substantial investments in new dealers that store records in hard copy covered.480In addition to publishing the systems.472Further, many dealers may are unlikely to require extensive NPRM in the Federal Register, the elect to furnish some disclosures additional storage for physical Commission announced the proposed electronically, further reducing total document retention, and, due to the low rule through press releases, social media costs.473 cost of electronic storage options, that posts, and blog articles directed toward The Commission previously estimated expanding electronic storage capacity businesses and consumers, as well as non-labor costs for providing would impose minimal costs.475The through other outreach,481in keeping disclosures in written or electronic Commission also invited comments on with the Commission’s history of small form. This estimate was based on estimated storage costs; while some business guidance and outreach.482 proposed §463.5(b), which required commenters generally discussed The Commission thereafter received written disclosures in all transactions in burdens, as addressed in the section-by- over 27,000 public comments, many of which dealers charge for optional add- section analysis of the recordkeeping which identified themselves as being ons. As discussed in the paragraph-by- requirements in §463.6, that they from small dealers, industry paragraph analysis of §463.5 in SBP contended would accompany the associations that represent small III.E.2, the Commission has determined proposed provisions, the Commission dealers, and employees of small not to finalize the proposed provision at did not receive any comments that dealers.483The Commission greatly §463.5(b). While some commenters provided estimates. The Commission generally discussed burden with respect nevertheless has conducted additional 480NPRM at 42035. to disclosure requirements being research, and now estimates that each 481See, e.g., Press Release, Fed. Trade Comm’n, finalized by the Commission, no dealer will need to spend approximately ‘‘FTC Proposes Rule to Ban Junk Fees, Bait-and- Switch Tactics Plaguing Car Buyers’’ (June 23, commenter estimated non-labor costs $300 per year in investment in 2022), https://www.ftc.gov/news-events/news/press- associated with such requirements. The additional IT systems and hardware for releases/2022/06/ftc-proposes-rule-ban-junk-fees- Commission estimates that the non- additional storage (either on premises or bait-switch-tactics-plaguing-car-buyers; Lesley Fair, labor costs related to disclosures, which electronically) to retain records, the ‘‘Proposed FTC Rule Looks Under the Hood at the Car Buying Process,’’ Fed. Trade Comm’n Business relate to fundamental information (the annual cost for which would be Blog (June 23, 2022), https://www.ftc.gov/business- vehicle offering price, that optional add- $14,181,300 for all covered dealers guidance/blog/2022/06/proposed-ftc-rule-looks- ons are not required, and regarding the ($300 × 47,271 covered dealers).476 under-hood-car-buying-process; Alan S. Kaplinsky, A Close Look at The Federal Trade Commission’s total amount to purchase or lease the
2. Recordkeeping (‘‘RFA’’), as amended by the Small Protection, Division of Financial Practices, In the NPRM, the Commission Business Regulatory Enforcement Consumer Finance Monitor (Aug. 11, 2022), https:// www.ballardspahr.com/Insights/Blogs/2022/08/ observed that dealers already have in Fairness Act of 1996,477requires an Podcast-The-FTCs-Proposed-Rule-Motor-Vehicle- place existing recordkeeping systems for agency to provide an Initial Regulatory Dealer-Guests-Sanya-Shahrasbi-and-Daniel-Dwyer. the storage of documentation they Flexibility Analysis (‘‘IRFA’’) and Final 482Each year since FY2002, the Small Business would retain in the ordinary course of Regulatory Flexibility Analysis Administration’s Office of the National business irrespective of the Rule’s (‘‘FRFA’’) of any rule subject to notice- Ombudsman has rated the Federal Trade Commission an ‘‘A’’ on its small business requirements.474Commenters including and-comment requirements,478unless compliance assistance work. See U.S. Small industry associations, a dealership the agency head certifies that the Business Administration, ‘‘2013–2020 SBA Nat’l organization, and a dealership regulatory action will not have a Ombudsman’s Ann. Reps. to Cong.,’’ https:// www.sba.gov/document/report—national- association argued that the Commission significant economic impact on a ombudsmans-annual-reports-congress (providing underestimated the burdens associated substantial number of small entities.479 reports from FY2013–FY2020); Letter from Joseph with the Commission’s proposed In the NPRM, the Commission provided J. Simons, Chairman of the Federal Trade requirements to retain written Commission, to Senator James Risch, Chairman of the Committee on Small Business and communications, as well as the need to 475NPRM at 42034–35. Entrepreneurship, U.S. Senate, and to Congressman develop new systems to capture these 476Our review of dealer transaction records Steve Chabot, Chairman of the Committee on Small materials. The Commission disagrees suggests that a typical transaction generates 3.4 MB Business, U.S. House of Representatives, https:// that the recordkeeping requirements in of data under the status quo. Given the average www.ftc.gov/system/files/documents/reports/ number of transactions per dealer, this suggests that federal-trade-commission-rule-compliance-guides- §463.6 mandate the creation of new storing all these records would require dedicated small-businesses-other-small-entities-commission/ recordkeeping systems. As explained in space of roughly 4.2 GB per year. With a two-year tenth_section_212_report_to_congress_july_2016- the section-by-section analysis of retention window, this corresponds to 8.4 GB of june_2017_1_0.pdf (citing Commission’s ‘‘A’’ rating §463.6, this provision gives dealers the storage at any given time. We estimate that the for ‘‘Compliance Assistance’’ by the National (annual) amount budgeted here should be sufficient Ombudsman from FY2002–FY2016). flexibility to retain materials in any to maintain at least 1 TB of storage—either on 483The Commission received 27,349 comment legible form, including in the same premises or through a cloud storage vendor—which submissions filed in response to its NPRM. See Gen. manner, format, or place as they may is sufficient for more than 100 times the data Servs. Admin., Doc. No. FTC–2022–0046–0001, already keep such records in the storage capacity necessary to retain all transaction Proposed Rule, Motor Vehicle Dealers Trade files generated by a typical dealership in a year Regulation Rule (July 13, 2022), https:// ordinary course of business. under the status quo. The Commission anticipates www.regulations.gov/document/FTC-2022-0046- The Commission is, however, revising that this amount of data storage capacity will be 0001 (noting comments received). To facilitate its estimates regarding incremental more than sufficient to also allow for dealers to public access, 11,232 such comments have been storage expenses that may be associated keep any necessary records of correspondence with posted publicly at www.regulations.gov. Id. (noting consumers who ultimately do not complete posted comments). Posted comment counts reflect transactions at the dealership. the number of comments that the agency has posted 472Id. 477See Public Law 104–121 (1996). to Regulations.gov to be publicly viewable. 473Id. 4785 U.S.C. 603(a), 604(a). Agencies may choose to redact or withhold certain 474Id. 4795 U.S.C. 605(b). Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 666 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations appreciates, and thoroughly considered, however, that the Commission believes Several commenters, including industry the feedback it received from such that the vast majority of covered entities associations and a dealership stakeholders in developing the Final are small entities and provided an IRFA association, generally argued that the Rule; made changes from the proposed in the NPRM, in the interest of Rule would impose substantial rule in response to such feedback; and thoroughness, the Commission has also economic burdens on small entities, and will continue to engage with performed an FRFA, as described in some suggested that small entities may stakeholders moving forward to SBP VI.B.2. be disproportionately burdened by the facilitate implementation of the Rule. Rule given limited legal and compliance
(1) first-year compliance costs and (2) based on number of employees as estimated cost per employee ($76.86) by costs in subsequent years. follows. The Commission estimates that the average number of employees within
(3) one year of annual ongoing costs that employee to provide the total of $499.59 per dealer with between 5 and scale. payments disclosures required by 9 employees ($76.86 × 6.50 employees); The Commission estimates the §463.4(d) and (e) (((417,110 sales & $1,058.73 per dealer with between 10 upfront fixed costs per dealer under the related employees × 1 estimated hour and 19 employees ($76.86 × 13.77 highest-cost scenario as follows: $963.44 for training × $29.43 per hour) + employees); $2,584.18 per dealer with to update policies and procedures to (19,228,256 total covered transactions between 20 and 49 employees ($76.86 × provide the offering price disclosure involving monthly payments or 33.62 employees); $5,343.19 per dealer required by §463.4(a) ((8 estimated financing × (2/60 estimated disclosure with between 50 and 99 employees pricing hours499× $80.19 per hour) + (8 hours per transaction × $28.41 per hour ($76.86 × 69.52 employees); $10,784.88 estimated programming hours × $40.24 + $0.15 printing costs per disclosure)))/ per dealer with between 100 and 249 per hour)); $249.68 to design disclosures 1,257,877 total employees); $36.40 per employees ($76.86 × 140.31 employees); required by §463.4(d) and (e) and employee for training and the delivery $24,384.79 per dealer with between 250 inform associates of their obligations to of a disclosure under a regime in which and 499 employees ($76.86 × 317.25 provide these disclosures (8 estimated dealers choose to deliver an itemized employees); $44,623.26 per dealer with compliance manager hours × $31.21 per disclosure to comply with §463.5 between 500 and 999 employees ($76.86 hour); $1,783.56 to cull add-ons with no (((417,110 sales & related employees × 1 × 580.56 employees); and $147,085.08 consumer benefit from offerings, estimated hour for training × $29.43 per per dealer with 1,000 or more develop policies regarding when certain hour) + ((10,343,319 new vehicle sales employees ($76.86 × 1,913.60 add-ons may or may not be sold, and + 21,219,640 used vehicle sales) × (2/60 employees). create nonmandatory disclosures, in estimated disclosure hours per sale Thus, the total first-year compliance response to the requirements of §463.5 transaction × $28.41 per hour + $0.11 costs based on dealer size are $4,345.51 ((16 estimated compliance manager hours × $31.21 per hour) + (12 estimated physical costs per disclosure)))/ ($3,530.80 + $690.13 + $124.59) per sales manager hours × $80.19 per hour) 1,257,877 total employees); and $13.93 dealer with fewer than 5 employees; + (8 estimated programmer hours × per employee to generate and store $4,720.51 ($3,530.80 + $690.13 + calculations required to be retained $499.59) per dealer with between 5 and $40.24 per hour)); and $534.12 to under §463.6 ((31,562,959 vehicle sales 9 employees; $5,279.66 ($3,530.80 + upgrade recordkeeping systems and × 1/60 estimated hours per transaction $690.13 + $1,058.73) per dealer with create the templates necessary to × $28.41 per hour/1,257,877 total between 10 and 19 employees; accommodate retention of all relevant employees) + (5,444,502 vehicle sales $6,805.11 ($3,530.80 + $690.13 + ( m p 5 r a o e t g s e r t r i a i m a m l a m u te n e d r d c e h l r o e § u ri r 4 c s 6 a × 3 l . h $ 6 4 o ( 0 u (8 . r 2 s e 4 × s p t $ i e m 2 r 0 a h . t 1 o e 6 u d r p ) e + r h w o it u h r s G p A e P r t a r g a r n e s e a m ct e i n on t × × 1 $ / 2 6 8 0 . 4 e 1 st i p m er a t h e o d u r/ $ an 2 d ,5 8 4 4 9 . 1 em 8) p p l e o r y e d e e s a ; l e $ r 9 , w 5 i 6 t 4 h . 1 b 2 e t ( w $3 e , e 5 n 3 0 2 . 0 8 0 1,257,877 total employees)). + $690.13 + $5,343.19) per dealer with hour) + (1 estimated sales manager hour × $80.19 per hour) + (1 estimated Next, the Commission uses census between 50 and 99 employees; compliance manager hour × $31.21 per data on the average number of $15,005.80 ($3,530.80 + $690.13 + employees at dealerships within $10,784.88) per dealer with between 100 hour)). These figures total $3,530.80 per different dealer size cohorts to and 249 employees; $28,605.72 dealer.500 The Commission estimates the annual determine the per-dealer cost for each ($3,530.80 + $690.13 + $24,384.79) per fixed ongoing costs per dealer for the dealer cohort.501Multiplying the dealer with between 250 and 499 first year under the highest-cost scenario employees; $48,844.18 ($3,530.80 + as follows: $390.13 to conduct a 501Based on 2021 census data, dealers with fewer $690.13 + $44,623.26) per dealer with than five employees have an average of 1.62 heightened compliance review of employees (34,616 employees at all dealerships between 500 and 999 employees; and public-facing representations to ensure with fewer than five employees/21,356 dealers with $151,306.01 ($3,530.80 + $690.13 + compliance with §463.3 (150 estimated fewer than five employees); dealers with 5–9 $147,085.08) per dealer with 1,000 or documents per year × 5 estimated employees have an average of 6.50 employees more employees. (35,794 employees/5,507 dealers); dealers with 10– minutes of review per document × 19 employees have an average of 13.77 employees To analyze the economic effect of the $31.21 per hour of compliance officer (52,852 employees/3,837 dealers); dealers with 20– costs of the Rule by dealer size, the review); and $300 estimated for 49 employees have an average of 33.62 employees Commission compares per-dealer costs expanded storage to retain records (253,365 employees/7,536 dealers); dealers with to per-dealer sales, gross margin, and 50–99 employees have an average of 69.52 required under §463.6. These figures gross margin minus operating expenses. employees (423,351 employees/6,090 dealers);
total $690.13 per dealer per year. dealers with 100–249 employees have an average of The Commission does not have data on The Commission estimates annual 140.31 employees (386,001 employees/2,751 how sales, gross margin, and operating ongoing costs that scale with dealer size dealers); dealers with 250–499 employees have an expenses are apportioned to dealerships average of 317.25 employees (57,105 employees/180 based on the number of employees.
annual gross margin of $291,376.10 The NPRM noted the Commission’s The industry group also argued that the number (1.62 employees × $179,761.61 gross belief that the proposed rule would not of complaints is overstated because it includes: (1) have a significant economic impact on complaints that are not applicable to motor vehicle margin per employee), and annual per- dealers or conduct addressed by the Rule, and (2) small entities, but nevertheless dealer gross margin minus operating consumers who did not report a loss. This industry expenses of $105,472.17 (1.62 examined the six IRFA factors, and group also argued that the Commission failed to employees × $65,069.96 gross margin invited comment on the proposed rule’s take notice of survey data indicating that the burdens on small businesses. In the majority of consumers are satisfied with their minus operating expenses per vehicle purchases. See, e.g., Cox Auto., ‘‘2021 Cox following paragraphs, the Commission employee). Automotive Car Buyer Journey Study’’ (2022)
(b) Succinct Statement of the Objectives are small entities. Final Rule will benefit consumers who of, and Legal Basis for, the Proposed encounter conduct that is already illegal Rule (d) Description of the Projected and will assist law-abiding dealers that Reporting, Recordkeeping, and Other The objectives of the Rule and its presently lose business to competitors Compliance Requirements of the legal basis, including the specific grant that act unlawfully. Proposed Rule of rulemaking authority under section (f) Description of Any Significant An industry association commenter 1029 of the Dodd-Frank Act, 12 U.S.C. Alternatives to the Proposed Rule argued that the Commission did not 5519, were set forth in the IRFA.507The Which Accomplish the Stated ‘‘accurately’’ lay out the proposed rule’s objectives and legal basis, and Objectives of Applicable Statutes and projected requirements. The commenter comments on these topics, additionally Which Minimize Any Significant did not provide an explanation of what have been discussed throughout this Economic Impact of the Proposed Rule it alleged to be inaccurate in the SBP. on Small Entities Commission’s description. This (c) Description of and, Where Feasible, comment notwithstanding, the NPRM Statutory examples of ‘‘significant Estimate of the Number of Small described the proposed rule’s projected alternatives’’ include different Entities to Which the Proposed Rule requirements, including by elaborating requirements or timetables that take into Will Apply on the proposed recordkeeping account the resources available to small In its IRFA, the Commission requirements and providing estimates entities; the clarification, consolidation, estimated that there were approximately regarding the anticipated recordkeeping or simplification of compliance and 46,525 franchise, new motor vehicle, time and resource obligations for reporting requirements under the Rule and independent/used motor vehicle programmers, clerical staff, sales for small entities; the use of dealers.508As discussed in the managers, and compliance officers.511 performance rather than design The NPRM also provided a detailed standards; and an exemption from coverage of the Rule, or any part thereof, 505One industry group argued that the majority of the FTC’s enforcement actions have pertained to market compared to other types of motor vehicle for small entities.513Comments from deceptive advertising, and few have alleged dealers, and the greater availability of relevant SBA Advocacy and from a national unlawful conduct involving add-ons. The information for this market, its NPRM analysis industry association argued that the Commission agrees that many of its actions have exclusively considered automobile dealers. The Commission did not set forth alleged deceptive pricing. In focusing on certain Commission invited submissions of market actions that involved allegations that dealers placed information for other types of motor vehicles such alternatives to the proposed rule.514 unauthorized charges for add-ons, however, the as boats, RVs, and motorcycles that would allow In its Regulatory Flexibility Act commenter leaves out other unlawful conduct expansion of the scope of its analysis. See NPRM compliance guidance to Federal related to add-ons. Such conduct includes, for at 42035–36. agencies, the SBA Office of Advocacy example, misrepresentations regarding the pricing 509U.S. Census Bureau, ‘‘All Sectors: County provides that, ‘‘[i]f an agency is unable of add-ons (Complaint ¶¶6–12, TT of Longwood, Business Patterns, Including ZIP Code Business Inc., No. C–4531 (F.T.C. July 2, 2015)), or failing to Patterns, by Legal Form of Organization and to analyze small business alternatives disclose that mandatory add-ons were included in Employment Size Class for the U.S., States, and separately, then alternatives that reduce the cost of credit (Consent Order ¶¶73–75, Y King Selected Geographies: 2021,’’ https:// the impact for businesses of all sizes S Corp., CFPB No. 2016–CFPB–0001 (Jan. 21, data.census.gov/table?q=CB2100CBP& must be considered.’’515As the 2016)). In addition, unauthorized charges are likely n=44111:44112&tid=CBP2021. to go unnoticed by consumers, which can hamper CB2100CBP&nkd=EMPSZES∼001,LFO∼001 (listing enforcement efforts. See, e.g., Auto Buyer Study, 21,622 establishments for ‘‘[n]ew car dealers,’’ 512See NPRM at 42027, 42035 (enumerating supra note 25, at 14 (describing several study NAICS code 44111, and 25,649 establishments for records to be retained and time period for participants who thought they had not purchased ‘‘[u]sed car dealers,’’ NAICS code 44112). retention). add-ons, or that add-ons were free, and only learned 510See SBP VI.A.2. 513See 5 U.S.C. 603(c)(1)–(4). during the study that they were charged for add- 511NPRM at 42035; see also id. at 42033–34 514Comment of SBA Advocacy, Doc. No. FTC– ons). (describing recordkeeping requirements and 2022–0046–6664. 506See AMG Cap. Mgmt., LLC v. Fed. Trade analyzing cost burden). To avoid duplicative or 515Off. of Advoc., U.S. Small Bus. Admin., ‘‘A Comm’n, 141 S. Ct. 1341 (2021). unnecessary analysis, the information required by Guide for Government Agencies: How to Comply 507NPRM at 42035. the IRFA can be provided with or as part of any with the Regulatory Flexibility Act’’ 39 (2017), 508Id. at 42035. The Commission explained that, other analysis required by any other law. 5 U.S.C. https://advocacy.sba.gov/wp-content/uploads/ because of the relative size of the automobile 605(a). 2019/06/How-to-Comply-with-the-RFA.pdf. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 671 Commission explained in its NPRM, it industry association also discussed the (a) Statement of the Need for, and ‘‘envisioned and drafted this Rule proposed rule’s disclosure requirements Objectives of, the Rule mindful that most motor vehicle dealers in an industry-wide manner, not The FTC issues this Final Rule to are small entities,’’ and drafted its limiting their comments to businesses address deceptive and unfair acts or proposal in the first instance to under any particular size threshold.518 practices during the vehicle buying or minimize economic impact on all motor Nevertheless, the Commission has leasing process, and to provide an vehicle dealers.516For example, the reviewed these comments carefully, has additional enforcement tool to remedy Rule prohibits conduct that already responded to comments on alternatives consumer harm and assist law-abiding violates the FTC Act, but still takes in the corresponding sections of its dealers. As detailed in SBP II.B.1, these steps to minimize burdens for dealers of section-by-section analysis, and has deceptive and unfair practices include all sizes, by, for example, allowing determined to modify the definition of bait-and-switch tactics, such as dealers records to be kept in any legible form ‘‘Covered Motor Vehicle’’ at §463.2(e) advertising deceptively low prices or already kept in the ordinary course of and not to finalize the requirements other deceptive terms to induce business, and by limiting recordkeeping proposed in §§463.4(b) and 463.5(b).519 consumers to visit the dealership, and requirements to twenty-four months charging such consumers additional, from the date the record is created 2. Final Regulatory Flexibility Analysis unexpected amounts, including after the despite the fact that motor vehicle consumers have invested significant financing terms are generally years Although the Commission is time and effort traveling to, and longer than this period. Commenters certifying that the Rule will not have a negotiating at, the dealership premises.
generally appear to understand the significant economic impact on a At present, consumers may never learn relevant market in a similar manner. For substantial number of small entities, the that they are paying substantial instance, the possible alternatives raised Commission has prepared the following unexpected charges, given the by the comment from SBA Advocacy FRFA with this Final Rule. In the complexity and length of the motor would apply uniformly to both large following paragraphs, the Commission vehicle sale, financing, or lease and small businesses. These alternatives provides the information required for a transaction and its attendant contracts included excluding vehicle dealers that FRFA: (1) a statement of the need for, and other documents. Law enforcement, do not sell automobiles, regardless of and objectives of, the Rule; (2) a outreach and other engagement in this the size of the dealer, and creating a statement of the significant issues raised area, as well as the number of consumer carve-out for banks and other financing by public comments in response to the complaints each year regarding motor companies that would cover multi- IRFA, including any comments filed by vehicle dealer practices, indicate that billion dollar institutions.517Comments from SBA Advocacy and a national the Chief Counsel for Advocacy of the unlawful conduct persists despite Small Business Administration in Federal and State law enforcement response to the proposed rule, the efforts.
(d) Description of the Projected these practices, the Rule also will publishing a final rule. The final Reporting, Recordkeeping, and Other benefit competition by preventing law- regulatory analysis must contain (1) a Compliance Requirements abiding dealers, many of which are concise statement of the need for, and The Final Rule prohibits certain small businesses, from losing business objectives of, the final rule; (2) a unfair or deceptive acts or practices and due to unlawful practices by other description of any alternatives to the contains recordkeeping requirements. dealers. final rule which were considered by the The Final Rule contains no reporting For each provision in the Rule, the Commission; (3) an analysis of the requirements. Commission has attempted to reduce projected benefits, any adverse The Final Rule requires covered the burden on businesses, including economic effects, and any other effects motor vehicle dealers to clearly and small entities. For example, the of the final rule; (4) an explanation of conspicuously disclose the offering Commission limited the number of the reasons for the determination of the price of a vehicle in certain disclosures that dealers are required to Commission that the final rule will advertisements and in response to make under the Final Rule, and in attain its objectives in a manner consumer communications. It also response to comments, further limited consistent with applicable law and the requires dealers to make certain other such disclosures by determining not to reasons the particular alternative was disclosures during the sale, financing, or finalize the disclosures in proposed chosen; and (5) a summary of any leasing process. To enforce the Rule and §§463.4(b) and 463.5(b). Similarly, the significant issues raised by the prevent the unfair or deceptive practices comments submitted during the public Commission has limited the duration of prohibited by the Rule, the Rule further comment period in response to the the Rule’s recordkeeping requirements requires dealers to retain records preliminary regulatory analysis, and a to twenty-four months from the date the necessary to demonstrate compliance summary of the assessment by the relevant record is created, even though with the Rule. Such records include Commission of such issues. this period is far shorter than the length advertising materials and copies of As discussed previously, the FTC of many financing contracts.
purchase orders and financing and lease issues this Final Rule to address As previously noted, the Commission documents. The Rule requires such deceptive and unfair acts or practices does not believe the Final Rule imposes records to be retained for a period of during the vehicle buying or leasing a significant economic impact on a twenty-four months from the date they process, and to provide an additional substantial number of small entities.
are created and provides that they may enforcement tool to remedy consumer Nonetheless, the Commission has taken be kept in any legible form, and in the harm and assist law-abiding dealers. care to avoid extensive requirements same manner, format, or place as they These deceptive and unfair practices related to form. For example, the may already be kept in the ordinary include bait-and-switch tactics, such as Commission does not specify the form course of business. Further details on dealers advertising deceptively low in which records required by the Final these provisions are discussed prices or other deceptive terms to Rule must be kept. Moreover, the Rule’s throughout this SBP, including in the induce consumers to visit the disclosure requirements do not mandate section-by-section analysis of the dealership; and charging such specific font sizes. In sum, the recordkeeping requirements in §463.6, consumers additional, unexpected Commission has worked to minimize as well as in the preceding Paperwork amounts, including after the consumers any significant economic impact on Reduction Act analysis. have invested significant time and effort small businesses.
(e) Description of the Steps the
relating to undisclosed or unselected to the Rule has been revised in response Quantifiable costs primarily reflect the add-ons). As a result of the to public comments, and the resources expended by automobile Commission’s determination not to Commission’s identification of dealers in developing the systems finalize these sections of the proposed additional data sources that can be used necessary to comply with the provisions rule, costs and benefits associated with to exclude private party and fleet of the Rule. In addition, we expect those provisions have been excluded transactions.
from the final regulatory analysis. The The Final Rule contains requirements additional benefits and costs that we are Commission also has made revisions in in the following areas: presently unable to quantify. Among the response to public comments, the 1. Prohibited misrepresentations; unquantified benefits are time savings availability of newer data, the 2. Required disclosure of offering that accrue to individuals who abandon identification of additional relevant price in certain advertisements and in vehicle transactions entirely; additional data, and the application of newer response to inquiry; time savings on activities that scholarly research. The final regulatory 3. Required disclosure of total of individuals engage in digitally under analysis thus builds upon the payments for financing and leasing the status quo; reductions in deadweight preliminary regulatory analysis, while transactions; loss resulting from direct price effects in incorporating several updates: 4. Prohibition on charging for add-ons the markets for used vehicles or vehicle • The analysis of consumer time in certain circumstances; add-ons; and the benefit of reduced savings has been revised in response to 5. Requirement to obtain express, stress, discomfort, and unpleasantness public comments and changes following informed consent before any charges; experienced by motor vehicle the NPRM. and consumers under the status quo. Among • A section quantifying the reduction 6. Recordkeeping. the unquantified costs would be any in deadweight loss resulting from the In the following analysis, we describe potential reductions in consumer Rule has been added, based upon recent the anticipated impacts of the Final information resulting from changes in research that allows the Commission to Rule. Where possible, we quantify the dealers’ policies regarding marketing quantify both how dealer markups will benefits and costs and present them and advertisements. The discount rate respond to price transparency and how separately by provision. If a benefit or new and used vehicle quantities will cost is quantified, we indicate the reflects society’s preference for respond to changes in price. sources of the data relied upon. If an receiving benefits earlier rather than • Training costs have been added for assumption is needed, the text makes later; a higher discount rate is associated some provisions in response to public clear which quantities are being with a greater preference for benefits in comments. assumed. the present. The present value is • Information systems costs have A period of 10 years is used in the obtained by multiplying each year’s net been added to the Recordkeeping baseline scenario because FTC rules are benefit by a discount factor a number of section in response to public comments, generally subject to review every 10 times equal to the number of years in based on estimates of how much data years.524Quantifiable aggregate benefits the future the net benefit accrues.525 TABLE 1.1—PRESENT VALUE OF NET BENEFITS (IN MILLIONS), 2024–2033 Low estimate Base case High estimate 3% Discount 7% Discount 3% Discount 7% Discount 3% Discount 7% Discount rate rate rate rate rate rate Benefits:
524See Fed. Trade Comm’n, Notification of Intent Rule’s effective date. For the purposes of to Request Public Comment, Regulatory Review discounting, the Commission assumes that any VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 674 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations TABLE 1.1—PRESENT VALUE OF NET BENEFITS (IN MILLIONS), 2024–2033—Continued Low estimate Base case High estimate 3% Discount 7% Discount 3% Discount 7% Discount 3% Discount 7% Discount rate rate rate rate rate rate Prohibition on Misrepresentations .... 157 130 157 130 0 0 Recordkeeping .................................. 296 248 296 248 296 248 Total Costs ................................ 1,270 1,075 1,270 1,075 559 474 Net Benefits ............................... 6,761 5,538 14,954 12,284 25,784 21,216 Note: ‘‘Low Estimate’’ reflects all lowest benefit estimates and high cost scenarios and ‘‘High Estimate’’ reflects all highest benefit estimates and low cost scenarios. ‘‘Base Case’’ reflects base case benefit estimates and high cost scenarios. Not all impacts can be quantified; estimates only reflect quantified costs and benefits.
B. Estimated Benefits of Final Rule of shopping for a motor vehicle (e.g., by analysis. This sensitivity analysis visiting a dealership in response to an reflects a ‘‘high-end’’ estimate that In this section, we describe the ad or initiating negotiations in response consumers will save as many as 3.3 beneficial impacts of the Rule, by (1)
1. Consumer Time Savings When them, this benefit remains unquantified 2020 Cox Automotive Car Buyer Journey Shopping for Motor Vehicles in the analysis. study, which showed that consumers Several provisions of the Rule would Obviously, many consumers end up spent roughly 15 hours researching, benefit consumers by saving them time purchasing and leasing vehicles under shopping, and visiting dealerships for as they complete motor vehicle the status quo—either because full each motor vehicle transaction.527Based transactions. Required disclosures of revelation of prices and terms still on the proposed rule provisions relevant prices and prohibitions of results in a mutually beneficial prohibiting misrepresentations and misrepresentations, inter alia, would transaction or because full revelation requiring price transparency, the save consumers time when shopping for never occurs and consumers are Commission assumed each consumer a vehicle by requiring the provision of deceived into completing a transaction who consummated a vehicle transaction salient, material information early in the that is not mutually beneficial. These would spend 3 fewer hours shopping process and eliminating time spent consumers also spend additional, online, corresponding with dealerships, pursuing misleading offers. The unnecessary time discovering visiting dealer locations, and negotiating Commission’s enforcement record information that dealers would be with dealer employees. The 3 hours shows that consumer search and required to disclose earlier once the corresponded to 20% of an average shopping is sometimes influenced by Rule is in effect. The Commission consumer’s time spent on such activities unfair or deceptive advertising that expects the Rule’s required disclosures in 2019 (pre-COVID). draws consumers to a dealership in and prohibitions against The Commission received a number pursuit of an advertised deal, only to misrepresentations to improve of comments emphasizing the find out at some point later in the information flows and consumer search unnecessary time consumers must process (if at all) that the advertised deal efficiency, including but not limited to, spend to ascertain the price and terms is not actually available to them.526This addressing the influence of deception when attempting to consummate a bait-and-switch advertising has the and unfairness on consumer search and vehicle transaction. One group of effect of wasting consumers’ time shopping behavior. commenters, for example, asserted that traveling to and negotiating with The Commission’s preliminary ‘‘[t]he most important factor for unscrupulous dealerships, time which analysis estimated that the proposed consumers purchasing a vehicle is its would otherwise be spent pursuing rule would allow consumers to spend 3 price, yet the price is almost impossible truthful offers in the absence of fewer hours completing each motor to ascertain without spending hours at deception and unfairness. If consumers vehicle transaction and result in the dealership.’’528Another group of are faced with hard constraints on their (quantifiable) overall time savings commenters provided a compilation of time or other resources, this wasted time valued at between $30 billion and $35 numerous consumer complaints, may mean that they are unable to find billion. In this final regulatory analysis, including many that described the deal that best fits their needs and the Commission takes into account the consumers spending hours at a preferences. Additionally, motor vehicle effects of revisions to the proposed rule consumers frequently begin the process and additional data, addresses industry 527NPRM at 42037 & n.180.
526See SBP II.B–C. analytical approach with a sensitivity No. FTC–2022–0046–7607. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 675 dealership trying to ascertain the final 12-and-a-half hours researching, between the time they were accessed by price and terms of the transaction.529 shopping, and visiting dealerships for the Commission for the drafting of the The improved information flow under each motor vehicle transaction.531In preliminary analysis and the time that the Final Rule will provide quantifiable contrast, in the 2022 Car Buyer Journey comments were received. The final benefits for consumers by reducing or study, consumers spent roughly 14-and- analysis uses the revised data. In eliminating this unnecessary need to a-half hours researching, shopping, and addition, in response to comments that spend time penetrating opaque pricing visiting dealerships for each motor private party transactions should be and terms, and will provide qualitative vehicle transaction.532This admittedly excluded from the analysis, the benefits by reducing frustration and short trend suggests that the COVID–19 Commission is revising its analysis. stress in the car buying process. pandemic had a significant effect on Additional data would be necessary to Some industry commenters motor vehicle shopping, reducing the quantify any time savings benefits for questioned the appropriateness of the amount of time the typical consumer wholesale and fleet transactions. data and assumptions used to quantify spent on these activities, and that time Accordingly, the Commission has the time savings benefit. A number of spent on these activities has already excluded all transactions occurring industry association commenters argued rebounded to previous levels.533 through non-retail channels from the that the 15-hour figure did not represent Another industry association final analysis.534 a reasonable base from which time commenter suggested that the figure A number of comments raised savings attributable to the Rule could be included categories of time use that concerns about the foundations of the 3- derived. One such commenter criticism could not conceivably be affected by the hour time-savings assumption. One asserted that the publication from which proposed rule, such as online research industry organization noted that the Cox it was sourced only surveyed consumers into vehicle features, and that attention Automotive study cited in the NPRM who used the internet during research should be restricted to time spent does not itself address the proposals in and shopping and therefore could not be shopping. The Commission finds that the NPRM (which the survey, of course, representative of the time spent by several provisions in the Rule clearly predated) and does not estimate time consumers who do not use the internet. have the potential to reduce time spent savings.535Another organization Still other commenters noted that across most categories covered by the additional data from the same 15-hour figure, including the largest 534When the transaction volume from the organization were available. The category (‘‘Researching and Shopping preliminary analysis is applied to the Commission’s Commission disagrees that the 15-hour Online’’). This category of time use current methodology and sensitivity analysis, time savings under the Final Rule ranges from a high-end estimate is an unreasonable base from would include comparing listed vehicle of $35 billion to a low-end of $11 billion, with a which to derive time savings from the prices across dealerships that, under the base case of $22 billion (assuming a 7% discount Rule. While the Cox Automotive Study Rule, would be transparent and rate). In comparison, the preliminary analysis acknowledges only internet users were comparable in a way that they were not computed savings under the proposed rule as approximately $31 billion (also assuming a 7% surveyed, the study also indicates its in the status quo, thus saving consumers discount rate). The residual difference in base case ‘‘[r]esults are weighted to be time. savings is attributable to less time saved per representative of the buyer Some commenters also noted that the transaction—partially explained by additional population.’’530Also, while more recent total base of transactions reported in the provisions in the NPRM that the Commission is not finalizing—as well as updates to the underlying data were available at the time of the preliminary analysis appeared to wages used to monetize the consumer time savings. analysis for the NPRM, those data were overstate the number of transactions to 535This same organization commissioned a study from an extraordinary period (the which the proposed rule would apply. that was recently released asserting the proposed COVID–19 pandemic). The Commission First, commenters asserted that the 62.1 rule would lead to an increase in consumer transaction time. This survey, however, had expects that the data used for the million transactions double-counted numerous methodological shortcomings rendering preliminary analysis are more new vehicle leases in the data source its results unreliable. For example, the survey representative of consumer experiences from which it was obtained (2019 presented each respondent at the outset with a over the analysis window than the more National Transportation Statistics, Table leading statement telling them the rule would recent data. While not dispositive, the 1–17). Second, commenters asserted impose ‘‘new duties [that] are expected to create additional monitoring, training, forms, and limited data available since the NPRM that the number included private party compliance review responsibilities as well as a was published bears this hypothesis out. transactions that would be entirely modification of record keeping systems and In the 2021 Cox Automotive Car Buyer unaffected by the proposed rule. coordination with outside IT and other vendors’’ Journey Study, consumers spent roughly Finally, commenters argued that the and ‘‘increase the time of a motor vehicle transaction, inhibit online sales, limit price transactions number contained disclosures, and increase customer confusion and 529Comment of Consumer Reps. et al., Doc. No. wholesale and fleet transactions, where frustration.’’ Edgar Faler et al., Ctr. for Auto. Rsch., FTC–2022–0046–7520 at 3, 11, 12, 16, 38 (including the amount of time spent researching, ‘‘Assessment of Costs Associated with the story from Illinois consumer describing ‘‘[spending] shopping, and visiting dealers is likely Implementation of the Federal Trade Commission about 4 hours at the dealership while the salesman Notice of Proposed Rulemaking (RIN 2022–14214), to be substantially different relative to a kept changing the terms of the deal . . . .’’; story CFR part 463’’ 34–36 (2023), https:// from Connecticut consumer describing how, ‘‘[a]fter household consumer. www.cargroup.org/wp-content/uploads/2023/05/ nearly three hours of paperwork . . . I was finally The Commission has verified that the CAR-Report_CFR-Part-463_Final_May-2023.pdf presented with the official bill to pay the balance. source data were revised to fix the (introductory instructions on the survey instrument The price was now higher than the original adjusted erroneous double-counting of leases sent to respondents). Moreover, the survey started sticker.’’; story from New Jersey consumer with a sample size of 60 dealers (id. at 7) in an describing how, ‘‘[a]fter 4 hours of negotiations . . . industry with an estimated 46,525 dealers, NPRM I finally got nearly the same price as the verified 531See 2021 Cox Automotive Car Buyer Journey at 42,031 & n.154, but only 40 dealers actually offer [for the vehicle] but about $1000 less on my Study, supra note 504, at 16. completed responses to many key questions (id. at trade-in[] (that was also part of the verified offer). 532See 2022 Car Buyer Journey, supra note 25, at 29). The survey does not describe how these 40– The [dealer] also added on Accessories ‘other 6. 60 dealers were chosen. Although the survey products’ [of] $474.00 . . . .’’; story from Texas 533Interestingly, consumer satisfaction with the estimates that the proposed rule would require consumer describing how ‘‘[t]he [dealership] car buying process, as measured by this same consumers to spend additional time on motor finance manager kept me there for two hours, and survey, was highest during the COVID–19 vehicle transactions, this conclusion is based on the said the deal was done. I went to get my wife, when pandemic when the time spent on research, responses of just 40 dealers and included no we got back the price had gone up $3,000.00.’’). shopping, and visiting dealerships was lowest, and consumers. Id. at 29–32. Moreover, the survey 5302020 Cox Automotive Car Buyer Journey, has since dropped back to pre-pandemic levels. report attributed much of this estimated increase to supra note 25, at 1. 2022 Car Buyer Journey, supra note 25, at 5. Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 676 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations expressed confusion as to whether the the vehicle buying process digitally closely the status quo digital shopping assumption was intended as a flat 3- (‘‘digital consumers’’) save time at the experience is expected to resemble the hour time savings or a 20% time dealership relative to those who do not shopping experience for all consumers savings, asserting that dynamism in (‘‘non-digital consumers’’).537The once the Rule is in effect. Additionally, automotive retailing will likely lead to Commission’s revised base case time because these numbers only reflect time evolution in the total amount of time savings calculation assumes that only saved at the dealership of purchase, we spent shopping. the fraction of consumers who are not assume that these same consumers will While the Commission believes its 3- currently shopping digitally will also save time on these activities to the hour time-saving assumption in the experience time savings, and that these extent that they are initiated at NPRM remains reasonable, the savings will be proportional to the time dealerships visited prior to the Commission has conducted additional savings found in the Car Buyer Journey dealership at which they purchase analyses, the results of which 2019 study for digital consumers.538 (‘‘non-purchase dealerships’’). Based on demonstrate the positive net benefits of Because the Commission expects the 2020 data from Cox Automotive, the the Rule even when applying more conservative assumptions around time provisions of the Rule to emulate some average consumer visits 1 non-purchase savings and adjusting for the removal of of the time-saving features of dealership for each transaction.539Table certain proposed provisions from the completing these activities digitally, the 2.1 documents both the fraction of NPRM.536Using recent figures from Cox time savings benefits of the Rule are consumers performing activities Automotive’s Car Buyer Journey 2019 assumed to be a proportion of the time digitally under the status quo and the study, the Commission notes that saved by status quo digital consumers, time saved at the dealership by these consumers who do various activities in with the proportion determined by how consumers on each activity. TABLE 2.1—COMPLETING ACTIVITIES DIGITALLY % of Consumers Time saved at digital dealership Activity (2020 (2019 journey)
Negotiating the Purchase Price ................................................................................................................... 20 43 Select F&I Add-Ons ..................................................................................................................................... 18 33 Discussing and Signing Paperwork ............................................................................................................. 13 45 Get a Trade-In Offer .................................................................................................................................... 31 26 Source: Car Buyer Journey 2019 and Digitization of End-to-End Retail. Based on the description of these dealership for the non-digital consumer. equal to the half the amount of time activities and the anticipated effects of Mandating offering price disclosures— saved by those doing these activities the Rule, our base case estimates assume which are comparable across digitally under the status quo (33 × 0.5 that non-digital consumers will save an dealerships by definition—early in the = 16.5 minutes and 45 × 0.5 = 22.5 amount of time negotiating a vehicle shopping process will emulate the price minutes, respectively). Time saved purchase price equal to the amount of discovery function of negotiating prices selecting add-ons flows primarily from time saved by those negotiating online, in which comparable price the prohibitions on various purchase price digitally under the status quotes can be obtained (with effort) via misrepresentations, the mandatory quo (43 minutes). For non-digital email.540 disclosures regarding whether add-ons consumers, it is currently time- The Commission anticipates that the are required, and the prohibition on consuming to obtain comparable price impact of the Rule on time spent charging for add-ons under certain quotes from dealerships. Many selecting F&I add-ons and discussing circumstances.541Time saved dealerships will not initiate price and signing paperwork will be discussing and signing paperwork also negotiations in earnest without a moderate. In our base case estimates, flows from the prohibitions on various competing price quote in writing, which non-digital consumers will save an misrepresentations, several disclosures can only be obtained by visiting a amount of time doing these activities mandated by the Rule, and the proposed rule provisions that are not in the Final of performing these activities digitally vs. at the insufficient data to estimate this marginal savings Rule. Id. at 25. dealership suggests these offsets should be small. and so we leave this benefit unquantified in the 536In fact, the sensitivity analysis in Table 2.3 of 538The 2020 Cox Automotive Digitization of End- analysis. this final regulatory analysis presents a range of to-End Retail study reports the fraction of 5392020 Cox Automotive Car Buyer Journey, reasonable estimates for time savings that includes consumers who are already engaging in various supra note 25, at 15 (noting an average of 2.2 the 3-hour time-saving assumption from the activities online under the status quo. Cox Auto., dealerships visited among new car buyers). preliminary analysis in the NPRM. ‘‘Digitization of End-to-End Retail’’ (2021) 540Shoppers who negotiate purchase price [hereinafter Digitization of End-to-End Retail], 537Cox Auto. et al., ‘‘Car Buyer Journey 2019’’ digitally under the status quo will likely also obtain https://www.coxautoinc.com/wp-content/uploads/ (2019) [hereinafter Car Buyer Journey 2019], https:// time savings from mandatory offering price 2021/01/2020-Digitization-of-End-to-End-Retail- www.coxautoinc.com/wp-content/uploads/2019/06/ Study-FINAL.pdf. While the activities listed across disclosures, corresponding to the time and effort 2019-Car-Buyer-Journey-Study-FINAL-6-11-19.pdf. studies do not match perfectly, we map the activity they put into contacting and exchanging email with While Cox Automotive has released subsequent Car categories to the closest corresponding activity in dealerships. We lack sufficient data on the time Buyer Journey studies, none of these subsequent the other study and, in our final analysis, exclude spent on these activities to quantify these benefits, studies quantify time savings from shopping from the time savings calculation the percentage of however. digitally. In addition, to the extent that shoppers transactions corresponding to the fraction of 541See §§463.3(a), (b), and (f); 463.4(c); and compensate by spending more time at home on consumers already engaging in that activity online. 463.5(a) and (c). The Commission notes that time these activities, these time savings should be While it is likely that consumers shopping digitally savings would likely be higher in this category had reduced to reflect net time savings from performing under the status quo will also experience some it determined to finalize proposed §463.4(b), which these activities digitally. We believe that the nature additional time savings under the Rule, there is would have required disclosure of an add-on list. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 677 prohibition on charging for items that involve them. There is a concern, vehicle sales in 2019 were fleet sales.548 without express, informed consent.542 however, that dealers may spend more This fraction of the 17.1 million new For non-digital consumers, considerable time trying to extract maximum value vehicle sales and leases in the data are time must be spent at the dealership out of any given trade-in opportunity excluded from the analysis. An both closely reviewing paperwork (e.g., once the Rule is in effect. Because the Automotive News article from January to ensure that unwanted optional add- Commission believes that greater 2023 (citing data from Cox Automotive) ons are not being added to the transparency in vehicle pricing and add- states that 48% of all used vehicle sales transaction; to ensure that the financing ons will lead to reduced markups on occurred outside of the retail terms, including monthly payments, these products (see ‘‘Reductions in channel.549As with new vehicle sales, total payments, and term length, are as Deadweight Loss’’), it is possible that this fraction of the 40.8 million used expected; and to confirm that terms in dealers will attempt to make up these vehicle transactions in the data are the contract generally conform to what lost profits by maximizing trade-in excluded from the analysis. Adding up was discussed) and waiting for sales and margins, which may lead to increased the covered transactions (35 million)550 F&I staff at the dealership to consult time spent on negotiations. Since we do and applying the time savings with managers and revise paperwork as not have sufficient data to determine the calculated from the base case needed. Digital consumers, however, balance of these two effects, we assume may have access outside the dealership assumptions, we anticipate that the Rule in the base case that they offset. In to add-on menus where they can select will generate a total time savings of sensitivity analyses where we explore their desired F&I products affirmatively more than 72 million hours per year. alternative assumptions, note that time without worry that dealership staff will According to the Bureau of Labor savings from this activity only apply to misrepresent the products or pressure Statistics Occupational Employment the roughly 50% (by one estimate) of them into selecting something Statistics, the average hourly wage of vehicle purchase transactions at unwanted. In addition, digital U.S. workers in 2021 was $29.76, and dealerships where consumers trade in a consumers may receive and review recent research suggests that individuals vehicle.545 paperwork before arriving at the living in the U.S. value their non-work dealership. This way, any necessary Finally, data from the 2021 Cox time at 82% of average hourly revisions can be performed by the Automotive Car Buyer Journey Study earnings.551Thus, the value of non- dealership asynchronously so that the reveal that consumer time spent at non- work time for the average U.S. worker consumer is free to spend that time as purchase dealerships is roughly 82% of would be $24.4 per hour. As a result, they wish instead of being stuck in an the time spent at the dealership of our final analysis refines the estimate to F&I office. The noted Rule provisions purchase.546Additionally, the average a present value of between $12.3 billion will give consumers confidence that the consumer visits 1 non-purchase and $14.9 billion as described in Table add-on options presented to them are dealership for each transaction, so 2.2, which translates to savings of non-deceptive and the contract under the dual assumptions that (1) the roughly $1.75 billion per year.552 paperwork they are asked to review will proportions of time spent at dealerships not yield any unpleasant surprises. As across these activities is consistent a result, on average they will neither across purchase and non-purchase 548See Edmunds, ‘‘Automotive Industry Trends need to engage in such close scrutiny of dealerships and (2) the noted time 2020’’ 7 (2020), https://static.ed.edmunds- their contract documents, nor spend as savings are constant as a fraction of time media.com/unversioned/img/industry-center/ much time waiting for dealership staff spent, we multiply the time savings insights/2020-automotive-trends.pdf. to speak to managers or make changes numbers by this ratio to obtain the 549See Auto. News, ‘‘Used-vehicle volume hits lowest mark in nearly a decade’’ (Jan. 13, 2023), as the first draft will be more likely to additional time saved at non-purchase https://www.autonews.com/used-cars/used-car- conform to their expectations.543 dealerships. volume-hits-lowest-mark-nearly-decade (estimating The Commission assumes that the 19,100,000 of used vehicle sales in the year 2022 Proceeding as in the preliminary Rule will likely not assist consumers occurred within the retail channel). The same much (if at all) in reducing time spent analysis, we assume that motor vehicle Automotive News source reports a total used purchase, financing, and lease vehicle sales number of approximately 40 million obtaining a trade-in offer. In our base transactions will be stable at the 2019 for 2019. Id. The conclusions of the analysis are case estimates, we assume non-digital robust to using this total figure instead. level of 57.9 million transactions per consumers will not save additional time 550A recent report by the Center for Automotive year.547As discussed previously, the on obtaining a trade-in offer under the Research estimates that there approximately 43 Rule. There are various provisions in final analysis excludes private party, million non-fleet, non-private party sales in 2019 fleet, and wholesale transactions. based on privately sourced data. Edgar Faler et al., the Rule that touch trade-in offers made According to Edmunds Automotive Ctr. for Auto. Rsch., ‘‘Assessment of Costs by dealerships544and may increase Industry Trends 2020, 19.3% of new Associated with the Implementation of the Federal consumer confidence in dealer contracts Trade Commission Notice of Proposed Rulemaking as discussed previously. In addition, (RIN 2022–14214), CFR part 463’’ 5 (2023), https:// trade-in values are an important piece of 545See Progressive, ‘‘Consumers embrace online www.cargroup.org/wp-content/uploads/2023/05/ car buying,’’ http://www.progressive.com/resources/ CAR-Report_CFR-Part-463_Final_May-2023.pdf. transaction pricing, so greater price insights/online-car-buying-trends/ (last visited Dec. While this would result in a savings estimate transparency may save consumers time 5, 2023). approximately 22% higher, the Commission relies on the trade-in aspect of transactions 546See 2021 Cox Automotive Car Buyer Journey on its analysis of the publicly available data Study, supra note 504, at 16 (noting total time of described herein. 542See §§463.3; 463.4(c), (d), and (e); and 2:09 spent ‘‘Visiting Other Dealerships/Sellers’’ and 551Daniel S. Hamermesh, ‘‘What’s to Know About §463.5(c). total time of 2:37 spent ‘‘With the Dealership/Seller Time Use?’’ 30 J. Econ. Survs. 198, 201 (2016), 543Again, status quo digital shoppers will likely Where Purchased’’). https://onlinelibrary.wiley.com/doi/epdf/10.1111/ obtain time savings on these activities as well, to 547See U.S. Dep’t. of Transp., Off. of the Sec’y of joes.12107. the extent that their paperwork will also be less Transp., Bureau of Transp. Stat., ‘‘National 552Note that we assume only one consumer is likely to require close scrutiny and revisions. We Transportation Statistics 2021, 50th Anniversary involved in each transaction; to the extent that lack sufficient data on the time spent on these Edition’’ 21 (2021), https://www.bts.dot.gov/sites/ multiple members of a household may visit activities to quantify these benefits, however. bts.dot.gov/files/2021-12/NTS-50th-complete-11-30- dealerships for each transaction, these calculations 544See §§463.3(i) and (j); 463.4(d). 2021.pdf (Table 1–17). are likely to underestimate the total time savings. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 678 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations TABLE 2.2—ESTIMATED BENEFITS OF TIME SAVINGS FOR COMPLETED TRANSACTIONS 2024–2033 Completed Transactions Avg. minutes saved at dealership of purchase/other deal- ers (by activity):a Negotiating the Purchase Price................................... ............................................................................................. 34/28 Select F&I Add-Ons..................................................... ............................................................................................. 14/11 Discussing and Signing Paperwork............................. ............................................................................................. 20/16 Get a Trade-In Offer .................................................... ............................................................................................. 0/0 Hours saved per transaction .............................................. ............................................................................................. 2.05 Number of covered vehicle transactions per yearb ........... ............................................................................................. 34,986,253 Value of time for vehicle-shopping consumersc ................ ............................................................................................. $24.40 Abandoned Transactions Unquantified Total Quantified Benefits (in millions)................................. 3% discount rate ................................................................ $14,926 Total Quantified Benefits .................................................... 7% discount rate ................................................................ $12,290 Note: Benefits have been discounted to the present at both 3% and 7% rates. aAverages are across all retail transactions; transactions where consumers performed activity digitally under the status quo will have a time savings of 0 for that activity.
Avg. minutes saved at dealership of pur- chase/other dealers (by activity):a Negotiating the Purchase Price ............... ......................................................................... 17/14 34/28 34/28 Selecting F&I Add-Ons ............................ ......................................................................... 7/6 14/11 27/22 Discussing and Signing Paperwork ......... ......................................................................... 10/8 20/16 39/32 Get a Trade-In Offer ................................ ......................................................................... 0/0 0/0 18/15 Hours saved per transactionb ........................ ......................................................................... 1.02 2.05 3.3 Total Quantified Benefits (in millions) ............. 3% discount rate ............................................ $7,463 $14,926 $24,036 Total Quantified Benefits ................................ 7% discount rate ............................................ $6,145 $12,290 $19,790 Note: Benefits have been discounted to the present at both 3% and 7% rates. aAverages are across all retail transactions; transactions where consumers performed activity digitally under the status quo will have a time savings of 0 for that activity.
2. Reductions in Deadweight Loss shrouded prices, deception, and products and services than could be obfuscation. As a result, dealers likely supported once the Rule is in effect. The status quo in this industry charge higher prices for a number of Recent research suggests that when features consumer search frictions, 553See Car Buyer Journey 2019, supra note 537, [financing] steps completed online = higher Cox-Automotive-Car-Buyer-Journey-Study- at 9 (Consumers who negotiate (88% vs. 64%) and satisfaction & less time at the dealership’’); Cox Pandemic-Edition-Summary.pdf (‘‘Heavy Digital complete paperwork online (74% vs. 65%) are more Auto., ‘‘Cox Automotive Car Buyer Journey Study: Buyers were the Most Satisfied’’). satisfied with their dealership experience.); 2022 Pandemic Edition’’ 22 (2021), https:// Car Buyer Journey, supra note 25, at 22 (‘‘More www.coxautoinc.com/wp-content/uploads/2021/02/ VerDate Sep<11>2014 19:33 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 679 consumers are able to observe prices for number sold as the supply is not fixed. a distortion exists in the market causing vehicles before visiting dealerships—as As a result, this quantity expansion the product in question to be sold at a is intended by the Rule—prices and effect unambiguously increases welfare price above the marginal (social) cost of dealer profits are likely to fall.554When by reducing the deadweight loss that production (e.g., a tax, an externality, or not accompanied by changes in quantity occurs when firms can charge prices a markup enabled by market power), (due to a fixed supply of the good), price that are marked up over marginal costs. this quantity expansion has the effect of adjustments serve to transfer welfare
will likely also lead to an increase in the the good sold will typically increase. If The solid line reflects the demand for will go to consumers, and part will go be calculated from an estimate of the the good, where some quantity is to producers. slope or elasticity of the demand curve purchased at a market price of p 0 (point Imagine that this graph depicts the for new vehicles), and some information A), which is higher than marginal costs market for new automobiles. The Final or assumption about the shape of the (MC). Because of this wedge between Rule will increase price competition, demand curve between points A and B. price and marginal costs, there is a thus reducing market power and Of course, the new automobile market is reduction in welfare relative to the shifting prices closer to marginal costs closely linked to the used automobile outcome where prices equal marginal in the new automobile market. If this market, so this simple picture does not costs; this deadweight loss is illustrated market satisfied the criteria for the capture the entire story. on the graph by the bordered triangle simple case described herein (i.e., no When a good has a close substitute (ACD). Holding everything else close substitutes or complements), the (like used versus new vehicles), a price constant, when prices fall from p to p , only data we would need to estimate decrease for that good will cause 0 1 this deadweight loss is reduced to some this change in total welfare would be demand for the related good to decrease. extent. Part of this increase in welfare the predicted change in price, the Also, in the case of automobiles, there predicted change in quantity (which can is a long-run link between the new and 554Marco A. Haan et al., ‘‘A Model of Directed www.transportation.gov/sites/dot.gov/files/docs/ transfer from buyers to sellers.’’ To the extent any Consumer Search,’’ 61 Int’l J. Indus. Org. 223, 223– OMB%20Circular%20No.%20A-4_0.pdf: ‘‘A price changes caused by the Rule result in transfers 55 (2018), https://doi.org/10.1016/ regulation that restricts the supply of a good, to consumers from dealers who were in violation j.ijindorg.2018.09.001; Jose´Luis Moraga-Gonzalez et causing its price to rise, produces a transfer from of existing laws, such transfers would be consistent al., ‘‘Consumer Search and Prices in the Automobile buyers to sellers. The net reduction in the total with the agency’s mission of providing redress to Market.’’ 90 Rev. Econ. Stud. 1394–1440 (2023), surplus (consumer plus producer) is a real cost to https://doi.org/10.1093/restud/rdac047. society, but the transfer from buyers to sellers injured consumers and its history of doing so in 555See Off. of Mgmt. & Budget, Exec. Off. of the resulting from a higher price is not a real cost since enforcement actions. President, ‘‘Circular A–4’’ 38 (2003), https:// the net reduction automatically accounts for the VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 >HPG/<100.42AJ40RE 680 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations used vehicle markets as a new vehicle resulting simulations examine the long- an estimate of baseline markups, we purchased today becomes a potentially run ‘‘steady state’’ of vehicle inventories estimate the aggregate cost of new- and available used vehicle tomorrow. These and demand, accounting for cross- used-vehicles sold in 2019.560 linkages between the markets will market demand effects as well as the Finally, based on the academic dampen the demand response to any endogenous supply of used vehicles literature on search costs in the given price change in the primary resulting from changes in demand for automobile market, the Rule is expected market. In practice, this means that our new vehicles in previous periods. to reduce prices of new vehicles by estimates of the responsiveness of new Importantly, among the outputs of their reducing the markup that dealers are vehicle purchases to price changes (i.e., simulations are the ‘‘policy price able to charge over marginal costs. We the price elasticity of demand for new elasticities’’ required by our welfare have identified two papers that vehicles) will overstate the change in change formula. Our base case estimates empirically estimate the effect of price quantity resulting from a change in of deadweight loss reduction use the transparency or reduced search frictions prices, because such estimates typically long-run policy price elasticities that on auto markups by specifying a assume that all other prices remain result from calibrating the model with structural model of the new-vehicle constant. In addition, if there are the EPA Report’s intermediate values for market, estimating the structural distortions present in the market for the aggregate new vehicle and outside parameters, and then conducting related goods (i.e., used vehicles are also option demand elasticities, but we counterfactual simulations where search sold at a markup over marginal costs) explore sensitivity to other calibration frictions are reduced. Murry and Zhou only examining the welfare effect in the scenarios. (2020) simulate a full information primary market will understate the total To obtain baseline estimates of new- counterfactual in the Ohio automobile welfare effect, as there will be an vehicle markups, we refer to a recent market where search frictions are analogous reduction in deadweight loss paper entitled ‘‘The Evolution of Market eliminated entirely and find that in the market for the related good. These Power in the US Automobile Industry’’ markups are reduced by $333.561 linkages between markets for related by Paul Grieco, Charles Murry, and Ali Moraga-Gonzalez et al. (2022) simulate goods become difficult to explain Yurukoglu.557The authors specify a a counterfactual in the Dutch graphically. However, we have included model of the U.S. new car industry to automobile market where prices are in the technical appendix an algebraic explore trends in concentration and observed prior to costly consumer derivation of the total welfare effect in markups. The authors find that markups search (i.e., visiting dealerships) and new and used vehicle markets resulting in the industry have been falling over find that markups are reduced from from the finalization of the Rule. The time generally, but have been fairly 40.52% to 32.59%.562For our base case resulting formula requires estimates of stable since the early 2000s.558As our estimates, we use the smaller Murry and seven parameters in order to compute baseline, we use their most recent Zhou (2020) estimate, primarily because the welfare effect: two ‘‘policy estimate of industry markups, which their model is estimated using U.S. data elasticities’’ that reflect the was 15% in 2018.559While this estimate consistent with our setting. However, responsiveness of quantities of new and reflects markups over production costs we note that Moraga-Gonzalez et al. used vehicles sold to a change in prices by manufacturers and not markups over offers evidence to suggest that in the new vehicle market after all wholesale prices paid by dealers, it is significantly larger changes in markups adjustments have occurred in both the wedge between retail price and may result from the Rule. markets, two baseline markups that production cost that matters for welfare. Using these parameters obtained from represent the differences between prices As we are unaware of any publicly the literature in combination, we and marginal costs for new and used available data measuring used-vehicle implement the formula for the change in vehicles, two quantities that reflect the markups, we explore two alternatives total welfare given in the technical aggregate costs of all new and used that we believe reflect the limiting appendix. For each market—new and vehicles sold under the status quo, and cases: (1) used vehicles have no markup used—the formula multiplies the policy the predicted change in prices due to and (2) used-vehicle markups are the price elasticity by the percent change in the Rule. same as new-vehicle markups. price to get the percent change in We obtain both quantities of new- and quantity, and then multiplies this by the 4. Estimation used-vehicles sold as well as average aggregate markup (as given by the price- To obtain ‘‘policy elasticities’’ we prices from National Transportation cost markup563at baseline times the reference a U.S. Environmental Statistics, Table 1–17. As before, we aggregate cost of baseline transactions) Protection Agency report titled ‘‘The exclude private party, fleet, and to get the approximate change in total Effects of New-Vehicle Price Changes on wholesale transactions. This exclusion welfare per year. As an example, our New- and Used-Vehicle Markets and is likely to bias our estimate of the total base case estimate assumes a policy Scrappage’’ (‘‘EPA Report’’).556In this welfare effect downward because, report, the authors ‘‘developed a unlike the time savings benefits of the 560Aggregate cost of good i is equal to (1¥m i) × theoretical model of the relationships Rule which may be restricted to dealer- pi × Qi, where m i, pi, and Qiare the markup, price, between new- and used-vehicle markets, and quantity sold of good i, respectively. consumer transactions, the price effects 561Charles Murry & Yiyi Zhou, ‘‘Consumer scrappage, and total vehicle inventory’’ of the Rule are likely to carry over to Search and Automobile Dealer Colocation,’’ 66 that allows for simulation of prices and private party and fleet transactions. Mgmt. Sci. 1909–1934 (2020), https://doi.org/ quantities in these markets. The model 10.1287/mnsc.2019.3307. Using these aggregate figures along with is calibrated using a range of demand 562Jose´Luis Moraga-Gonzalez et al., ‘‘Consumer elasticity estimates from a review of the Search and Prices in the Automobile Market,’’ 90 557See Paul L. E. Grieco et al., ‘‘The Evolution of Rev. Econ. Stud. 1394–1440 (2022), https://doi.org/ relevant literature on auto markets. The Market Power in the US Automobile Industry’’ 10.1093/restud/rdac047. (2022), mimeo. 563The baseline new vehicle markup estimate of 556Assmt. & Standards Div., Ofc. of Transp. & Air 558Paul L. E. Grieco et al., ‘‘The Evolution of 15% is defined as the ratio of the price-cost margin Quality, U.S. Env’t Prot. Agency, ‘‘The Effects of Market Power in the US Automobile Industry’’ 19 to unit price, i.e. (pi ¥MCi)/pi, and is sometimes New-Vehicle Price Changes on New- and Used- (2022), mimeo. referred to as the Lerner index. With knowledge of Vehicle Markets and Scrappage’’ (2021), https:// 559Paul L. E. Grieco et al., ‘‘The Evolution of either price or marginal cost, this can be rearranged cfpub.epa.gov/si/si_public_file_download.cfm?p_ Market Power in the US Automobile Industry’’ 19 to express the price-cost markup, i.e. (pi ¥MCi)/MCi, download_id=543273&Lab=OTAQ. (2022), mimeo. which is used in the formula referenced here. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 681 price elasticity of new-vehicle demand new-vehicle price) of ¥0.04, and used (15%), resulting in the following of ¥0.25, a policy price elasticity of car markups equal to new car markups calculation: used-vehicle demand (with respect to This annual reduction in deadweight vehicle demand with respect to the elasticities of ¥0.14 and 0.01, Scenario loss is then applied to each year of the change in price and (2) the existence of B corresponds to new-/used-vehicle 10-year analysis period and discounted baseline markups in the used-vehicle elasticities of ¥0.17 and ¥0.04, to the present to yield the total benefit. market. In Table 2.4, baseline markups Scenario C corresponds to new-/used- We highlight this base case (bolded in for used vehicles vary across columns vehicle elasticities of ¥0.23 and ¥0.10, Table 2.4) but explore several scenarios while the relevant policy price and Scenario E corresponds to new-/ that vary along two dimensions: (1) the elasticities vary across rows: Scenario A used-vehicle elasticities of ¥0.39 and ‘‘policy elasticity’’ of new- and used- corresponds to new-/used-vehicle ¥0.12. TABLE 2.4—REDUCTION IN DEADWEIGHT LOSS (IN MILLIONS), 2024–2033 No used-vehicle markups Symmetric markups Scenario Total @ 3% Total @ 7% Total @ 3% Total @ 7% discount discount discount discount A............................................................................................... $617 $508 $568 $468 B............................................................................................... 749 617 945 778 C .............................................................................................. 1,014 835 1,504 1,238 D .............................................................................................. 1,102 907 1,298 1,069 E............................................................................................... 1,719 1,415 2,307 1,899 Note: Benefits have been discounted to the present at both 3% and 7% rates. Scenarios correspond to those in Table 7–2 of ‘‘The Effects of New-Vehicle Price Changes on New- and Used-Vehicle Markets and Scrappage.’’ New-vehicle demand elasticities range from ¥0.4 (Scenarios A, B, and C) to ¥0.8 (Scenario D) to ¥1.27 (Scenario E). Outside option elasticities vary from 0 (Scenario A) to ¥0.05 (Scenarios B and D) to ¥0.14 (Scenarios C and E). New/Used cross-price elasticities are set such that substitution away from new vehicles flows almost entirely to used-vehicles, with only small effects on the total number of vehicles. All scenarios hold scrappage elasticity fixed at ¥0.7.
5. Benefits Related to More Transparent a quantitative gain, these benefits are data was not available (e.g., regarding Negotiation left unquantified in the analysis. time devoted to compliance tasks), the Commission made assumptions based An additional, albeit difficult to C. Estimated Costs of Final Rule on a review of previous regulatory quantify, benefit is the reduction in analyses that featured similar discomfort and unpleasantness that In this section, we describe the costs requirements, with adjustments made consumers associate with negotiating of the Rule provisions as enumerated in based on our understanding of the motor vehicle transactions under the SBP VII.A, provide quantitative particulars of motor vehicle dealer status quo. According to the 2020 Cox estimates where possible, and describe operations.565 Automotive Car Buyer Journey study, costs that we can only assess Throughout this section, the cost of filling out paperwork, negotiating qualitatively. Some industry employee time is monetized using vehicle price, and dealing with commenters questioned the wages obtained from the Bureau of salespeople are three of the top four appropriateness of the data and Labor Statistics Industry-Specific frustrations for consumers at car assumptions used in the NPRM, Occupational Employment and Wage dealerships.564Once the Rule is in including the discussion of costs in the Estimates for Automobile Dealers.566 effect, all three of these issues will be preliminary regulatory analysis. The mitigated somewhat by the transparency Commission used a variety of data 565See, e.g., Off. of the Sec’y, Dep’t of Transp., facilitated by the Rule’s required sources in its calculations for the NPRM
stressful. While we expect an increase establishment counts from U.S. Census 566Applicable wage rates for the Commission’s in social welfare through this channel, County Business Patterns, transaction preliminary regulatory analysis, which was due to a lack of data allowing this more counts from National Transportation published in its NPRM, were based on data from the qualitative benefit to be translated into Statistics, and breakdowns of motor Bureau of Labor Statistics’ May 2020 National vehicle transactions (e.g., by financing, Industry-Specific Occupational Employment and Wage Estimates for NAICS industry category GAP agreement, F&I add-ons) from 5642020 Cox Automotive Car Buyer Journey, 441100—Automobile Dealers, which is available at supra note 25, at 37. numerous industry sources. Where such Continued VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 >HPG/<200.42AJ40RE 682 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations This is valid under the assumption that The second scenario allowed for costs 150 assumed and that review would the opportunity cost of hours spent in incurred by firms because of the require at least 15 minutes per compliance activities is hours spent in enhanced penalty associated with document because ‘‘dealers typically do other productive activities, the social violating the Rule (relative to a de novo not fully control the advertising value of which is summarized by the violation of section 5 of the FTC Act) platforms they use given the direct employee’s wage.567To the extent that under the assumption that dealers may involvement of the vehicle OEMs . . . these activities can be accomplished expend additional resources to ensure and that of other third parties. Also, using time during which employees compliance. This ‘‘heightened many dealers, and especially small would otherwise be idle under the compliance review’’ scenario assumed business dealers do not employ internal status quo, our estimates will overstate that each of the 46,525 dealers would compliance officers or attorneys who the welfare costs of the Rule. have a professional spend 5 additional could conduct marketing reviews.’’568 1. Prohibited Misrepresentations minutes reviewing each public-facing As there is scant empirical evidence representation (assumed to be 150 per In its preliminary analysis, the provided for these assertions, the year on average). At a labor rate of Commission presented two scenarios Commission’s preliminary estimates $26.83 per hour for compliance officers that estimated the costs associated with remain unchanged (with the exception employed at auto dealers, this cost was the Rule provisions prohibiting of updates to more recent data where estimated to be $15.6 million per year.
misrepresentations. First, as all the available). However, we have conducted misrepresentations prohibited by the The Commission received comments a sensitivity analysis in which all labor Rule are material and therefore about the appropriateness of the data hours in the base case analysis are deceptive under section 5 of the FTC and assumptions used to estimate the increased by an order of magnitude, in Act, one scenario assumed that all cost of complying with this provision of keeping with the spirit of the comments motor vehicle dealers are compliant the Rule. The most specific criticism discussed; see SBP VII.G. As can be seen with section 5 under the status quo and contended that the number of in the results from that analysis, the will therefore conduct no additional documents dealers would need to Rule clearly still generates net benefits review. review would be ‘‘several times’’ the for society. TABLE 3.1—ESTIMATED COMPLIANCE COSTS FOR PROHIBITED MISREPRESENTATIONS 2024–2033 Scenario 1—No Review:
2. Required Disclosure of Offering Price and any subsequent re-pricing of procedures for determining the public- in Advertisements and in Response to vehicles in inventory would take no (or facing prices of vehicles in inventory. In Inquiry minimal) additional time under the addition, each dealer would employ a Rule. programmer for 8 hours to update any The Rule requires all dealers to As with the prohibition on automated systems that need to be disclose an offering price in any misrepresentations, the second scenario updated in accordance with these new advertisement that references an considers the enhanced penalty policies and procedures. At labor rates individual vehicle or in response to any associated with violating the Rule and of $63.93 per hour and $28.90, consumer inquiry about an individual allows for costs given that dealers may respectively, this cost was estimated at vehicle. For this provision, the expend additional resources to ensure $34.5 million. Both scenarios assume Commission’s preliminary analysis that the prices they disclose conform to that, once calculated, the time required presented two cost scenarios for dealers the Rule’s definition of offering price, to train employees to include prices in when complying with the Rule. First, thus minimizing the risk of penalties response to consumer inquiries about because dealers already price all should they fail to conform to that specific vehicles will either be vehicles in inventory under the status definition. The latter scenario assumed negligible or be subsumed by training quo, one scenario assumed that there that, in the first year under the Rule, costs included under other provisions. would be no additional cost of each of the 46,525 dealers would have Finally, the time required to deliver the complying with this provision. This a sales and marketing manager spend 8 disclosures is also negligible, as prices scenario assumes that the initial pricing hours reviewing their policies and are already typically disclosed in https://www.bls.gov/oes/2020/may/oes_nat.htm. NAICS industry category 441100—Automobile 567This assumption would hold, for example, if Labor rates in the present analysis have been Dealers, which is available at https://www.bls.gov/ both the product and labor markets in this industry updated based on data from the Bureau of Labor oes/current/naics4_441100.htm. were competitive. Statistics’ May 2022 National Industry-Specific 568Comment of Nat’l Auto. Dealers Ass’n, Doc. Occupational Employment and Wage Estimates for No. FTC–2022–0046–8368 at 299–300. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 683 advertisements and in interactions with that had not been considered in the Commenters also raised concerns consumers under the status quo; the preliminary analysis. about the potential for behavioral Rule just requires the price to conform If indeed the Rule required significant adjustment by dealerships, choosing to to a specific definition. additional employee time spent per refrain from advertising individual Some commenters raised issues with transaction, that would have vehicles or responding to consumer the assumptions regarding the time and implications for the cost estimates. inquiries about specific vehicles and resources necessary to determine However, as previously discussed, it is thus increasing consumers’ costs of compliant prices as well as deliver the the understanding of the Commission search. The Commission, however, has required disclosures. The comments that virtually all dealer-customer not been presented with compelling asserted that vehicle prices change discussions regarding specific motor evidence that dealers will forego frequently in response to market vehicles that occur under the status quo competition with other dealers on price, conditions, which would make it already include time devoted to a choosing instead to default to difficult to ensure that offering prices discussion of the vehicle’s price. The advertising a focal price (such as are accurate. Additionally, comments only change under the Rule is that, MSRP). Indeed, the Commission’s disputed the notion that delivery of the within that price discussion an offering offering price disclosure requirement is information to consumers in accordance price (as defined by the Rule) must be similar to existing requirements in a with the Rule’s provisions would not be provided. The cost of determining this costly, in terms of employee time and price is included under the second number of States, and the Commission consumer time. One comment suggested scenario in our preliminary analysis, is not aware of any such behavioral that ‘‘there would be an average of three and sensitivity to the specific adjustments (e.g., eliminating prices Offering Price disclosures based there assumptions of that scenario have been from advertisements, refusing to [sic] being an average of three dealer- explored in the Appendix. The results respond to consumer inquiries, etc.) customer discussions regarding three from our analysis indicate that the Rule having occurred in those States. As a specific motor vehicles, per generates net benefits for society under result, the Commission’s preliminary transaction,’’569asserting that the a wide range of plausible assumptions estimates remain unchanged (with the frequency of these disclosures would about the inputs to our cost exception of updates to more recent data have implications for the cost estimates calculations. where available). TABLE 3.2—ESTIMATED COMPLIANCE COSTS FOR OFFERING PRICE DISCLOSURES Scenario 1—No Review:
3. Disclosure of Add-On List and approximately $42 million and $43 corresponding to different methods by Associated Prices million for the disclosure of add-on lists which dealers may choose to comply and associated prices, those costs are with the Rule. In the first scenario, we In the NPRM, the proposed rule not included in the final analysis. assumed that dealers would incur a one- would have required all dealers to time, upfront cost of both designing the disclose an itemized menu of all 4. Required Disclosure of Total of optional add-on products and services Payments for Financing/Leasing required disclosures and informing along with prices, or price ranges, on all Transactions associates of their obligations to provide dealer-operated websites, online the disclosures. Importantly, ongoing services, and mobile applications as The Rule requires all dealers to costs on a per transaction basis were well as at all dealership locations. disclose, when representing a monthly assumed to be negligible, reflecting a Various commenters expressed concern payment, the total of payments for the compliance regime where dealers that the add-on list requirement would financing or leasing contract. In already generate the required have been too complex and potentially addition, in any comparison of two information during the normal course of confusing, as discussed in the payment options with different monthly business and must only convey it to paragraph-by-paragraph analysis in SBP payments, the dealer is required to consumers at an appropriate point in III.D.2(b). As a result, the Commission disclose that the option with the lower the transaction. In the second scenario, has determined not to finalize §463.4(b) monthly payment features a higher total we assumed that dealers incur an of the proposed rule. While the of payments (if true). additional ongoing cost per financed or preliminary analysis estimated The Commission’s preliminary leased transaction in order to compliance costs between analysis presented two cost scenarios, communicate the required disclosures 569Comment of Nat’l Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8368 at 300.
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 684 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations to consumers in writing, reflecting a that . . . the average dealer experiences dealer under the status quo. The only compliance regime where dealers find it an annual sales consultant turnover rate additional cost incurred per transaction necessary to maintain a documentary of 67%.’’571The comment further would be the delivery of this record of compliance with the Rule.570 asserted that dealers cannot determine information to the consumer (the The upfront costs (and total costs the total cost of a financing or leasing determination of which is contemplated under Scenario 1) of complying with agreement without knowing the terms in the costs estimated under Scenario 1). this provision as estimated by the for which consumers qualify and what With respect to the comment preliminary analysis were limited to 8 terms they want. The comment argued regarding insufficient allowance for hours spent by a compliance manager that as a result, only the scenario with training costs in light of employee churn (at a rate of $26.83) on the creation of costs incurred on a per transaction basis in the industry, the Commission has a template disclosure script that should be considered. Finally, the determined this to be a valid critique of contains the required information and comment argued that the per-transaction the preliminary analysis. As a result, the informing sales staff of their obligations costs in Scenario 2 are too low, both final regulatory analysis includes an to deliver the disclosure at an because the Commission underestimates additional ongoing cost for both appropriate time during the transaction.
time per financed/leased transaction (at industry, at an (average) cost of $29.43 a rate of $21.84) spent on the process of These comments misunderstand the per hour. The resulting additional populating and delivering a printed Commission’s analysis with respect to ongoing costs in both scenarios amounts version of the disclosure, with $0.15 per the costs of complying with this to $12.3 million per year. Further, as disclosure spent on printing costs. The provision. Scenario 1 does not discussed in a previous section, the total additional cost under this scenario anticipate that the dealer presents a final analysis excludes private party, is estimated at $213.4 to $249.5 million. consumer with the total of payments for fleet, and wholesale transactions.572The Comments from industry groups a financing or leasing contract at the remainder of the Commission’s asserted that the preliminary analysis outset of the transaction. It requires only preliminary estimates remain underestimated training costs and that it that, at the point where the dealer unchanged (with the exception of would be difficult to determine the total engages in discussions regarding updates to more recent data where of payments for financing prior to different monthly payments for available). Concerns about knowing the details of the transaction. financing or leasing arrangements, the underestimates of the time required to One comment contended that ‘‘these information that must be disclosed (i.e., review disclosures on a per-transaction mandates . . . necessarily would the total of payments and a comparison basis are addressed by the Commission’s involve significant annual training of these totals across differing monthly sensitivity analyses conducted in the requirements for new employees given payments) is already available to the Appendix. TABLE 3.4—ESTIMATED COMPLIANCE COSTS FOR FINANCING COSTS 2024 only 2024–2033 Scenario 1—Creation of disclosure and training only:
Covered new vehicle sales per yearb ............. ................................................................................. .............................. 10,343,319 % New vehicle sales involving financingc....... ................................................................................. .............................. 81% Covered used vehicle sales per year .............. ................................................................................. .............................. 21,219,640 % Used vehicle sales involving financing ....... ................................................................................. .............................. 35% Covered new vehicle leases per year ............. ................................................................................. .............................. 3,423,294 570While disclosures of this nature are already standard TILA disclosure has not yet been 572Without cross-tabulations of fleet sales and required to be present in the financing contract by generated at the point where disclosure is required sales involving financing, we assume that these are the Truth in Lending Act (TILA), the Rule would under the Rule. independent such that the fraction of covered change the timing of a subset of those disclosures. transactions involving financing is equal to the 571Comment of Nat’l Auto Dealers Ass’n, Doc.
As a result, the dealer may have to develop and fraction of covered transaction times the fraction of
deliver a separate document in the event that the financed transactions. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 685 TABLE 3.4—ESTIMATED COMPLIANCE COSTS FOR FINANCING COSTS—Continued 2024 only 2024–2033 Total transactions involving monthly pay- ................................................................................. .............................. 19,228,256 ments/financing.
bFor total volume, National Transportation Statistics Table 1–17. For retail/non-fleet fraction, Edmunds Automotive Industry Trends 2020 (for new vehicle) and Cox Automotive via Automotive News (for used vehicles). cMelinda Zabritski, Experian Info. Sols. Inc., ‘‘State of the Automotive Finance Market Q4 2020’’.
5. Prohibition on Charging for Add-Ons disclosures determined by the fraction these policies and their obligations That Provide No Benefit of transactions involving optional add- under the Rule. Finally, the Commission ons and/or financing. includes a second cost scenario in The Rule prohibits dealers from In response to numerous comments, which dealers will choose to deliver one charging for add-on products or services the Commission has determined not to itemized disclosure to each customer from which the targeted consumer finalize the proposal in §463.5(b), before the finalization of each would not benefit. Compliance with this which would have required the delivery transaction. Although this is not provision will require dealers to of written disclosures and required under the Final Rule, dealers develop policies and transaction-level acknowledgement via signature of those may wish to have documentation of rules about when consumers can be disclosures by consumers. Various compliance with the provisions of the charged for add-on products and commenters were concerned that the Rule. As in the preliminary analysis, the services. The Rule as proposed in the add-on disclosures would add Commission assumes that each dealer NPRM also would have included documents and time to the transaction. will employ 8 hours of compliance additional provisions relating to add- In response to these comments, the manager time and 4 hours of sales ons that have not been finalized. These Commission has determined to omit manager time creating this disclosure included a prohibition on charging for what would have been the only and 8 hours of programmer time optional add-on products or services provision affirmatively requiring the creating a system to populate these unless dealership employees made a dealer and consumer to review forms when provided inputs by sales number of disclosures at various points additional documentation during a staff. The same occupational wage data before finalizing a transaction. This transaction. As a result, while the have been used, but the rates have been provision would have required each preliminary analysis estimated updated to match the most recent data dealer to design form disclosures, create compliance costs between available. We further assume, as in the a system for populating these forms, approximately $883 million and $1 preliminary analysis, that sales staff will train their sales staff on the disclosure billion for the disclosure of total costs spend 2 minutes per disclosure (at a rate requirements, and provide the for cash and financed transactions with of $28.41 per hour) updating, printing, disclosures in writing, with the optional add-on products, the cost and delivering these forms to consumers appropriate information filled in, to estimate in the final analysis is on the and that the physical costs of delivering each consumer prior to completing the order of one-tenth to one-half of the the disclosure are roughly $.11 per transaction. preliminary estimate (depending on the disclosure.573Finally, as discussed in a The Commission’s preliminary scenario).
requirements budgeted for 8 hours of this section. First, the Commission compliance manager time (at a cost of assumes that each dealer will employ 8 573The physical costs are $.15 per paper $26.83 per hour) and 4 hours of sales hours of compliance manager time (at a disclosure and $.02 per electronic disclosure, manager time (at a cost of $63.93 per rate of $31.21) and 8 hours of sales assuming that 27% are made electronically. This hour) to design disclosure forms, and an manager time (at a rate of $80.19) in the assumption is informed by a consumer survey that additional 8 hours of programmer time first year under the Rule, to cull add-ons indicates 73% of consumers with motor vehicles prefer to receive registration renewal notices by (at a cost of $28.90) to create a system with no value from their offerings and mail as opposed to electronically. See Consumer to populate these forms. The develop policies regarding when certain Action, ‘‘Your opinion wanted: Paper vs. electronic preliminary analysis also budgeted for 2 add-ons may or may not be sold. bills, statements and other communications’’ 4 minutes of sales associate time (at a rate Second, the Commission budgets for 1 (2018–2019), https://www.consumer-action.org/ downloads/Consumer_Action_Paper_v_electronic_ of $21.84 per hour) and $0.11 in hour of training per year for each of the survey.pdf (showing that 1800 of 2456 respondents printing/electronic delivery costs per 417,110 sales and related employees who owned and needed to periodically register a disclosure, with the number of across the industry, to apprise them of motor vehicle preferred mail notices). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 686 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations TABLE 3.5—ESTIMATED COMPLIANCE COSTS FOR PROHIBITION ON CERTAIN ADD-ONS 2024 only 2024–2033 Scenario 1—Policies and Training Only:
Number of dealers ........................................... ................................................................................. 47,271 .............................. Compliance manager hours per dealer ........... ................................................................................. 8 .............................. Cost per hour of compliance manager ............ ................................................................................. $31.21 .............................. Sales manager hours per dealer ..................... ................................................................................. 4 .............................. Cost per hour of sales manager ..................... ................................................................................. $80.19 .............................. Programmer hours per dealer ......................... ................................................................................. 8 .............................. Cost per hour of programmer .......................... ................................................................................. $40.24 .............................. Subtotal .................................................... ................................................................................. $42,182,750 .............................. Disclosure delivery (per transaction):
New vehicle sales per year ............................. ................................................................................. .............................. 10,343,319 Used vehicle sales per year ............................ ................................................................................. .............................. 21,219,640 Minutes per disclosure .................................... ................................................................................. .............................. 2 Cost per hour of disclosure ............................. ................................................................................. .............................. $28.41 Physical costs per disclosure .......................... ................................................................................. .............................. $0.11 Subtotal .................................................... 3% discount rate .................................................... .............................. $285,904,302 7% discount rate .................................................... .............................. $235,407,319 Scenario 2—Total Cost ............................ 3% discount rate .................................................... .............................. $474,927,875 7% discount rate .................................................... .............................. $405,936,291 Note: In scenarios with ongoing expenses, costs have been discounted to the present at both 3% and 7% rates.
6. Requirement To Obtain Express, calculations of loan-to-value ratios in upgrade their systems and create the Informed Consent Before Any Charges contracts including GAP agreements. templates necessary to accommodate The Rule requires dealers to obtain • Copies of all purchase orders, retention of all relevant materials. The express, informed consent before financing and lease contracts signed by Commission also assumed that each charging any consumer for any product the consumer (whether or not final dealer would employ 1 additional or service in association with the sale, approval is received), and all written minute of sales staff time per transaction financing, or lease of a vehicle. Because communications with any consumer to populate forms and store relevant we presume that all dealers who are who signs a purchase order or financing materials. complying with the law currently have or lease contract. One industry commenter contended policies in place to prevent charges • Copies of all written consumer that the proposed rule would impose without consent, we assume that there complaints, inquiries related to add-ons, substantial and costly recordkeeping will be no additional costs imposed by and inquiries and responses about mandates, citing primarily the various this provision. individual vehicles.
7. Recordkeeping be required to capture and retain produced in the normal course of communications. The Commission The Final Rule requires dealers to business under the status quo, or the believes the recordkeeping requirements retain records of all documents costs of creating them have already been strike an appropriate balance, requiring pertaining to Rule compliance. These accounted for in previous sections. In its the retention of materials needed to recordkeeping requirements include: preliminary analysis, the Commission • Copies of all materially different assumed that each dealer would incur allow effective enforcement while being mindful of dealer burden. In addition, marketing materials, sales scripts, and an upfront cost, employing 8 hours of the recordkeeping requirements are training materials that discuss sales programmer time, 5 hours of clerical prices and financing or lease terms. time, 1 hour of sales manager time, and similar to analogous requirements in • Records demonstrating that all add- 1 hour of compliance officer time, at other Commission disclosure rules, as ons charged for meet the requirements hourly rates of $28.90, $18.37, $63.93, stated in the Rule, including and $26.83, respectively, in order to VerDate Sep<11>2014 19:33 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 687 tailored to individual industries and and used vehicle sales with a GAP which was left unquantified in the markets.574 agreement to 17%.575As in the preliminary analysis. After additional As such, the Commission’s final preliminary analysis, for these research, the Commission estimates that analysis retains its preliminary transactions sales staff will spend an each dealer will need to spend estimates—appropriately updated where additional minute to generate and store approximately $300 per year on storage more recent data were available—with a the relevant calculations. As discussed (either on premises or in the cloud) to few changes. First, we made in a previous section, the final analysis house the records that the Rule requires adjustments to the cost estimates excludes private party, fleet, and them to maintain. Based on a review of associated with the required loan-to- wholesale transactions. In addition, the the transaction records we have value calculations for all transactions expansion of the volume of records that received from dealers through with GAP agreements. Based on a dealers are required to retain and investigations, this amount is likely to comment from one industry group, we manage will likely require investment in be more than sufficient for revised down the share of covered new additional IT systems and hardware, compliance.576 TABLE 3.6—ESTIMATED COMPLIANCE COSTS FOR RECORDKEEPING 2024 only 2024–2033 Updating systems:
Number of covered motor vehicle sales.......... ................................................................................. .............................. 31,562,959 % of sales with GAP agreementa ................... ................................................................................. .............................. 17% Number of motor vehicle sales with GAP ................................................................................. .............................. 5,444,502 agreement.
Sales staff minutes per transaction ................. ................................................................................. .............................. 1 Cost per hour of recordkeeping ...................... ................................................................................. .............................. $28.41 Subtotal .................................................... 3% discount rate .................................................... .............................. $270,444,391 Subtotal .................................................... 7% discount rate .................................................... .............................. $222,677,967 Total Cost .......................................... 3% discount rate .................................................... .............................. $295,692,777 Total Cost .......................................... 7% discount rate .................................................... .............................. $247,926,354 Note: In scenarios with ongoing expenses, costs have been discounted to the present at both 3% and 7% rates. aComment of Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022–0046–8368 at 12 n.43.
D. Other Impacts of Final Rule response to the transparency facilitated quo would not have complied with the by the Rule, and quantified the benefits Rule to consumers. In addition, other As the status quo in this industry that result when vehicle quantities prices may be impacted by the Rule, features consumer search frictions, increase in response to a more such as used vehicle prices and add-on shrouded prices, deception, and transparent and less deceptive prices. As we have insufficient data to obfuscation, dealers likely charge higher equilibrium. The price changes in the predict these price effects, neither the prices for a number of products and new vehicle market discussed in SBP transfers associated with these potential services than could be supported once VII.B will also have the effect of price changes nor the resulting quantity the Rule is in effect. SBP VII.B transferring $3.4 billion per year from adjustments and deadweight loss discussed the Commission’s expectation dealers whose conduct under the status reductions are quantified in the current that prices are likely to adjust in 57416 CFR 310.5 (Telemarketing Sales Rule); 16 576Our review of dealer transaction records premises or through a cloud storage vendor—which CFR 437.7 (Business Opportunity Rule); 16 CFR suggests that a typical transaction generates 3.4 MB is sufficient for more than 100 times the data 453.6 (Funeral Industry Practices Rule); 16 CFR of data under the status quo. Given the average storage capacity necessary to retain all transaction 301.41 (Fur Products Labeling). number of transactions per dealer, this suggests that files generated by a typical dealership in a year storing all these records would require dedicated under the status quo. The Commission anticipates 575Comment of Nat’l Auto. Dealers Ass’n, Doc. space of roughly 4.2 GB per year. With a two-year that this amount of data storage capacity will be No. FTC–2022–0046–8368 at 12 n.43 (indicating retention window, this corresponds to 8.4 GB of more than sufficient to also allow for dealers to 15.3% (18.2%) for new (used) vehicles). These rates storage at any given time. We estimate that the keep any necessary records of correspondence with were weighted by transactions counts to calculate (annual) amount budgeted here should be sufficient consumers who ultimately do not complete an overall rate of 17%. to maintain at least 1 TB of storage—either on transactions at the dealership. VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 688 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations analysis. Finally, it may be the case that otherwise have gone to dealers using net benefits—providing one measure of enhanced transparency of the Rule leads bait-and-switch tactics or deceptive the value of regulation. to fewer of certain types of transactions door opening advertisements will now Using our base case estimates, the relative to the status quo. Recent go to honest dealerships. Again, present value of quantified benefits for evidence suggests that price shrouding assuming that the costs of the firms are consumers from the Rule’s requirements of the kind that is prevalent in the motor similar, any one-for-one diversion of over a 10-year period using a 7% vehicle market results in consumers sales from one set of businesses to discount rate is estimated at $13.4 spending more than they would another is generally characterized as a billion. The present value of quantified otherwise.577We expect that this transfer under OMB guidelines. costs for covered motor vehicle dealers phenomenon may extend especially to However, in this case, it would of complying with the Rule’s the motor vehicle add-on market, where represent a transfer from the set of requirements over a 10-year period the Commission has compiled dishonest dealers to honest dealers, using a 7% discount rate is estimated at which may weigh differently if profits substantial evidence that individuals $1.1 billion. This generates an estimate from law violations are not counted frequently inadvertently purchase add- of the present value of quantified net towards social welfare in the regulatory ons that they did not want and benefits equal to $12.3 billion using a analysis.
ultimately will not use.578While much discount rate of 7%. Using the best (or of this effect may ultimately be E. Conclusion worst) case assumptions discussed in transfers, we reiterate that to the extent the preceding analysis results in net The Commission has attempted to they represent transfers from dishonest benefits of $21.2 billion (or $5.5 billion) catalog and quantify the incremental dealers to consumers, this may be using a discount rate of 7%. benefits and costs of the provisions considered a benefit of the Rule.
Finance/Lease Total of Payments Disclosure...................................... 296 246 296 246 117 98 Offering Price Disclosure .................. 46 46 46 46 0 0 Prohibition Re Certain Add-ons & Express, Informed Consent .......... 475 406 475 406 147 128 Prohibition on Misrepresentations .... 157 130 157 130 0 0 Recordkeeping .................................. 296 248 296 248 296 248 Total Costs ................................ 1,270 1,075 1,270 1,075 559 474 Net Benefits ............................... 6,761 5,538 14,954 12,284 25,784 21,216 Note: ‘‘Low Estimate’’ reflects all lowest benefit estimates and high cost scenarios and ‘‘High Estimate’’ reflects all highest benefit estimates and low cost scenarios. ‘‘Base Case’’ reflects base case benefit estimates and high cost scenarios. Not all impacts can be quantified; estimates only reflect quantified costs and benefits.
577See Tom Blake et al., ‘‘Price Salience and problems and cited ‘‘loan packing’’ and yo-yo Nissan, No. 2:16–cv–07329 (C.D. Cal. Sept. 29, Product Choice,’’ 40 Mktg. Sci. 619–36 (2021), financing as the most frequent auto lending abuses 2016) (alleging deceptive and unauthorized add-on https://doi.org/10.1287/mksc.2020.1261. affecting servicemembers); Adam J. Levitin, ‘‘The charges in consumers’ transactions); Complaint 578See Nat’l Consumer Law Ctr., ‘‘Auto Add-ons Fast and the Usurious: Putting the Brakes on Auto ¶¶6, 9, TT of Longwood, Inc., No. C–4531 (F.T.C. Add Up: How Dealer Discretion Drives Excessive, Lending Abuses,’’ 108 Geo. L.J. 1257, 1265–66 July 2, 2015) (alleging misrepresentations regarding Inconsistent, and Discriminatory Pricing’’ (Oct. 1, (2020), https://www.law.georgetown.edu/ prices for added features); see also Auto Buyer r 2 e 0 p 1 o 7 r ) t , - h au tt t p o s - : a / d /w d w -o w n . . n p c d l f c ; . C or o g n / s im um ag e e rs s / f p o d r f A /c u a t r o _ sales/ g 2 e 6 o /2 rg 0 e 2 t 0 o / w 0 n 5 - / l L a e w v - i j t o in u _ r T n h al e / - w F p as -c t- o a n n t d en -t t h / e u - p U lo su a r d i s o / u s s it - e s/ Study, supra note 25, at 14 (‘‘Several participants who thought that they had not purchased add-ons, Reliability and Safety, Comment Letter on Motor Putting-the-Brakes-on-Auto-Lending-Abuses.pdf or that the add-ons were included at no additional Vehicle Roundtables, Project No. P104811 at 2–3 (discussing ‘‘loan packing’’ as the sale of add-on charge, were surprised to learn, when going through (Apr. 1, 2012), https://www.ftc.gov/sites/default/ products that are falsely represented as being files/documents/public_comments/public- required in order to obtain financing.); Complaint the paperwork, that they had in fact paid extra for roundtables-protecting-consumers-sale-and-leasing- ¶¶12–19, Fed. Trade Comm’n v. Liberty Chevrolet, add-ons. This is consistent with consumers’ motor-vehicles-project-no.p104811-00108/00108- Inc., No. 1:20–cv–03945 (S.D.N.Y. May 21, 2020) experiencing fatigue during the buying process or 82875.pdf (citing a U.S. Department of Defense data (alleging deceptive and unauthorized add-on confusion with a financially complex transaction, call summary that found that the vast majority of charges in consumers’ transactions); Complaint but would also be consistent with dealer military counselors have clients with auto financing ¶¶59–64, Fed. Trade. Comm’n v. Universal City misrepresentations.’’). VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 689
F. Appendix: Derivation of Deadweight We have a mass of consumers i with given markups Ti for good j and j Loss Reduction utility function ui(xi O , xi N , xi U ) over new consumer i and income Yifor consumer The derivation of the formula for the cars, used cars, and the numeraire (good i. Pre-markup prices are normalized to reduction in deadweight loss from the 0) who face the following budget one so xi j is the cost of consumer i’s Rule follows from ‘‘Sufficient Statistics constraint: purchase of good j. Total profits from Revisited’’ by Henrik Kleven.579In the the consumption of consumer i are Ti= source article, the wedge between costs S j Ti j x i j . and prices is tax rates, but here we Define a policy to be evaluated as q. consider producer markups; the Total welfare is defined as:
fundamental principles are unchanged.
is labelled the ‘‘policy elasticity’’ for 3. For simplicity, all elasticities are good and consumer with respect to assumed to be cost share-weighted averages of individual effects, so Assuming that the Rule affects only rewrite the ‘‘policy elasticities’’ as a elasticity of price with respect to the markups for new vehicles, we can product of a price elasticity and the Rule, as follows: where no dynamics in the path from the policy and marginal costs for new/used to the long-run steady-state. Computing vehicles, two quantities that reflect the this formula requires estimates of seven aggregate cost of all new/used vehicles parameters: two ‘‘policy price sold under the status quo, and the is the long-run ‘‘policy price elasticity’’ elasticities’’ that reflect the predicted change in prices due to the of demand for good w.r.t. the price of responsiveness of quantities of new and Rule. Calibration of these parameters is good , including the effects that a price used vehicles sold to a change in prices discussed in the main text. change has on the prices of related in the new vehicle market after all
Disclosure Creation Compliance Manager Hours 8 Triangular ......................... 4 12 (Scenario 2 only).
Disclosure Creation Web Developer Hours (Scenario 8 Triangular ......................... 4 12 2 only).
Disclosure Delivery Minutes (Scenario 2 only) ........... 2 Triangular ......................... 0 4 Printing Costs (Scenario 2 only) ................................. 0.15 Triangular ......................... 0.10 0.20 Electronic Disclosure Costs (Scenario 2 only) ........... 0.02 Triangular ......................... 0 0.04 TABLE A.7—ALTERNATIVE PARAMETERS: RECORDKEEPING COSTS Base case Monte Carlo Distribution lower Distribution upper Parameter Parameter value Modeled distribution bound bound GAP Sales Share ........................................................ 0.17 Triangular ......................... 0.07 0.27 GAP Sale Minutes....................................................... 1 Triangular ......................... 0 2 Upfront Web Developer Hours.................................... 8 Triangular ......................... 4 12 Upfront Clerical Hours................................................. 5 Triangular ......................... 2 8 Upfront Sales Manager Hours .................................... 1 Triangular ......................... 0 2 Upfront Compliance Manager Hours .......................... 1 Triangular ......................... 0 2 IT Hardware Costs ...................................................... 300 Triangular ......................... 100 500 We simulate 1,000 scenarios drawing recording the costs and benefits of each costs and benefits is plotted in the from these parameter distributions, potential outcome. The distribution of following table for discount rates of 3% and 7%.
VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 692 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations Differencing the costs and benefits distribution of net benefits under the this distribution under 3% and 7% from each simulation iteration yields a various parameter draws. We again plot discount rates. This exercise finds heterogeneity in still yields positive net benefits in all possibility of systematic net benefits under the alternative simulated outcomes. underestimating of labor costs, we parameter distributions, but the Rule Finally, to examine the sensitivity of calculate costs and benefits in a scenario the net benefits conclusions to the where all labor costs turn out to be ten VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 >HPG/<310.42AJ40RE >HPG/<210.42AJ40RE Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations 693 times larger than the parameter values rates, and prevalence counts) are in the main text. All non-labor hours unchanged in this analysis. costs (including benefits hours, wage TABLE A.8—PRESENT VALUE OF NET BENEFITS (IN MILLIONS), LABOR COSTS × 10, 2024–2033 Base case 3% Discount rate 7% Discount rate Benefits:
as defined by 5 U.S.C. 804(2).
463.1 Authority.
463.2 Definitions. (1) In any communication that is (e) ‘‘Covered Motor Vehicle’’ or 463.3 Prohibited misrepresentations. solely visual or solely audible, the ‘‘Vehicle’’ means any self-propelled 463.4 Disclosure requirements. disclosure must be made through the vehicle designed for transporting 463.5 Dealer charges for Add-ons and other same means through which the persons or property on a public street, items. communication is presented. In any highway, or road. For purposes of this 463.6 Recordkeeping. communication made through both part, the term Covered Motor Vehicle
463.7 Waiver not permitted.
463.8 Severability.
463.9 Relation to State laws. television advertisement, the disclosure (1) Recreational boats and marine must be presented simultaneously in equipment;
§463.1 Authority. representation requiring the disclosure (3) Motor homes, recreational vehicle This part is promulgated pursuant to is made in only one means. trailers, and slide-in campers; or section 1029 of the Dodd-Frank Wall (2) A visual disclosure, by its size, (4) Golf carts. Street Reform and Consumer Protection contrast, location, the length of time it (f) ‘‘Covered Motor Vehicle Dealer’’ or Act of 2010, 12 U.S.C. 5519(d). It is an appears, and other characteristics, must ‘‘Dealer’’ means any person, including unfair or deceptive act or practice stand out from any accompanying text any individual or entity, or resident in within the meaning of section 5(a)(1) of or other visual elements so that it is the United States, or any territory of the the Federal Trade Commission Act (15 easily noticed, read, and understood. United States, that: VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR2.SGM 04JAR2 694 Federal Register/Vol. 89, No. 3/Thursday, January 4, 2024/Rules and Regulations
product or service. The following are expressly or by implication, regarding a
any practice designed or manipulated response regarding that specific Vehicle
purchaser or lessee for any of the for the purpose of preventing the unfair
unrecovered theft or total loss and the and (b) and 463.5(c).
waive the unpaid difference between (l) Whether the Dealer or any of the about an Add-on Product or Service, the money received from the purchaser’s or Dealer’s personnel or products or Dealer must disclose that the Add-on is lessee’s Vehicle insurer and some or all services is or was affiliated with, not required and the consumer can of the amount owed on the Vehicle at endorsed or approved by, or otherwise purchase or lease the Vehicle without the time of the unrecovered theft or total associated with the United States the Add-on, if true. If the representation loss, including products or services government or any Federal, State, or is in writing, the disclosure must be in otherwise titled ‘‘Guaranteed local government agency, unit, or writing. The requirements in this Automobile Protection Agreement,’’ department, including the United States paragraph (c) also are prescribed for the ‘‘Guaranteed Asset Protection Department of Defense or its Military purpose of preventing the unfair or Agreement,’’ ‘‘GAP insurance,’’ or ‘‘GAP Departments. deceptive acts or practices defined in Waiver.’’ (m) Whether consumers have won a this part, including those in §§463.3(a)
includes discussion of a lower monthly protection provided by or any right of payment, the Dealer must disclose that §463.6 Recordkeeping. the consumer under this part. the lower monthly payment will (a) Any Covered Motor Vehicle Dealer increase the total amount the consumer subject to this part must create and §463.8 Severability. will pay to purchase or lease the retain, for a period of twenty-four The provisions of this part are Vehicle, if true. If the representation is months from the date the record is separate and severable from one in writing, the disclosure must be in created, all records necessary to another. If any provision is stayed or writing. The requirements in this demonstrate compliance with this part, determined to be invalid, it is the paragraph (e) also are prescribed for the including the following records: Commission’s intention that the purpose of preventing the unfair or (1) Copies of all Materially different remaining provisions will continue in deceptive acts or practices defined in advertisements, sales scripts, training effect. this part, including those in §§463.3(a) materials, and marketing materials §463.9 Relation to State laws. and 463.5(c). regarding the price, financing, or lease
to charge for any of the following. then only to the extent of the
provide coverage for the Vehicle, the contract with the Dealer; By direction of the Commission.
consumer, or the transaction or that are (4) Records demonstrating that Add- duplicative of warranty coverage for the ons in consumers’ contracts meet the Joel Christie, Vehicle, including a GAP Agreement if requirements of §463.5, including Acting Secretary. the consumer’s Vehicle or neighborhood copies of all service contracts, GAP [FR Doc. 2023–27997 Filed 12–28–23; 8:45 am] is excluded from coverage or the loan- Agreements and calculations of loan-to- BILLING CODE P VerDate Sep<11>2014 17:45 Jan 03, 2024 Jkt 262001 PO 00000 Frm 00107 Fmt 4701 Sfmt 9990 E:\FR\FM\04JAR2.SGM 04JAR2 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations 15017 procedure under 5 U.S.C. 553(b) are 2 regarding Extraordinary SUMMARY: This final rule prohibits the unnecessary. Circumstances, this action has been impersonation of government, reviewed for factors and circumstances businesses, and their officials or agents Regulatory Notices and Analyses in which a normally categorically in interstate commerce. This document The FAA has determined that this excluded action may have a significant contains the text of the final rule and regulation only involves an established environmental impact requiring further the rule’s Statement of Basis and body of technical regulations for which analysis. Accordingly, the FAA has Purpose (‘‘SBP’’), including a Regulatory frequent and routine amendments are determined that no extraordinary Analysis. necessary to keep them operationally circumstances exist that warrant DATES: This rule is effective April 1, current. It, therefore: (1) is not a preparation of an environmental 2024. ‘‘significant regulatory action’’ under assessment or environmental impact Executive Order 12866; (2) is not a study.
(SUA) that does not alter the impersonation. No commenter dimensions, altitudes, or times of [FR Doc. 2024–04361 Filed 2–29–24; 8:45 am] expressed the view that the Commission designation of the airspace (such as BILLING CODE 4910–13–P should not commence the rulemaking. changes in designation of the Commenters also offered suggestions for controlling or using agency, or the Commission’s consideration in correction of typographical errors). This FEDERAL TRADE COMMISSION drafting the proposed rule and other airspace action is an administrative recommendations in furtherance of the change to the description of restricted 16 CFR Part 461 proposed rulemaking. areas R–2510A and R–2510B to update the using agency name. It does not alter RIN 3084–AB71 B. Notice of Proposed Rulemaking the restricted area dimensions, Based on an extensive review of the Trade Regulation Rule on designated altitudes, times of comments received in response to the Impersonation of Government and designation, or use of the airspace. ANPR, the Commission’s own history of Businesses Therefore, this airspace action is not enforcement, and other considerations expected to result in any significant AGENCY: Federal Trade Commission. that occurred after the ANPR’s environmental impacts. In accordance publication,3the Commission published ACTION: Final rule.
with FAA Order 1050.1F, paragraph 5– the NPRM on October 17, 2022.4In the VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15018 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations NPRM, the Commission stated it has §461.4, which would prohibit providing increasingly harmful.15In the NPRM, reason to believe impersonation of the means and instrumentalities to the Commission also took notice of government, businesses, and their commit violations of government and additional indications of prevalence that officials or agents is prevalent.5The business impersonation. Some came after the ANPR’s publication.16 Commission identified no disputed suggested alternative language imposing Specifically, the NPRM cited data from issues of material fact based on the a scienter requirement to narrow the a broad spectrum of commenters comment record; explained its scope of this provision, discussed in (businesses, trade associations, and considerations in developing the Section III.D. government or law-enforcement proposed rule; solicited additional In crafting the final rule, the organizations) regarding the prevalence public comment thereon, including Commission has carefully considered of government and business posing specific questions designed to the comments received in response to impersonation scams, which echoed the assist the public in submitting the NPRM and on the rulemaking Commission’s findings that these comment; and provided interested record, which includes the oral schemes are among the most common parties the opportunity to request to statements and documentary deceptive or unfair practices affecting present their position orally at an submissions in response to the Notice of U.S. consumers and businesses and informal hearing.6Finally, the NPRM Hearing. The final rule contains some continue to be a significant source of set out the Commission’s proposed rule. changes from the proposed rule. These consumer injury.17 In response to the NPRM, the modifications, discussed in detail in
C. Notice of Informal Public Hearing the Rule making, expressly or by implication, On March 30, 2023, the Commission The Commission is promulgating 16 statements that misrepresent the published an Initial Notice of Informal CFR part 461 pursuant to section 18 of defendants’ identity.19Nearly as Hearing (‘‘Notice of Hearing’’).9The the FTC Act, 15 U.S.C. 57a, the frequent are allegations of Notice designated the Commission’s Administrative Procedure Act (‘‘APA’’), misrepresentations concerning Chief Administrative Law Judge, D. and Part 1, subpart B of the defendants’ affiliation with, Michael Chappell, to serve as the Commission’s Rules of Practice.13This endorsement or approval by, or other presiding officer of the informal hearing authority permits the Commission to association with a government or and stated that any member of the promulgate, modify, and repeal trade business. The Commission has further public wishing to speak at the informal regulation rules that define with found false threats of severe hearing or make a documentary specificity acts or practices that are consequences and promises of benefits submission to be placed on the public unfair or deceptive in or affecting are additional deceptive tactics rulemaking record (or both) should commerce within the meaning of deployed by government and business submit a comment on or before April 14, section 5(a)(1) of the FTC Act, 15 U.S.C. impersonators. In the Commission’s
2023.10 45(a)(1). experience, such claims regarding
III. Response to Comments finalizing the proposed rule as a final number and. . .the name of the The Commission received 78 rule, and without recommending telemarketer to any caller identification comments in response to the NPRM additional modifications to the text of service in use by a recipient of a from a diverse group of individuals, the proposed rule, urged the telemarketing call.’’46By definition, a industry groups and trade associations, Commission to do so.37Some of these spoofed telephone number is not the consumer organizations, and commenters stated the proposed rule is number of the telemarketer, and the government agencies.28The in the public interest because it would Commission can rely on this prohibition Commission received 28 comments in allow for civil penalties against to bring an enforcement action for response to the Notice of Hearing, government and business violation of the TSR against a including oral presentations from 14 impersonators, provide redress for telemarketer that uses a spoofed commenters.29Commenters generally victims of impersonation scams, and number. supported the proposed rule, deter future bad acts.38 The Commission also received several recognizing the Commission’s authority Several government agencies and comments that identified the lack of to protect consumers from the trade associations explained how the access to accurate information increasing number of government and proposed rule would benefit them, their concerning domain name registrants business impersonation frauds targeting members, or the people they serve. The (commonly known as ‘‘WHOIS’’ data) as consumers. United States Patent and Trademark a significant impediment to combatting In the NPRM, the Commission invited Office (‘‘USPTO’’) described its the use of domain names to impersonate comment on any issues or concerns the experience of agency impersonation, government and businesses.47These public believes are relevant or and stated that reliance on the FTC’s commenters expressed support for appropriate to the Commission’s enforcement capabilities through such a expanding the text or scope of the final consideration of the proposed rule.30 rule would allow the USPTO to rule to address this issue.48In The NPRM also posed eight specific conserve and allocate its resources to particular, a few commenters urged the questions for the public.31Some of these different enforcement efforts that impact Commission to issue a final rule that questions relate to the Paperwork the USPTO and its stakeholders.39 requires domain name registrars to VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15020 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations collect, verify, maintain, and disclose member services’’ or ‘‘the car of authority by initiating this accurate WHOIS data to the FTC and dealership’’; (8) sending physical mail rulemaking. third-party victims on request for such through any carrier using addresses, The AFPF also expressed various information based on credible evidence seals, logos, or other identifying insignia criticisms specific to the language of the of impersonation fraud.49The Coalition of a business or officer thereof; (9) proposed rule and recommended for Online Accountability (‘‘COA’’), a creating a website or other electronic several suggested revisions discussed in group advocating for online service impersonating the name, logo, greater detail in Sections III.C and III.D transparency and accountability, argued insignia, or mark of a business or a close below. ‘‘[t]here is no justification for the facsimile or keystroke error, such as Following review of all comments and redaction of data of legal person ‘‘ntyimes.com,’’ ‘‘rnicrosoft.com,’’ careful consideration of the relevant registrants or the overwhelming denial ‘‘microsoft.biz,’’ or law, the final rule issued by the of reasonable access to personal WHOIS ‘‘carnegiehall.tixsales.com’’; (10) Commission contains some minor data for legitimate third-party creating or spoofing an email address changes from the proposed rule, as interests. . ..’’50Both the Messaging that impersonates a business; (11) discussed in Section III. Malware Mobile Anti-Abuse Working placing advertisements that pose as a B. Relevant Evidence Regarding Group (‘‘M3AAWG’’) and the Anti- business or officer thereof against search Provisions of the Proposed Rule, Phishing Working Group (‘‘APWG’’) queries for business services; and (12) Prevalence, Impact and Alternative also suggested the Commission using, without authorization, a Proposals encourage Domain Name System business’s mark on a building, In the ANPR, the Commission asked (‘‘DNS’’) registries and registrars to letterhead, website, email, vehicle, or specific questions about the prevalence engage in DNS mitigation and other physical or digital place.52 of impersonation fraud, and requested frequently impersonated entities to Accordingly, the Commission finds the the data source commenters relied upon participate as ‘‘trusted notifiers’’ to final rule is drafted with sufficient for formulating their answer(s).56The address fraudulently registered domain clarity and flexibility to address the ANPR also asked specific questions names.51 unauthorized use of internet identifiers, regarding how to craft a proposed rule The Commission declines to adopt including but not limited to domain to maximize the benefits to consumers commenters’ suggestion that the final names. and minimize the costs to businesses, rule expressly reference in Only one commenter suggested in and what alternatives to regulations the accompanying examples the use of response to Question 1 of the NPRM Commission should consider in domain names in impersonation that the proposed rule should not be addressing impersonation frauds.57In schemes. Rather, the Commission here finalized.53The Americans for Question 2 of the NPRM, the repeats what it previously stated in the Prosperity Foundation (‘‘AFPF’’), a Commission posed these same or nearly NPRM and earlier in this SBP, that the 501(c)(3) nonpartisan education identical specific questions regarding following list of examples of conduct organization, argued the Commission each different provision of the proposed covered by the prohibition on the should ‘‘abandon its Section 18 rule.58Six commenters specifically impersonation of government and rulemaking ambitions, instead addressed these questions.59Each of businesses was intended to be refocusing its efforts on case-by-case these commenters described various illustrative, not exhaustive: (1) calling, enforcement actions in federal court in types of government and business messaging, or otherwise contacting an cases involving concrete harm to impersonation scams common to their individual or entity while posing as a consumers.’’54 own experience or industry in support government or an officer or agent or The Commission disagrees with the of their view that such frauds are highly affiliate or endorsee thereof, including AFPF’s suggestion that the section 18 prevalent.60For example, the Toy by identifying a government or officer rulemaking process is too difficult or Association noted various business by name or by implication; (2) sending unwieldy to address many of the unfair impersonation scams experienced by its physical mail through any carrier using or deceptive acts or practices prevalent members, including counterfeit or non- addresses, government seals or in commerce. In 1975, Congress passed compliant toys, falsified documents lookalikes, or other identifying insignia the Magnuson-Moss Warranty—Federal regarding endorsement and affiliation of a government or officer thereof; (3) Trade Commission Improvement Act related to counterfeit toys, false creating a website or other electronic laying out specific procedures for the solicitation and phishing schemes service impersonating the name, promulgation of ‘‘Trade Regulation collecting customer information, and government seal, or identifying insignia Rules’’ to protect consumers in a domain impersonation.61Similarly, the of a government or officer thereof or dynamic and changing economic USPTO and USCO described several using ‘‘.gov’’ or any lookalike, such as landscape.55The Commission’s examples of government impersonation ‘‘govusa.com’’; (4) creating or spoofing regulations at 16 CFR part 1, subpart B, scams involving the trademark and an email address using ‘‘.gov’’ or any respect the underlying statutory copyright registration processes, lookalike; (5) placing advertisements requirements of section 18, which respectively, and included illustrative that pose as a government or officer provide ample transparency and examples as attachments with their thereof against search queries for opportunity for public participation in public comment.62 government services; (6) using a the promulgation of Trade Regulation Other commenters particularly government seal on a building, Rules. The Commission intends concerned with online business letterhead, website, email, vehicle, or therefore to fulfill its mission to protect impersonation cited data from studies or other physical or digital place; (7) against unfair or deceptive acts or reports regarding trends in these kinds calling, messaging, or otherwise practices in or affecting commerce and of impersonation frauds, and recent contacting an individual or entity while to provide consumers and businesses examples of phishing attacks against posing as a business or an officer or with due process, clarity, and consumers through the impersonation of agent or affiliate or endorsee thereof, transparency while crafting the rules to recognized online companies in support including by naming a business by do so. Accordingly, the Commission of their arguments regarding name or by implication, such as ‘‘card rightfully responds to Congress’s grant prevalence.63A small number of VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations 15021 commenters addressed the impact specific terms to define representatives deceptive acts or practices, such as (including any benefits and costs) on of governments and businesses, ‘‘fictional depictions’’ in television consumers, governments, and respectively.71No other commenter advertisements.84 businesses, discussed in more detail in suggested a revision to the definitions in Raising First Amendment concerns, Section VI. proposed §461.1. The USPTO suggested the AFPF similarly asserted that the Only one commenter suggested an the Commission broaden the exemplary proposed rule’s ‘‘falsely pose as’’ alternative proposal for the ‘‘list of matter’’ used to impersonate a language, ‘‘read literally,’’ would Commission’s consideration.64 government to specifically reference impose civil penalties on ‘‘utterly Specifically, the M3AAWG ‘‘logos.’’72In support of this innocuous conduct’’ and ‘‘would appear recommended as an alternative to the recommendation, the USPTO noted ‘‘the to make it unlawful for anyone to dress means and instrumentalities provision use of logos’’ was explicitly identified in up as an FTC Commissioner, politicians, in proposed §461.4 that the the NPRM’s examples of unlawful or . . . a Microsoft executive and attend Commission ‘‘identify best practices or conduct that would be covered by the a Halloween party.’’85It also expressed safe harbors to incentivize prompt prohibition against business concern that the proposed prohibitions mitigation efforts and sound verification impersonation in proposed §461.3, but did not require ‘‘materiality,’’ techniques’’ to address the use of not in the NPRM’s examples of unlawful ‘‘consumer harm,’’ or ‘‘connection to domain names in business conduct that would be covered by the interstate commerce.’’86Several impersonation schemes.65M3AAWG prohibition of government commenters suggested alternative argued this alternative to regulation impersonation in proposed §461.2. The language to cure what they perceived to would avoid the risk of inadvertently USPTO further asserted government be the overbreadth of the prohibition imposing ‘‘secondary or intermediary agencies also ‘‘use logos in addition to provisions. For example, M3AAWG liability against legitimate businesses, official seals and insignia,’’ and recommended that the final rule adopt technologies or services’’ exploited by provided an illustrative example of a definition of ‘‘impersonation’’ that impersonators.66 impersonators misusing the USPTO’s mirrors the definition of ‘‘criminal Upon review of the comments logo.73 impersonation’’ in 18 U.S.C. Chapter received in response to Question 2 of Three commenters indicated the 43.87M3AAWG asserted that such a the NPRM, the Commission concludes language of proposed §§461.2 and 461.3 definition would narrow the scope of such comments support its own was vague or provided inadequate the rule to cover only those bad actors findings that government and business guidance, and warranted modification.74 with ‘‘clear intent and specific impersonation schemes are both Some commenters raised constitutional knowledge’’ of prohibited acts. prevalent and harmful. The Commission concerns based on the purported MacLeod proposed narrowing the declines at this time to adopt overbreadth of the one-sentence focus of the final rule by adopting M3AAWG’s alternative proposal for prohibitions.75These commenters’ language that specifies particular §461.4. As discussed in Section III.D, constitutional arguments addressed two prohibited practices or the mens rea of the Commission is continuing to review primary considerations: (1) whether the its intended targets.88The AFPF agreed comments and records relevant to the proposed rule provides due process with MacLeod and suggested that the means and instrumentalities provision notice;76and (2) whether it encroaches Commission revise the proposed rule to in proposed §461.4 to determine upon free speech protected under the ‘‘explicitly incorporate Section 5’s whether additional action or protections First Amendment.77The AFPF stated statutory prohibition . . . [and] are warranted and is requesting the proposed rule is an ‘‘open-ended requirements set forth in the additional public comment through a regulation,’’ arguing it ‘‘fails to provide Commission’s Deception Statement.’’89 SNPRM, published elsewhere in this constitutionally adequate notice of After analyzing and considering the issue of the Federal Register. required or prohibited conduct’’ and comments, the Commission is otherwise falls short of section 18’s persuaded that the language of the final C. Clarity of Prohibitions Against specificity requirements.78Other rule should adhere more closely to the Impersonation of Government & commenters wary of inadvertent language of section 5 of the FTC Act to Businesses intrusions on protected speech asserted avoid any potential confusion about the In Question 5 of the NPRM, the any final prohibition should exempt scope of the rule. The Commission Commission solicited comment innocent behavior such as parody79and believes that these revisions sufficiently regarding whether the proposed rule’s non-commercial or otherwise legitimate address some commenters’ concerns one-sentence prohibitions against speech.80 that the language of the proposed rule impersonation of government in §461.2 In his documentary submission in put it in conflict with Due Process and against impersonation of businesses response to the Notice of Informal requirements and the First Amendment. in §461.3 are clear and unambiguous, Hearing, William MacLeod echoed The Commission emphasizes that it and how, if at all, they should be concerns he previously expressed in does not intend for the final rule to improved.67The Commission received response to the NPRM that the language regulate non-commercial speech. To several comments that addressed this in proposed §§461.2 and 461.3 adhere more closely to the language of question directly68or indirectly.69Two ‘‘depart[s] from the standards of section 5 of the FTC Act and case law, commenters considered the one- deception that the Commission applies the Commission has revised the final sentence prohibitions to be clear and under Section 5.’’81MacLeod noted regulatory text to incorporate relevant unambiguous and/or deferred to the that: ‘‘[i]ts terms do not include language from section 5. Specifically, Commission’s construction, but ‘deception’ or ‘fraud’ or critical the Commission has replaced suggested certain additions or elements of the FTC’s deception policy ‘‘unlawful’’ with ‘‘unfair or deceptive modifications.70For example, the USCO statement.’’82He raised additional act or practice,’’ and added ‘‘materially’’ suggested the Commission consider concerns about ‘‘impersonations and and ‘‘in or affecting commerce’’ in whether the definition of ‘‘officer,’’ affiliations [that] can be false, but also §§461.2 and 461.3. These changes make which covers representatives of both unbelievable.’’83MacLeod argued that it abundantly clear that the scope of the governments and businesses, should be the prohibitions, as written, are too final regulatory text is coterminous with bifurcated into two separate and more broad and would proscribe non- the scope of the FTC’s authority under VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15022 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations the FTC Act, and they clearly specify impersonation in connection with support for means and instrumentalities the misconduct prohibited by the final artistic costumery, parody, or other non- liability, but with some concern or rule. Accordingly, false impersonations commercial speech.91The Commission suggested modifications. Some or misrepresentations that are not further notes that, by the terms of these supportive commenters cautioned that material to a commercial transaction, sections, a court must find that the the proposed means and such as impersonation in purely artistic alleged defendant made an express or instrumentalities provision could be or recreational costumery or implied misrepresentation regarding read too broadly.97Others expressed the impersonation in connection with material information for §§461.2 and concern that without a specific scienter political or other non-commercial 461.3 to be violated. For an express or or knowledge requirement, the proposed speech, are not covered by the final rule. implied misrepresentation regarding rule provision runs the risk of imposing The Commission concludes that it is material information to be made in strict liability against innocent and unnecessary to divide the definition of violation of the FTC Act and this rule, unwitting third-party providers of ‘‘officer’’ into two separate terms as there must be a representation that services or products.98Accordingly, suggested by the USCO. Section 461.1 misleads consumers acting reasonably several commenters urged the defines ‘‘officer’’ to ‘‘include[] under the circumstances regarding Commission to clarify the scope of executives, officials, employees, and material information. Thus, while the means and instrumentalities liability or agents,’’ which the Commission believes Commission rejects the explicitly include a specific knowledge appropriately describes and covers both recommendation by both MacLeod and requirement in the final rule government and business AFPF to incorporate the FTC Deception provision.99 representatives. Policy Statement into the final rule, by For example, the Consumer As previously stated, the NPRM’s list incorporating the changes above, the Technology Association (‘‘CTA’’), a of examples of prohibited conduct Commission has ensured that the final trade association representing the U.S. covered by the rule is intended to be rule is consistent with the Deception consumer technology industry, stated illustrative, not exhaustive, and Policy Statement, is consistent with that the Commission’s explanation and therefore, the Commission declines to other relevant Commission rules, and examples of the ‘‘means and adopt the USPTO’s suggestion that it provides further specificity regarding instrumentalities’’ provision in the enlarge that exemplary ‘‘list of matter.’’ the prohibited acts and practices under NPRM seem to limit its applicability, Rather, the Commission maintains that section 5 of the FTC Act. but such limitation ‘‘is not squarely not including specific prohibitions in reflected in the text of the proposed
E. Inclusion of Prohibition Against organizations can lead to harmful activity, romance scams and scams Impersonating Nonprofits consumer confusion.’’118In INTA’s and impersonating a family member in In response to the ANPR, the the Toy Association’s view, the same trouble are the most insidious, given the Commission received a number of applies with respect to impersonation emotional devastation that combines comments that urged the Commission to schemes; thus, the final rule should also with often significant financial include ‘‘nonprofit’’ entities in the make no distinction between for profit losses.’’125A joint comment submitted proposed rule’s definition of businesses and nonprofit businesses. by several consumer and privacy that can be impersonated.109The Based upon the record, including advocacy organizations argued that such Commission agreed with these public comments in response to evidence ‘‘should be sufficient comments, and consequently, defined a Question 7 of the NPRM, the justification’’ for the Commission to ‘‘business’’ that may be impersonated to Commission has determined that the ‘‘add a subsection to proposed Section include nonprofits in §461.1 of the final rule will retain the definition of 461 to cover ‘Impersonation of proposed rule, notwithstanding the fact ‘‘business’’ in §461.1 that includes Individuals.’’’126 VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15024 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations A few commenters discussed the impersonation.135Both the students and changes in the marketplace and prevalence and harmfulness of other the NCTA agreed that expanding the scammers’ behavior. The Commission kinds of impersonation scams as proposed rule to prohibit impersonation finds therefore that the final rule is support for expanding the rule beyond of individuals would not impact drafted with sufficient clarity and government and businesses to include recreational or comedic impersonations flexibility to address the unauthorized individuals. For example, the NCTA of individuals in television or film.136 use of internet identifiers, including but stated that its member companies had Upon consideration of the comments not limited to, domain names. observed an increase in sophisticated received in response to Question 8 of Furthermore, the Commission declines residential IP address scams that the NPRM and all relevant records and to issue a final rule that imposes impersonate online subscribers for data, the Commission is seeking affirmative requirements upon domain illegal purposes such as piracy and additional public comment about name registrars which is beyond the fraud.127NCTA encouraged the potentially expanding part 461 to cover purview of this rulemaking and doing so Commission to consider a new rule to impersonation of individuals or entities arguably would place an impracticable prohibit impersonation of individuals other than governments and businesses burden upon consumers to know about through ‘‘unauthorized use of an in interstate commerce in a SNPRM and verify the trustworthiness of such individual’s online credentials, published elsewhere in this issue of the WHOIS data. accounts, IP addresses, and digital Federal Register.137
IV. Final Rule Under section 22 of the FTC Act, the Commission’s initial findings, as set Commission, when it promulgates a For the reasons described above, the forth in the NPRM,156addresses the final rule, must issue a ‘‘final regulatory Commission has determined to adopt required contents of the final regulatory analysis.’’149The required contents of the provisions of proposed §461.1 as analysis, and describes the steps the this final regulatory analysis are: (1) ‘‘a initially proposed, and the provisions of Commission has taken in the final rule concise statement of the need for, and §§461.2 and 461.3 with clarifying to minimize its impact on small entities. the objectives of, the final rule’’; (2) ‘‘a modifications. The Commission description of any alternatives to the A. Concise Statement of the Need for, declines to finalize proposed §461.4 at final rule which were considered by the and Objectives of, the Final Rule this time.
V. Paperwork Reduction Act The FTC does not expect that the final requested public comment on what The Paperwork Reduction Act rule will have a significant economic impact (including costs) will be (‘‘PRA’’), 44 U.S.C. 3501 et seq., requires impact on a substantial number of small incurred by existing and future federal agencies to seek and obtain entities, and this SBP serves as notice to businesses to comply with the proposed Office of Management and Budget the Small Business Administration of rule, and whether the Commission (‘‘OMB’’) approval before undertaking a the agency’s certification of no should consider alternative proposals to collection of information directed to ten significant impact. The final rule the proposed rule.160This information or more persons. In Question 3 of the imposes no disclosure or recordkeeping was requested by the Commission to NPRM, the Commission asked requirements. As such, both the burdens minimize the final rule’s burden on all commenters whether the proposed rule imposed on small entities and the businesses, including small entities. As contained a collection of information.148 economic impact of the final rule are explained throughout this SBP, the No comments responding to the NPRM likely to be minimal, if any. Commission has considered the or Notice of Hearing addressed this Furthermore, as noted in the IRFA, the comments and alternatives proposed by question. While the Commission has rule does not change the law regarding commenters and finds the final rule will revised the rule based on the comments the legality of government and business not create a significant economic impact it received, it has not added any new impersonation, which are already on small entities.161Indeed, the type of requirements that would collect prohibited by section 5 of the FTC deception that will be unlawful under information from the public. Act.154Although the Commission the final rule is already unlawful under Accordingly, the Commission has certifies the final rule would not, if the FTC Act, but the final rule would determined that there are no new promulgated, have a significant impact allow the Commission to obtain requirements for information collection on a substantial number of small monetary relief more efficiently than it associated with this final rule. entities, the Commission has could solely under section 19(a)(2) of VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15026 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations the FTC Act (i.e., without a rule D. Analysis of Projected Benefits and The final rule also would benefit violation). Accordingly, the Commission Adverse Effects of the Final Rule businesses whose brands are harmed by does not propose any specific small In the NPRM, the Commission invited impersonators.171As several entity exemption or other significant public comment and data on any commenters have mentioned, a final alternatives. benefits and costs of proceeding with rule that would allow the Commission to bring enforcement actions more the rulemaking to inform a final C. Summary of Significant Issues Raised efficiently against impersonators would regulatory analysis.166In issuing the by the Public Comments in Response to save businesses the time and other final rule, the Commission has carefully the Preliminary Regulatory Analysis and resources dedicated to monitoring and considered the comments received and IRFA combatting these kinds of deception.
government filing services to include 2022.169Accordingly, the most extensive disclosures in their marketing significant anticipated benefit of the F. Description of the Projected materials, arguing such disclosure final rule is that it will allow the Reporting, Recordkeeping, and Other requirements could lead to small Commission to provide monetary relief Compliance Requirements of the Final businesses declining the offered services to victims of rule violations and seek Rule, Including an Estimate of the and falling out of compliance with civil penalties against violators.170 Classes of Small Entities That Will Be government filing obligations.164This Furthermore, the final rule should Subject to the Requirements of the Final commenter, however, did not identify reduce economic harm resulting from Rule and the Type of Professional Skills any proposed disclosure requirements impersonation because its potential That Will Be Necessary To Implement that were the subject of his concern, nor deterrent effects make it less likely the Final Rule does the Commission impose any such impersonators get to keep their ill-gotten The final rule does not have any disclosure requirements in connection gains and more likely they must pay reporting or recordkeeping with the final rule. None of the civil penalties. requirements.172As explained comments responding to the NPRM or The final rule also would provide the previously, the final rule would apply to Notice of Hearing disputed the analysis benefit of a shorter path to obtaining no small entities other than small in the IRFA. Finally, the Small Business consumer redress because the entities violating existing law, and Administration did not submit Commission could directly pursue in therefore, no classes of small entities comments. federal court section 19 remedies in will be subject to the requirements of government and business impersonation the final rule. Finally, no professional After reviewing the public comments enforcement actions that do not skills are necessary for compliance with on the proposed rule, as discussed implicate an existing rule. The the final rule other than honesty and throughout this SBP, the Commission availability of more immediate integrity. concludes the final rule will not unduly consumer redress in federal court under burden small entities. The section 19 would allow the Commission G. An Explanation of the Reasons for Commission’s explanation in the IRFA to reduce the expense of litigating and the Determination of the Commission regarding the proposed rule is true of minimize the litigation fora and scope. That the Final Rule Will Attain Its the final rule—it only constitutes a The Commission could then apply the Objectives in a Manner Consistent With significant economic impact for small savings of these enforcement resources Applicable Law and the Reasons the entities violating existing law, which are to investigating and, where the facts Particular Alternative Was Chosen not entitled to procedural protections warrant, bringing enforcement actions The Commission’s primary objective when agencies consider rulemaking.165 in additional impersonation matters. in commencing this rulemaking was to VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations 15027 expand the remedies available to it in have instructed consumers to convert cash 15ANPR, 86 FR at 72901; see also Fed. combatting two prevalent categories of into cryptocurrency under false threats of Trade Comm’n, Explore Government impersonation scams most frequently government investigations or fraud. See Fed. Imposter Scams, TABLEAU PUBLIC, https:// Trade Comm’n, Notice of Proposed public.tableau.com/app/profile/ reported by consumers—government Rulemaking: Trade Regulation Rule on federal.trade.commission/viz/ impersonators and business Impersonation of Government and GovernmentImposter/Infographic. impersonators. As explained throughout Businesses, 87 FR 62741, 62742 (Oct. 17, 16NPRM, 87 FR at 62742. this SBP, based upon the record, 2022), https://www.federalregister.gov/ 17Id. at 62742–46. including public comments, the documents/2022/10/17/2022-21289/trade- 18In re Cliffdale Assocs., Inc., 103 F.T.C. Commission finds the final rule will regulation-rule-onimpersonation-of- 110, 174 (1984); see also In re POM attain this objective in a manner government-and-businesses. Wonderful LLC, No. 9344, 2013 WL 268926, consistent with applicable law. 4See id. at 62741–51. at *18 (Jan. 16, 2013). The final rule is straightforward and 5See id. at 62741–42. 19ANPR, 86 FR at 72901. 6Id. at 62750. 20NPRM, 87 FR at 62746–47.
defines with specificity acts or practices 7See Fed. Trade Comm’n, Trade 21ANPR, 86 FR at 72903–04; see also that are unfair or deceptive in or Regulation Rule on Impersonation of NPRM, 87 FR at 62748–49. affecting commerce within the meaning Government and Businesses, https:// 22See AMG Cap. Mgmt., LLC v. FTC, 141 of section 5(a)(1) of the FTC Act, 15 www.regulations.gov/docket/FTC-2022-0064/ S.Ct. 1341, 1352 (2021). U.S.C. 45(a)(1). It also avoids novelty by comments. 23See 15 U.S.C. 57b(a) and (b); see also borrowing from existing rules and 8Cindy L. Brown and Raye Mitchell, Cmt. NPRM, 87 FR at 62746 (discussing AMG Cap. statutory definitions.173At the same on NPRM at 9 (Dec. 19, 2022), https:// Mgmt.). time, the final rule is drafted with www.regulations.gov/comment/FTC-2022- 24The Commission can recover money for 0064-0077 (‘‘Brown Cmt.’’); William consumers directly through a federal court sufficient flexibility to address the MacLeod, Cmt. on NPRM at 2 (Dec. 16, 2022), action or obtain civil penalties directly from various types of conduct covered by the https://www.regulations.gov/comment/FTC- a federal court when the Rule has been prohibition on the impersonation of 2022-0064-0078 (‘‘MacLeod Cmt.’’). violated. Without the Rule, the path to government and businesses. 9Fed. Trade Comm’n, Initial Notice of monetary relief is longer, and requires the Furthermore, this rulemaking has Informal Hearing: Trade Regulation Rule on Commission to first issue a final cease-and- Impersonation of Government and provided ample transparency and desist order—which might not become final Businesses, 88 FR 19024 (Mar. 30, 2023), opportunity for public participation in until after the resolution of any resulting https://www.federalregister.gov/documents/ accordance with the underlying appeal. Then, to recover money for 2023/03/30/2023-06537/trade-regulation- statutory requirements of section 18 of rule-on-impersonation-of-government-and- consumers, the Commission must prove that the violator engaged in fraudulent or the FTC Act, 15 U.S.C. 57a, the businesses. This Initial Notice of Informal dishonest conduct in a second action in Administrative Procedure Act, and Part Hearing also served as the Final Notice of federal court. See 15 U.S.C. 57b(a) and (b).
1, subpart B of the Commission’s Rules Informal Hearing. The Commission 25See section 5(m)(1)(A) of the FTC Act, 15 of Practice.174 determined William MacLeod’s comment in U.S.C. 45(m)(1)(A) (providing that violators response to the NPRM represented an of a trade regulation rule ‘‘with actual VII.Congressional Review Act ‘‘adequate request’’ for such an informal knowledge or knowledge fairly implied on hearing. The comment from Cindy Brown Pursuant to the Congressional Review the basis of objective circumstances that such explicitly requesting to make a presentation Act (5 U.S.C. 801 et seq.), the Office of act is unfair or deceptive and is prohibited at an informal hearing also represented an Information and Regulatory Affairs has ‘‘adequate request’’ triggering the by such rule’’ are liable for civil penalties for designated this rule as not a ‘‘major Commission’s obligation to hold an informal each violation). In addition, any entity or rule,’’ as defined by 5 U.S.C. 804(2). hearing but was inadvertently omitted from person who violates such a rule (irrespective of the state of knowledge) is liable for injury inclusion in the Initial Notice of Informal Endnotes Hearing. caused to consumers by the rule violation. 1Fed. Trade Comm’n, Advance Notice of 10Because this informal hearing was the The Commission may pursue such recovery Proposed Rulemaking: Trade Regulation Rule first held in several decades, the Commission in a suit for consumer redress under section on Impersonation of Government and allowed interested parties to request the 19 of the FTC Act, 15 U.S.C. 57b. Businesses, 86 FR 72901 (Dec. 23, 2021), opportunity to make an oral comment in 26NPRM, 87 FR at 62749. https://www.federalregister.gov/documents/ response to the Notice of Informal Hearing as 27Id. 2021/12/23/2021-27731/trade-regulation- well as the NPRM. However, the Commission 28https://www.regulations.gov/document/ rule-on-impersonation-of-government-and- noted that in the future it may limit oral FTC-2021-0077-0001/comment. businesses. statements to those who requested to make 29https://www.regulations.gov/docket/ 2See id. at 72904. an oral statement in response to the NPRM, FTC-2023-0030/comments. 3Those included, among others, numerous as provided for in the Rules of Practice. Id. 30NPRM, 87 FR at 62750. reports of government impersonation scams at 19025 n.24. 31Id. reported to federal agencies as reflected in 11Although Cindy Brown did not submit a 32Id., Question 3 (Does the proposed rule the following public announcements. On request to make an oral statement in response contain a collection of information?) and March 7, 2022, the Federal Bureau of to the Notice of Hearing, she was permitted Question 4 (Would the proposed rule, if Investigation issued a Public Service to make an oral statement at the hearing promulgated, have a significant economic Announcement ‘‘warning the public of based upon her prior comment in response impact on a substantial number of small ongoing widespread fraud schemes in which to the NPRM in which she explicitly stated entities? If so, how could it be modified to scammers impersonate law enforcement or her interest ‘‘in making a presentation at an avoid a significant economic impact on a government officials in attempts to extort informal hearing.’’ substantial number of small entities?) money or steal personally identifiable 12The Notice of Informal Public Hearing 33NPRM, 87 FR at 62750. information.’’ Similarly, on May 20, 2022, comments addressing specific provisions of 34See, e.g., Anonymous, Cmt. on NPRM multiple federal law enforcement agencies the rule or questions in the NPRM soliciting (Nov. 3, 2022), https://www.regulations.gov/ issued a scam alert spearheaded by the Social public comment are discussed in Section III comment/FTC-2022-0064-0011 (describing Security Administration’s Office of the within the substantive discussions on the impersonation of accounts payable in Inspector General warning the public of relevant provisions. medical device industry); Bernadette Padilla, government impersonation scams involving 135 U.S.C. 551 et seq.; 16 CFR 1.7–1.20. Cmt. on NPRM (Nov. 8, 2022), https:// the reproduction of federal law enforcement 14Rules of Practice, 16 CFR 1.14(a)(1)(i)– www.regulations.gov/comment/FTC-2022- credentials and badges. On June 3, 2022, the (iii). In addition, in accordance with 16 CFR 0064-0014 (describing police impersonation Commission issued a press release noting 1.14(a)(2), the regulatory analysis is provided scam involving stolen PII); Anonymous that in some impersonation scams, fraudsters in Section VI of this SBP. Meeting Planner, Cmt. on NPRM (Dec. 6, VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15028 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations 2022), https://www.regulations.gov/ NPRM at 2; CTIA Cmt. on NPRM at 3; MRAA on NPRM at 3–5; Toy Cmt. on NPRM at 3– comment/FTC-2022-0064-0030 (describing Cmt. on NPRM at 4. See also supra, note 25. 5; USCO Cmt. on NPRM at 3–7; MRAA Cmt. attendee list and hotel reservation 39USPTO Cmt. on NPRM at 2–3. on NPRM at 2–4. impersonation scams); California IT in 40MRAA Cmt. on NPRM at 4. 61Toy Cmt. on NPRM at 3–5. Education, Cmt. on NPRM (Nov. 9, 2022), 41USCO Cmt. on NPRM at 2–3. 62USPTO Cmt. on NPRM at 3–9; USCO https://www.regulations.gov/comment/FTC- 42Id.; USPTO Cmt. on NPRM at 2. Cmt. on NPRM at 3–4; 2022-0064-0034 (describing attendee list 43CTIA Cmt. on NPRM at 5, 7. 63INTA Cmt. on NPRM at 3; M3AAWG impersonation scam); Illinois Landscape 44Somos, Inc., Cmt. on NPRM at 2–3 (Dec. Cmt. on NPRM at 7. Contractors Association, Cmt. on NPRM (Dec. 16, 2022), https://www.regulations.gov/ 64M3AAWG Cmt. on NPRM at 9. 12, 2022), https://www.regulations.gov/ comment/FTC-2022-0064-0068 (‘‘Somos 65Id. comment/FTC-2022-0064-0038 (describing Cmt.’’). 66Id.
attendee list and hotel reservation 45In explaining the scope of the proposed 67NPRM, 87 FR at 62750, Question 5. impersonation scams). rule, the NPRM provided an illustrative, but 68USCO Cmt. on NPRM at 8; USPTO Cmt. 35See e.g., Salina Maddox, Cmt. on NPRM non-exhaustive, list of unlawful conduct that on NPRM at 10; INTA Cmt. on NPRM at 6– (Oct. 22, 2022), https://www.regulations.gov/ would be covered by the prohibitions against 7; M3AAWG Cmt. on NPRM at 9; MacLeod comment/FTC-2022-0064-0003 (spam calls); impersonating government and businesses. Cmt. on NPRM at 1–2; AFPF Cmt. on NPRM Tatiana Alvarez, Cmt. on NPRM (Nov. 22, NPRM, 87 FR at 62746–47. That list merely at 3–6. 2022), https://www.regulations.gov/ provides examples as it would be 69NetChoice Cmt. on NPRM at 2; Toy Cmt. comment/FTC-2022-0064-0008 (Romanian impracticable to list all possible violative on NPRM at 2; ZoomInfo Technologies LLC, mob scam); Tinee Carraker, Cmt. on NPRM conduct. Cmt. on NPRM at 1–2 (Dec. 16, 2022), https:// (Nov. 4, 2022), https://www.regulations.gov/ 4616 CFR 310.4(a)(8). www.regulations.gov/comment/FTC-2022- comment/FTC-2022-0064-0012 (foreclosure 47USTelecom Cmt. on NPRM at 2; 0064-0079 (‘‘Zoom NPRM Cmt.’’). scam); Susan Rounsley, Cmt. on NPRM (Nov. M3AAWG Cmt. on NPRM at 3–4; RIAA Cmt. 70USCO Cmt. on NPRM at 8; USPTO Cmt. 6, 2022), https://www.regulations.gov/ on NPRM at 3; Anti-Phishing Working on NPRM at 10. comment/FTC-2022-0064-0013 (violations of Group, Cmt. on NPRM at 1–2 (Dec. 16, 2022), 71USCO Cmt. on NPRM at 8. Do Not Call requirements). https://www.regulations.gov/comment/FTC- 72USPTO Cmt. on NPRM at 10.
School Students, Cmt. on NPRM (Nov. 22, www.regulations.gov/comment/FTC-2022- 74MacLeod Cmt. on NPRM at 2; AFPF Cmt.
2022), https://www.regulations.gov/ 0064-0073 (‘‘APWG Cmt.’’); Coalition for on NPRM at 3; M3AAWG Cmt. on NPRM at comment/FTC-2022-0064-0019 (‘‘Rutgers Online Accountability, Cmt. on NPRM at 1– 9.
Law Students/Singh Cmt.’’); AIM, the 3 (Dec. 16, 2022), https:// 75M3AAWG Cmt. on NPRM at 2;
European Brands Association, Cmt. on NPRM www.regulations.gov/comment/FTC-2022- NetChoice Cmt. on NPRM at 2; Toy Cmt. on (Dec. 13, 2022), https://www.regulations.gov/ 0064-0074 (‘‘COA Cmt.’’); INTA Cmt. on NPRM at 2; AFPF Cmt. on NPRM at 2, 4;
comment/FTC-2022-0064-0041 (‘‘AIM NPRM at 8–10; Coalition for a Secure & Zoom Cmt. on NPRM at 1; INTA Cmt. on Cmt.’’); The Messaging Malware Mobile Anti- Transparent Internet, Cmt. on NPRM at 1 NPRM at 5–6; William MacLeod, Cmt. on Abuse Working Group, Cmt. on NPRM (Dec. (Dec. 16, 2022), https://www.regulations.gov/ Informal Hearing at 5–7 (Apr. 14, 2023), 15, 2022), https://www.regulations.gov/ comment/FTC-2022-0064-0065 (‘‘CSTI https://www.regulations.gov/comment/FTC- comment/FTC-2022-0064-0051 (‘‘M3AAWG Cmt.’’).
Cmt.’’); The International Trademark 48Id.
https://www.regulations.gov/comment/FTC- Cmt. on NPRM at 3–4; AIM Cmt. on NPRM 77AFPF Cmt. on NPRM at 3, 4. M3AAWG 2022-0064-0054 (‘‘INTA Cmt.’’); Electronic at 1; COA Cmt. on NPRM at 1–3; INTA Cmt.
Federation of America, National Association Cmt. on NPRM at 1–2; see also APWG, Cmt. of Consumer Advocates, and U.S. PIRG, Cmt. on Informal Hearing at 1–2 (Apr. 14, 2023), 78AFPF Cmt. on NPRM at 2, 6. on NPRM (Dec. 16, 2022), https:// https://www.regulations.gov/comment/FTC- 79NetChoice Cmt. on NPRM at 2; www.regulations.gov/comment/FTC-2022- 2023-0030-0027 (‘‘APWG IH Cmt.’’). M3AAWG Cmt. on NPRM at 3. 0064-0070 (‘‘EPIC Cmt.’’); Recording Industry 52See NPRM, 87 FR at 62746–47. The 80AFPF Cmt. on NPRM at 4; INTA Cmt. on Association of America, Cmt. on NPRM (Dec. example of voice cloning—a relatively new NPRM at 5–6; Toy Cmt. on NPRM at 2; Zoom 16, 2022), https://www.regulations.gov/ technology—emphasizes the need for an Cmt. on NPRM at 1; MacLeod IH Cmt. at 5. comment/FTC-2022-0064-0064 (‘‘RIAA illustrative, but non-exhaustive, list of 81MacLeod IH Cmt. at 1; see also MacLeod Cmt.’’). unlawful conduct. Audio deepfakes, Cmt. on NPRM at 1. 37United States Patent and Trademark including voice cloning, are generated, 82MacLeod IH Cmt. at 2. Office, Cmt. on NPRM at 2–3 (Dec. 2, 2022), edited, or synthesized by artificial 83Id. at 3. https://www.regulations.gov/comment/FTC- intelligence, or ‘‘AI,’’ to create fake audio that 84Id. at 3. 2022-0064-0026 (‘‘USPTO Cmt.’’); INTA Cmt. seems real. See Khanjani, et. al., How Deep 85AFPF Cmt. on NPRM at 3–4. on NPRM; United States Copyright Office, are the Fakes? Focusing on Audio Deepfake: 86Id. at 3, 5–6.
Cmt. on NPRM (Dec. 16, 2022), https:// A Survey, available at https://arxiv.org/ftp/ 87M3AAWG Cmt. on NPRM at 9. www.regulations.gov/comment/FTC-2022- arxiv/papers/2111/2111.14203.pdf. 88Id. at 1, 5. 0064-0067 (‘‘USCO Cmt.’’); The Toy 53Americans for Prosperity Foundation, 89AFPF Cmt. on NPRM at 5. Association, Inc., Cmt. on NPRM at 2 (Dec. Cmt. on NPRM at 1–2 (Dec. 16, 2022), https:// 90See 15 U.S.C. 45(m)(1)(A). 16, 2022), https://www.regulations.gov/ www.regulations.gov/comment/FTC-2022- 91See Cent. Hudson Gas & Elec. Corp. v. comment/FTC-2022-0064-0069 (‘‘Toy Cmt.’’); 0064-0062 (‘‘AFPF Cmt.’’). Pub. Serv. Comm’n of N.Y., 447 U.S. 557, Cellular Telecommunications and Internet 54Id. at 1. 563–64 (1980) (‘‘[T]here can be no Association, Cmt. on NPRM (Dec. 16, 2022), 55Public Law 93–637, 88 Stat. 2183 (1975). constitutional objection to the suppression of https://www.regulations.gov/comment/FTC- 56ANPR, 86 FR at 72904. commercial messages that do not accurately 2022-0064-0066 (‘‘CTIA Cmt.’’); Marine 57Id. inform the public about lawful activity. The Retailers Association of the Americas, 58NPRM, 87 FR at 62750, Question 2. government may ban forms of National Marine Manufacturers Association, 59USPTO Cmt. on NPRM at 3–9; communication more likely to deceive the National RV Dealers Association, Cmt. on M3AAWG Cmt. on NPRM at 6–9; INTA Cmt. public than to inform it, or commercial NPRM (Dec. 19, 2022), https:// on NPRM at 3–5; Toy Cmt. on NPRM at 3– speech related to illegal activity.’’) (citations www.regulations.gov/comment/FTC-2022- 5; USCO Cmt. on NPRM at 3–7; MRAA Cmt. omitted); see also Zauderer v. Office of 0064-0076 (‘‘MRAA Cmt.’’). on NPRM at 2–4. Disciplinary Counsel, 471 U.S. 626, 638 38See, e.g., USPTO Cmt. on NPRM at 2–3; 60USPTO Cmt. on NPRM at 3–9; (1985) (holding it is ‘‘well settled’’ that ‘‘[t]he USCO Cmt. on NPRM at 2; Toy Cmt. on M3AAWG Cmt. on NPRM at 6–9; INTA Cmt. States and the Federal Government are free VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations 15029 to prevent the dissemination of commercial 98ABA–IPL Cmt. on NPRM at 1–2; 115AIM Cmt. on NPRM at 2; M3AAWG speech that is false, deceptive, or NetChoice Cmt. on NPRM at 2; USTelecom Cmt. on NPRM at 10; CTA Cmt. on NPRM at misleading’’). Cmt. on NPRM at 2; see also CTA, May 2023 1. 92USPTO Cmt. on NPRM; Anonymous, Tr at 16; VON, May 2023 Tr at 36; ABA, May 116Toy Cmt. on NPRM at 6; INTA Cmt. on Cmt. on NPRM (Dec. 9, 2022), https:// 2023 Tr at 39–40; INCOMPAS, May 2023 Tr NPRM at 6. www.regulations.gov/comment/FTC-2022- at 42. 117Toy Cmt. on NPRM at 6; RIAA Cmt. on 0064-0033 (‘‘0033 Cmt.’’); AIM Cmt. on 99NetChoice Cmt. on NPRM at 2; CTA NPRM at 3. NPRM; Erik M. Pelton & Associates, PLLC, Cmt. on NPRM; American Society of 118INTA Cmt. on NPRM at 6; Toy Cmt. on Cmt. on NPRM (Dec. 14, 2022), https:// Association Executives, Cmt. on NPRM at 1 NPRM at 6. www.regulations.gov/comment/FTC-2022- (Dec. 16, 2022), https://www.regulations.gov/ 119NPRM, 87 FR at 62750. 0064-0045; NetChoice Cmt. on NPRM; comment/FTC-2022-0064-0057 (‘‘ASAE 120Rutgers Law Students/Singh Cmt. on M3AAWG Cmt. on NPRM; Consumer Cmt.’’); INTA Cmt. on NPRM; Somos Cmt. on NPRM; AIM Cmt. on NPRM; AARP Cmt. on Technology Association, Cmt. on NPRM NPRM; CTIA Cmt. on NPRM at 7; USTelecom NPRM; NCTA Cmt. on NPRM; EPIC Cmt. on (Dec. 16, 2022), https://www.regulations.gov/ Cmt. on NPRM at 2; ECA Cmt. on NPRM at NPRM; RIAA Cmt. on NPRM.
comment/FTC-2022-0064-0073 (‘‘CTA 3; ABA–IPL Cmt. on NPRM at 3; Zoom Cmt. 121AIM Cmt. on NPRM at 2; Rutgers Law Cmt.’’); NCTA—The internet and Television on NPRM at 2; Cmt. on NPRM at 3; see also Students/Singh Cmt. on NPRM at 1.
Association, Cmt. on NPRM (Dec. 16, 2022), CTA, May 2023 Tr at 16; MacLeod, May 2023 122Rutgers Law Students/Singh Cmt. on https://www.regulations.gov/comment/FTC- Tr at 27; USTelecom, May 2023 Tr at 30; NPRM at 1–2; AARP Cmt. on NPRM at 2;
2022-0064-0071 (‘‘NCTA Cmt.’’); ASAE Cmt. Chilson, May 2023 Tr at 34; VON, May 2023 EPIC Cmt. on NPRM at 5.
on NPRM; INTA Cmt. on NPRM; Somos Cmt. Tr at 36; INCOMPAS, May 2023 Tr at 42, 44; 123Rutgers Law Students/Singh Cmt. on on NPRM; CTIA Cmt. on NPRM; USCO Cmt. NCTA, May 2023 Tr at 51–52. on NPRM; USTelecom Cmt. on NPRM; 100CTA Cmt. on NPRM at 7. NPRM at 1–2. American Society of Association Executives, 101USTelecom Cmt. on NPRM at 2. 124Rutgers Law Students/Singh Cmt. on Center for Exhibition Industry Research 102ABA–IPL Cmt. on NPRM at 3. NPRM at 2–4; AARP Cmt. on NPRM at 1–2; Destinations International, Exhibition 103NCTA Cmt. on NPRM at 2. EPIC Cmt. on NPRM at 4–5. Services & Contractors Association, 104M3AAWG Cmt. on NPRM at 10. 125AARP Cmt. on NPRM at 2. Exhibitions & Conferences Alliance, 105Brown Cmt. on NPRM at 8. 126EPIC Cmt. on NPRM at 5. Experiential Designers + Producers 106M3AAWG Cmt. on NPRM at 3. 127NCTA Cmt. on NPRM at 3, 8. Association, International Association of 107COA Cmt. on NPRM at 3; M3AAWG 128Id. Exhibitions & Events, International Cmt. on NPRM at 4–5. ‘‘WHOIS data’’ is a 129RIAA Cmt. on NPRM at 3. Association of Venue Managers, PCMA, commonly used internet record listing that 130Id. at 2. Society of Independent Show Organizers, identifies who owns a domain and how to get 131Rutgers Law Students/Singh Cmt. on UFI, Cmt. on NPRM (Dec 16, 2022), https:// in contact with them. NPRM at 2. www.regulations.gov/comment/FTC-2022- 108See, e.g., Compl. at 3–5 & Ex. H, FTC 132Id. 0064-0060 (‘‘ECA Cmt.’’); RIAA Cmt. on v.Moore, No. 5:18–cv–01960 (C.D. Cal. filed 133Id. at 3. NPRM; American Bar Association Section of Sept. 13, 2018) (alleging that a seller of 134Id. Intellectual Property Law, Cmt. on NPRM at variety of fake but genuine-looking financial 135Id. at 3–4. 3 (Dec. 16, 2022), https:// documents provided to others the means and 136Id.; NCTA Cmt. on NPRM at 8, n. 16. www.regulations.gov/comment/FTC-2022- instrumentalities with which to make 137The Commission also is exploring other 0064-0061 (‘‘ABA–IPL Cmt.’’); AFPF Cmt. on misrepresentations regarding a person’s tools to address the fake endorsement NPRM; Zoom Cmt. on NPRM; American identity). concerns raised by the RIAA and Rutgers Bankers Association, ACA International, 109NPRM, 87 FR at 62746. Law School Students. Specifically, in the American Association of Healthcare 110Id. at 62751; see also 15 U.S.C. 44. Commission’s proposed Rule on the Use of Administrative Management, Credit Union 111NPRM, 87 FR at 62747. Consumer Reviews and Testimonials, §465.2 National Association, Mortgage Bankers 112Id. at 62750. would prohibit businesses from purchasing a Association National Association of 113Minnesota Nursery & Landscape consumer review, or from disseminating or Federally-Insured Credit Unions (the Association, Cmt. on NPRM at 2 (Dec. 2, causing the dissemination of a consumer Associations), Cmt. on NPRM (Dec. 16, 2022), 2022), https://www.regulations.gov/ testimonial or celebrity testimonial when the https://www.regulations.gov/comment/FTC- comment/FTC-2022-0064-0027; Louise business knew or should have known it was 2022-0064-0080 (‘‘Assocns. Cmt.’’); COA Nemmers, Cmt. on NPRM (Dec. 5, 2022), false or fake. See Fed. Trade Comm’n, Notice Cmt. on NPRM; MacLeod Cmt. on NPRM; https://www.regulations.gov/comment/FTC- of Proposed Rulemaking: Trade Regulation Brown Cmt. on NPRM. 2022-0064-0028; California Landscape Rule on the Use of Consumer Reviews and 93A copy of the transcript of the May 4, Contractors Association, Cmt. on NPRM (Dec. Testimonials, 88 FR 49364, 49391 (Jul. 31, 2023 Informal Hearing is available at https:// 6, 2022), https://www.regulations.gov/ www.ftc.gov/system/files/ftc_gov/pdf/ comment/FTC-2022-0064-0029; Outdoor 2023), https://www.federalregister.gov/ documents/2023/07/31/2023-15581/trade- impersonationruleinformalhearing Power Equipment Institute, Cmt. on NPRM at regulation-rule-on-the-use-of-consumer- transcript.pdf. References to the transcript 2 (Dec. 7, 2022), https://www.regulations.gov/ reviews-and-testimonials#sectno-reference- from the May 4, 2023 Informal Hearing are comment/FTC-2022-0064-0032; AIM Cmt. on 465.2.
cited herein as: Name of commenter, May NPRM at 2; AARP, Cmt. on NPRM (Dec. 14, 2023 Tr at page no. (e.g., Doe, May 2023 Tr 2022), https://www.regulations.gov/ 138USTelecom Cmt. on NPRM at 2; at #); see CTA, May 2023 Tr at 16; MacLeod, comment/FTC-2022-0064-0043 (‘‘AARP M3AAWG Cmt. on NPRM at 3–4; RIAA Cmt. May 2023 Tr at 27; USTelecom, May 2023 Tr Cmt.’’); Minnesota Municipal Utilities on NPRM at 3; APWG Cmt. on NPRM; COA at 30; Chilson, May 2023 Tr at 34; VON, May Association, Cmt. on NPRM (Dec. 14, 2022), Cmt. on NPRM at 1–3; INTA Cmt. on NPRM 2023 Tr at 36; American Bankers Association https://www.regulations.gov/comment/FTC- at 8–10; CSTI Cmt. on NPRM at 1. (ABA), May 2023 Tr at 39–40; INCOMPAS, 2022-0064-0048; M3AAWG Cmt. on NPRM at 139Id. May 2023 Tr at 42, 44; NCTA, May 2023 Tr 10; CTA Cmt. on NPRM; ASAE Cmt. on 140M3AAWG Cmt. on NPRM at 3–4; RIAA at 51–52. NPRM; INTA Cmt. on NPRM; Toy Cmt. on Cmt. on NPRM at 3–4; AIM Cmt. on NPRM 94USPTO Cmt. on NPRM at 10; USCO Cmt. NPRM at 6; RIAA Cmt. on NPRM at 2; at 1; COA Cmt. on NPRM at 1–3; INTA Cmt. on NPRM at 8; RIAA Cmt. on NPRM at 3; National Association of Broadcasters, Cmt. on NPRM at 8–10. ABA, May 2023 Tr at 39–40. on NPRM (Dec. 19, 2022), https:// 141COA Cmt. on NPRM at 2. 95USPTO Cmt. on NPRM at 10; USCO Cmt. www.regulations.gov/comment/FTC-2022- 142M3AAWG Cmt. on NPRM at 3–4; on NPRM at 8; RIAA Cmt. on NPRM at 3; 0064-0075; MRAA Cmt. on NPRM at 4. APWG Cmt. on NPRM at 1–2; see also ABA, May 2023 Tr at 39–40. 114See, e.g., Toy Cmt. on NPRM at 6; APWG, Cmt. on Informal Hearing at 1–2 96AFPF Cmt. on NPRM at 3–5; MacLeod MRAA Cmt. on NPRM at 4; AARP Cmt. at 2; (Apr. 14, 2023), https://www.regulations.gov/ IH Cmt. at 6–7; McLeod, May 2023 Tr at 27. CTA Cmt. on NPRM at 1; ASAE Cmt. on comment/FTC-2023-0030-0027 (‘‘APWG IH 970033 Cmt. on NPRM; ABA–IPL Cmt. on NPRM; RIAA Cmt. on NPRM at 1; INTA Cmt. Cmt.’’). NPRM at 2; Zoom Cmt. on NPRM at 1. on NPRM at 2. 143See also supra, note 52. VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 15030 Federal Register/Vol. 89, No. 42/Friday, March 1, 2024/Rules and Regulations 144Toy Cmt. on NPRM at 2; M3AAWG PART 461—RULE ON Statement of Chair Lina M. Khan Joined Cmt. on NPRM at 2; ABA–IPL Cmt. on NPRM IMPERSONATION OF GOVERNMENT by Commissioner Rebecca Kelly at 3; INTA Cmt. on NPRM at 2. AND BUSINESSES Slaughter and Commissioner Alvaro M. 145ABA–IPL Cmt. on NPRM at 3. Bedoya 146Toy Cmt. on NPRM at 2; M3AAWG Sec.
Cmt. on NPRM at 2; INTA Cmt. on NPRM at 461.1 Definitions. Today the Federal Trade Commission 2. 461.2 Impersonation of Government finalizes its rule prohibiting government 147INTA Cmt. on NPRM at 6–7. Prohibited. and business impersonation schemes 148NPRM, 87 FR at 62750. 461.3 Impersonation of Businesses and issues a supplemental notice of 149See 15 U.S.C. 57b–3(b)(2). Prohibited. proposed rulemaking to extend this 15015 U.S.C. 57b–3(b)(2)(A). Authority: 15 U.S.C. 41 through 58. prohibition to impersonation of 151See 5 U.S.C. 603–605; see also section individuals. This final rule marks the 22(b) of the FTC Act, 15 U.S.C. 57b–3(b). §461.1 Definitions. first time since 1980 that the 152NPRM, 87 FR at 62749–50; see also 5 As used in this part: Commission has finalized a brand-new U.S.C. 603.
162See supra note 161. entity or officer thereof, in or affecting 163Toy Cmt. on NPRM at 5–6; MRAA Cmt. FTC data show that in 2023 consumers commerce as commerce is defined in on NPRM at 4. reported losing $2.7 billion to reported the Federal Trade Commission Act (15 164Robert Kamerschen, Cmt. on NPRM at imposter scams.2Impersonation fraud U.S.C. 44); or 2 (Nov. 30, 2022), https:// has remained one of the largest sources www.regulations.gov/comment/FTC-2022- (b)materially misrepresent, directly of total reported consumer financial 0064-0023. or by implication, affiliation with, losses for several years.3 165See NPRM, 87 FR at 62750. including endorsement or sponsorship Public comments submitted to the 166NPRM, 87 FR at 62748.
visited December 21, 2023). sweepstakes. Her friend was scammed 169Id. It is a violation of this part, and an out of a total of $367,000: ‘‘She used all 170See 15 U.S.C. Secs. 45(m)(1)(A) and unfair or deceptive act or practice to: of her savings . . . to help her 57b. grandchildren go to college and wiped (a)materially and falsely pose as, 171See Toy Cmt. on NPRM at 5–6; MRAA out her IRA and now is left to pay the Cmt. on NPRM at 4; see also NPRM, 87 FR directly or by implication, a business or at 62749. officer thereof, in or affecting commerce 172NPRM, 87 FR at 62750. as commerce is defined in the Federal 1Fed. Trade Comm’n, Fraud Reports: Trends Over Time (2021), https://public.tableau.com/app/ 173See, e.g., TSR, 16 CFR 310.3(a)(2)(vii); Trade Commission Act (15 U.S.C. 44); or profile/federal.trade.commission/viz/FraudReports/ R-Value Rule, 16 CFR 460.21; Regulation O (b)materially misrepresent, directly FraudFacts. (Mortgage Assistance Relief Services), 12 CFR or by implication, affiliation with, 2Fed. Trade Comm’n, Consumer Sentinel 1015.3(b)(3). Network Data Book 2023 (2024), https:// 1745 U.S.C. 551 et seq.; 16 CFR 1.7 through including endorsement or sponsorship www.ftc.gov/reports/consumer-sentinel-network- 1.20. by, a business or officer thereof, in or data-book-2023. affecting commerce as commerce is 3Fed. Trade Comm’n, Fraud Reports: Top List of Subjects in 16 CFR Part 461 defined in the Federal Trade Reports, Tableau Public (last accessed Feb. 8, 2024), https://public.tableau.com/app/profile/ Consumer protection, Impersonation, Commission Act (15 U.S.C. 44). federal.trade.commission/viz/FraudReports/ Trade Practices. By direction of the Commission. TopReports; see also Fed. Trade Comm’n, Consumer Sentinel Network Data Book 2020 (2021)
cloning tools to impersonate the voice of lawbreakers do not profit from their is approving revisions to the Oklahoma a loved one seeking money in distress lawbreaking and that wronged State Implementation Plan (SIP)
or a celebrity peddling fake goods.8 consumers can be made whole. Scammers can use these technologies to This rule marks the agency’s first submitted by the State of Oklahoma disseminate fraud more cheaply, more brand-new Section 18 rulemaking since designee on December 17, 2021, and precisely, and on a much wider scale 1980. Although the authority to issue January 20, 2023. This action addresses than ever before. rules is clearly laid out in the FTC Act, the submittal of revisions to the In its supplemental NPRM, the bureaucratic red tape presented an Oklahoma SIP to update the Commission proposes to expand the obstacle to the agency’s exercise of this incorporation by reference provision of rule’s prohibitions to also cover important statutory authority. Thanks to Federal requirements under Oklahoma impersonation of individuals. If efforts initiated under Commissioner Administrative Code (OAC). adopted, this additional protection will Slaughter’s leadership to align the DATES: This rule is effective April 1, equip enforcers to seek civil penalties procedural requirements for Section 18 2024. and redress when fraudsters rulemaking with the FTC Act’s statutory ADDRESSES: The EPA has established a text, Section 18 rulemakings can now docket for this action under Docket ID 4Comment Submitted by Anonymous, FTC Seek proceed more efficiently.10This effort No. EPA–R06–OAR–2022–0279. All Comments on Advanced Notice of Proposed Rule; took two years from proposal to final documents in the docket are listed on Impersonation ANPR, Regulations.gov (Feb. 22, rule, finally putting lie to the old idea 2022), https://www.regulations.gov/comment/FTC- the https://www.regulations.gov that this must be an impossibly long 2021-0077-0131. website. Although listed in the index, 5Comment Submitted by Jamila Sherman, FTC process. some information is not publicly Seek Comments on Advanced Notice of Proposed Many thanks to the FTC team for their available, e.g., Confidential Business Rule; Impersonation ANPR, Regulations.gov (Feb. swift work and dedication. This rule 22, 2022), https://www.regulations.gov/comment/ Information or other information whose banning government and business FTC-2021-0077-0127. disclosure is restricted by statute. impersonation will allow us to more 6Comment Submitted by Susan Frost, FTC Seek Certain other material, such as Comments on Advanced Notice of Proposed Rule; vigorously and effectively protect copyrighted material, is not placed on Impersonation ANPR, Regulations.gov (Feb. 16, Americans from fraudsters. And we are the internet. Publicly available docket 2022), https://www.regulations.gov/comment/FTC- eager for public input on the 2021-0077-0031. materials are available electronically supplemental NPRM that would extend 7Bob Violino, AI Tools Such As ChatGPT Are through https://www.regulations.gov. Generating A Mammoth Increase In Malicious FORFURTHERINFORMATIONCONTACT:
Phishing Emails, CNBC (Nov. 28, 2023), https:// 9AMG Cap. Mgmt., LLC v. FTC, 593 U.S. (2021). www.cnbc.com/2023/11/28/ai-like-chatgpt-is- 10Press Release, Fed. Trade Comm’n, FTC Votes Adina Wiley, EPA Region 6 Office, Air creating-huge-increase-in-malicious-phishing- to Update Rulemaking Procedures, Sets Stage for Permits Section, 214–665–2115, email.html. Stronger Deterrence of Corporate Misconduct (July wiley.adina@epa.gov. Please call or 8Eric Revell, AI Voice Cloning Scams On The 1, 2021), https://www.ftc.gov/news-events/news/ email the contact listed above if you Rise, Expert Warns, Fox Business (Sept. 23, 2023), press-releases/2021/07/ftc-votes-update- need alternative access to material https://www.foxbusiness.com/technology/ai-voice- rulemaking-procedures-sets-stage-stronger- cloning-scams-on-rise-expert-warns. deterrence-corporate-misconduct. indexed but not provided in the docket. VerDate Sep<11>2014 16:31 Feb 29, 2024 Jkt 262001 PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1 1SELUR DORP32NR021KSD rellehmurdd 26760 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations Strategic Infrastructure, Washington, DC Rulemaking (‘‘2022 NPRM’’).1After calls’’);9(2) in 2008 to prohibit 20546. careful review and consideration of the prerecorded messages (‘‘robocalls’’) in entire record on the issues presented in sales calls and charity calls;10(3) in Nanette Smith, this rulemaking proceeding, including 2010 to ban the telemarketing of debt Team Lead, NASA Directives and 26 public comments submitted by a relief services requiring an advance Regulations.
www.ftc.gov. 12See Statement of Basis and Purpose and Final in 2003 to create the National Do Not Rule Amendments (‘‘2015 TSR Amendments’’), 80 FORFURTHERINFORMATIONCONTACT: Call (‘‘DNC’’) Registry and extend the FR 77520 (Dec. 14, 2015) (prohibiting the use of Patricia Hsue, (202) 326–3132, phsue@ Rule to telemarketing calls soliciting remotely created checks and payment orders, cash- to-cash money transfers, and cash reload ftc.gov, or Benjamin R. Davidson, (202) charitable contributions (‘‘charity mechanisms). 326–3055, bdavidson@ftc.gov, Division 13When the Commission decided in 2003 and of Marketing Practices, Bureau of 1Notice of Proposed Rulemaking (‘‘2022 NPRM’’), 2010 to make substantive amendments to the TSR, Consumer Protection, Federal Trade 87 FR 33677 (June 3, 2022). it declined to modify the Rule’s recordkeeping Commission, 600 Pennsylvania Avenue 2Public Law 103–297, 108 Stat. 1545 (1997) provisions. See 2003 TSR Amendments, 68 FR at 4645, 4653–54 (declining to implement any of the NW, Mail Stop CC–6316, Washington, (codified as amended at 15 U.S.C. 6101 through suggested recordkeeping revisions that were raised DC 20580. 6108). in the public comments); 2010 TSR Amendments, SUPPLEMENTARYINFORMATION: This 3 U U .
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document states the basis and purpose 5See Statement of Basis and Purpose and Final 15The Commission issued the 2022 NPRM after for the Commission’s decision to adopt Rule (‘‘Original TSR’’), 60 FR 43842 (Aug. 23, 1995). it had embarked on a regulatory review of the TSR amendments to the TSR that were 6See, e.g., 16 CFR 310.3(a); see also Original TSR, in 2014. In that review, it sought feedback on a proposed and published for public 60 FR at 43848–51. number of issues, including the existing 7See, e.g., 16 CFR 310.3(a)(1), 310.5; see also recordkeeping requirements. See 2014 TSR Rule comment in the Federal Register on Original TSR, 60 FR at 43846–48, 43851, 43857. Review, 79 FR 46732, 46735 (Aug. 11, 2014). June 3, 2022 in a Notice of Proposed 8Original TSR, 60 FR at 43857. 162022 NPRM, 87 FR at 33682–83. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations 26761 B2B calls, except those selling office clarify that telemarketers are prohibited actors hide their identities by using and cleaning supplies, because in the from making charity robocalls unless technology to ‘‘spoof’’ or fake a calling Commission’s experience at the time, the call recipient donated to the number, making it more difficult for the those calls were ‘‘by far the most soliciting non-profit charitable Commission to identify the responsible significant business-to-business problem organization (‘‘charity’’) within the last parties or obtain records of their illegal area.’’17In 2003, the Commission two years.26 telemarketing activities.30Technology considered extending the TSR’s also allows these bad actors to operate II.Overview of the Proposed protections to B2B calls selling internet from anywhere in the world, posing Amendments to the TSR or web services, but decided against additional challenges to the doing so for fear of chilling A.Recordkeeping Commission’s law enforcement technological innovation.18It did, efforts.31 The TSR’s recordkeeping provisions, however, note it would ‘‘continue to The primary hurdles in enforcing the which have remained unchanged since monitor closely’’ B2B telemarketing TSR in the current telemarketing the Rule was promulgated in 1995, practices in this area and ‘‘may revisit landscape are in: (1) identifying the generally require telemarketers and the issue in subsequent Rule Reviews telemarketer and seller responsible for sellers to keep for a 24-month period should circumstances warrant.’’19Since the telemarketing campaign; (2) records of: (1) any substantially different then, the Commission has continued to obtaining call detail records; and (3) advertisement, including telemarketing see small businesses harmed by linking the content of the telemarketing scripts; (2) lists of prize recipients, deceptive B2B telemarketing, and the calls with the call detail records to customers, and telemarketing employees 2022 NPRM proposed extending Section determine which TSR provisions might directly involved in sales or 310.3(a)(2)’s prohibition on apply to the telemarketing activity. solicitations; and (3) all verifiable misrepresentations20and Section As explained in more detail in the authorizations or records of express 310.3(a)(4)’s prohibition on false or 2022 NPRM, to identify the responsible informed consent or express misleading statements21to B2B calls.22 parties and obtain evidence of their agreement.27They may keep the records Finally, the 2022 NPRM proposed telemarketing activities, the in any form and in the same manner and adding a definition for ‘‘previous Commission often must issue civil format as they would keep such records donor.’’ In 2008 the Commission investigative demands to multiple voice in the ordinary course of business, and amended the TSR to prohibit robocalls, service providers to trace a call from the they may allocate responsibilities of but allowed charity robocalls if the consumer to the telemarketer’s voice complying with the Rule’s recipient is a ‘‘member of, or previous provider.32In some instances, by the recordkeeping requirements between donor to, a non-profit charitable time the Commission has identified the the seller and telemarketer.28 organization on whose behalf the call is relevant voice provider, the voice The telemarketing landscape has made.’’23The Commission intended provider may not have retained records changed drastically since 1995.
this narrow exemption to apply only to of the telemarketing calls such as the Technological advancements have made consumers who had previously donated date, time, call duration, and it easier and cheaper for unscrupulous to the soliciting organization,24but the disposition of each call, or the phone telemarketers to engage in illegal Commission did not define ‘‘previous number(s) that placed and received each telemarketing, resulting in a greater donor.’’25The new definition will call (i.e. ‘‘call detail records’’).33As a proliferation of unwanted calls.29Bad result, the call detail records either no 17Original TSR, 60 FR at 43867, 43861. longer exist or are not available for law coverage to charity calls. 2003 TSR Amendments, 182003 TSR Amendments, 68 FR at 4663; 2022 68 FR at 4582. As part of that amendment, the NPRM, 87 FR at 33682–83. Commission defined ‘‘donor’’ as ‘‘any person complaints. See Annual Report to Congress for FY 192003 TSR Amendments, 68 FR at 4663; 2022 solicited to make a charitable contribution.’’ Id. at 2003 and 2004 Pursuant to the Do Not Call NPRM, 87 FR at 33682–83. 4590. Implementation Act on Implementation of the 20Section 310.3(a)(2) prohibits, among other 262022 NPRM, 87 FR at 33679. National Do Not Call Registry, at 3 (Sept. 2005), things, misrepresenting: the total cost to purchase 2716 CFR 310.5(a). available at https://www.ftc.gov/sites/default/files/ a good or service, material restrictions on the use 2816 CFR 310.5(b) & (c). documents/reports/national-do-not-call-registry- of the good or service, material aspects of the annual-report-congress-fy-2003-and-fy-2004- 29See, e.g., Prepared Statement of the Federal central characteristics of the good or service, pursuant-do-not-call/051004dncfy0304.pdf (last Trade Commission Before the United States Senate material aspects of the seller’s refund policy, the visited Dec. 11, 2023); National Do Not Call Registry Committee on Commerce, Science and seller’s affiliation with or endorsement by any Data Book for Fiscal Year 2009, at 4 (Nov. 2009), Transportation: Abusive Robocalls and How We person or government agency, or material aspects of available at https://www.ftc.gov/sites/default/files/ Can Stop Them (Apr. 18, 2018), available at https:// a negative option feature or debt relief service. See www.ftc.gov/system/files/documents/public_ documents/reports_annual/fiscal-year-2009/ 16 CFR 310.3(a)(2)(i)–(x). statements/1366628/p034412_commission_ 091208dncadatabook.pdf (last visited Dec. 11, 21Section 310.3(a)(4) prohibits making false or testimony_re_abusive_robocalls_senate_ 2023). Conversely, technological advancements misleading statements to induce any person to pay have also reduced the burden and costs of 04182018.pdf (last visited Dec. 11, 2023); see also for goods or services or induce a charitable recordkeeping. 2022 NPRM, 87 FR at 33685 n.95 Prepared Statement of the Federal Trade contribution. See 16 CFR 310.3(a)(4). and 33690–91.
calls selling internet or web services to 61See, e.g., FTC v. Your Yellow Book Inc., No. C.New Definition for ‘‘Previous Donor’’ comply with the TSR because they had 14–cv–786–D (W.D. Ok. July 24, 2014), available at https://www.ftc.gov/system/files/documents/cases/ The 2022 NPRM proposed adding a become an emerging area for fraud.57 140807youryellowbookcmpt.pdf (last visited Dec. new definition for the term ‘‘previous The Commission ultimately decided not 11, 2023); FTC v. OnlineYellowPagesToday.com, donor’’ to clarify that telemarketers are to modify the B2B exemption because Inc., No. 14–cv–0838 RAJ (W.D. Wash. June 9, prohibited from making charity 2014), available at https://www.ftc.gov/system/files/ the Commission wanted to ‘‘move documents/cases/140717onlineyellowpages robocalls unless the consumer donated cautiously so as not to chill innovation cmpt.pdf (last visited Dec. 11, 2023); FTC v. Modern to the soliciting charity within the last in the development of cost-efficient Tech. Inc., et al., No. 13–cv–8257 (Nov. 18, 2013) two years. When the Commission available at https://www.ftc.gov/sites/default/files/ documents/cases/131119yellowpagescmpt.pdf (last amended the TSR to prohibit robocalls with International Telecommunications Union’s visited Dec. 11, 2023); FTC v. 6555381 Canada Inc. Recommendation E.164 format and domestic d/b/a Reed Publishing, No. 09–cv–3158 (N.D. Ill. numbers to comport with the North American May 27, 2009) available at https://www.ftc.gov/ available at https://www.ftc.gov/system/files/ Numbering plan. The Commission proposed that sites/default/files/documents/cases/2009/06/ documents/cases/matter_1723182_pointbreak_ records containing time and call duration be kept 090602reedcmpt.pdf (last visited Dec. 11, 2023); complaint.pdf (last visited Dec. 11, 2023); FTC v. to the closest whole second, and time must be FTC v. 6654916 Canada Inc. d/b/a Nat’l. Yellow 7051620 Canada, Inc. No. 14–cv–22132 (S.D. Fla. recorded in Coordinated Universal Time (UTC). Id. Pages Online, Inc., No. 09–cv–3159 (N.D. Ill. May June 9, 2014), available at https://www.ftc.gov/ at 33687. 27, 2009), available at https://www.ftc.gov/sites/ system/files/documents/cases/140717national 53The Commission proposed a safe harbor for default/files/documents/cases/2009/06/090602 busadcmpt.pdf (last visited Dec. 11, 2023). temporary and inadvertent errors in keeping call nypocmpt.pdf (last visited Dec. 11, 2023); FTC v. 64See, e.g., FTC v. Prod. Media Co., No. 20–cv– detail records if the telemarketer or seller can Integration Media, Inc., No. 09–cv–3160 (N.D. Ill. 00143–BR (D. Or. Jan. 23, 2020), available at demonstrate that: (1) it has established and May 27, 2009), available at https://www.ftc.gov/ https://www.ftc.gov/system/files/documents/cases/ implemented procedures to ensure completeness sites/default/files/documents/cases/2009/06/ production_media_complaint.pdf (last visited Dec. and accuracy of its records under Section 090602goamcmpt.pdf (last visited Dec. 11, 2023); 11, 2023). 310.5(a)(2); (2) it trained its personnel in the FTC v. Datacom Mktg. Inc., et al., No. 06–cv–2574 65See, e.g., FTC v. First Am. Payment Sys., LP, procedures; (3) it monitors compliance and enforces (N.D. Ill. May 9, 2006), available at https:// et al., No. 4:22–cv–00654 (E.D. Tex. July 29, 2022), the procedures, and documents its monitoring and www.ftc.gov/sites/default/files/documents/cases/ available at https://www.ftc.gov/system/files/ftc_ enforcement activities; and (4) any failure to keep 2006/05/060509datacomcomplaint.pdf (last visited gov/pdf/Complaint%20%28file%20stamped%29_ accurate or complete records under Section Dec. 11, 2023); FTC v. Datatech Commc’ns, Inc., 0.pdf (last visited Dec. 11, 2023). 310.5(a)(2) was temporary and inadvertent. Id. at No. 03–cv–6249 (N.D. Ill. Aug. 3, 2005) (filing 66See, e.g., FTC v. DOTAuthority.com, No. 16– 33687. amended complaint), available at https:// cv–62186 (S.D. Fla. Sept. 13, 2016) available at www.ftc.gov/sites/default/files/documents/cases/ 54Id. at 33687. https://www.ftc.gov/system/files/documents/cases/ 2005/08/050825compdatatech.pdf (last visited Dec.
• In obtaining written consent to delegate recordkeeping responsibilities [each unique robocall] despite the TSR to a telemarketer must also retain access currently not requiring businesses to do contact a consumer using robocalls on rights to those records so the seller can so. Retaining these records will protect behalf of a ‘‘specific seller,’’ the written produce responsive records in the event American consumers, who receive agreement must identify the ‘‘specific it has hired a telemarketer overseas. countless prerecorded messages, and seller’’ by its legal entity name to make protect companies, who will be able to clear that any agreement to receive A. Recordkeeping Requirements prove compliance with the TSR.’’92 robocalls is limited to that legal entity.
provided, and that recording must make 87The Telemarketing Act authorizes the 91NAAG 34–20 at 3–4; PACE 33–15 at 2; WPF clear the purpose for which consent was Commission to include recordkeeping requirements 34–21 at 2. provided; in the Rule. 15 U.S.C. 6102(a)(3). 92PACE 33–15 at 2. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR htiw DORP2X7Z1MJKSD 26766 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations year. Moreover, the Commission the TSR’s recordkeeping provisions members ‘‘make hundreds of millions of proposed requiring a copy of each already require telemarketers and sellers calls each year’’ and ‘‘[f]actoring in the unique robocall, not every robocall used. to retain a copy of each substantially size of a CDR file’’ multiplied by the Finally, as some commenters have different advertising, brochure, number of calls its members make each stated,93businesses typically keep these telemarketing script, and promotional year, ‘‘the expense associated with this records in the ordinary course of material.97The 2022 NPRM simply retention . . . would be massive.’’103 business. In the FTC’s law enforcement clarified telemarketing scripts include ECAC also argues that, while its experience, records of each unique robocall and upsell scripts, and the members likely keep information prerecorded message are necessary for failure to keep one substantially regarding the nature and purpose of the the Commission to ensure compliance different version of each record under calls in the ordinary course of business, with the TSR, and requiring retention of Section 310.5(a)(1) is a violation of the associating particular scripts with a each unique robocall should not impose TSR.98 particular call is unworkable because an undue burden. ‘‘well-trained telemarketers are able to With respect to calls utilizing 2. Section 310.5(a)(2)—Call Detail deviate from scripts or not use them at soundboard technology, the Records all’’ and ‘‘scripts are constantly Commission sought comment on the changing and evolving to reflect The 2022 NPRM proposed adding burden that may be imposed by consumer questions and concerns.’’104 Section 310.5(a)(2) to require retention requiring sellers or telemarketers to Sirius argues the Commission’s of call detail records, including, for each keep each unique prerecorded message ‘‘overly prescriptive’’ approach would call a telemarketer places or receives:
involving the use of soundboard impair a business’s ability to adapt to the calling number; called number;
technology, including how many time, date, and duration of the call; and telemarketers employ soundboard Other commenters generally objected to the the disposition of the call, such as technology in telemarketing, how many recordkeeping amendments, arguing that they calls they make using soundboard whether the call was answered, require telemarketers and sellers to retain more dropped, transferred, or connected. For information than they would in the ordinary course technology, the average duration of each transfers, the record included the phone of business and are ‘‘contrary to data minimization call, and whether the telemarketer principles’’ articulated by the Commission typically keeps recordings of such calls number or IP address the call was elsewhere. See, e.g., Sirius 34–18 at 2, 4–6; NFIB in the ordinary course of business.94 transferred to and the company name, if 33–4 at 3–4. The Commission interprets these transferred to a company different from arguments to refer to the new requirement that The FTC’s law enforcement experience sellers and telemarketers retain call detail records. the seller or telemarketer that placed the demonstrates the use of soundboard NFIB lists other categories in their comment as technology is ongoing. The Commission call. The 2022 NPRM also required the examples of burden, such as records of established retention of other records regarding the business relationships, customer lists, consent, and did not receive any public comments nature and purpose of each call entity-specific DNCs or versions of the FTC’s DNC regarding this issue. WPF did note, Registry. NFIB 33–4 at 3–4. None of these including: (1) the telemarketer who however, the Commission should be categories, however, is new, and the TSR has mindful of using technological language placed or received each call; (2) the always required telemarketers and sellers to keep seller or charity for which the these records. See, e.g., 16 CFR 310.5(a)(3) and (5) that is broad enough to encompass a telemarketing call is placed or received; (requiring records of consent and customer lists); variety of digital and other sound 310.4(b)(3)(iii) and (iv) (requiring records of an
message to a consumer in telemarketing. email address rather than a physical address. See Some digital soundboard technologies The Commission received eight proposed amendments under Sections 310.5(a)(2) allow a seller or telemarketer to mimic comments regarding this proposal. (call detail records); (a)(3) (prize recipients); (a)(4) (customer records); and (a)(6) (previous donor). As or clone the voice of a specific ECAC,99the National Federation of explained in the 2022 NPRM, the Commission individual and calls using this Independent Businesses (‘‘NFIB’’),100 believes that telemarketers and sellers likely retain technology would be subject to this and Sirius101objected, stating that this information in the ordinary course of business. provision of the TSR to the extent that compliance with this provision would 2022 NPRM, 87 FR at 33684–85. Furthermore, they must already retain consumers’ phone numbers to the mimic or cloning creates a impose enormous expense on comply with the entity-specific DNC requirements.
prerecorded message that is used in businesses engaged in lawful As discussed in additional detail in Section telemarketing. telemarketing.102ECAC states its III.A.3—Prize Recipients and Customer Records, the WPF also ‘‘encourage[s] the FTC to Commission will prohibit use of any records created to comply with the TSR’s recordkeeping require telemarketers to keep a copy of 9716 CFR 310.5(a)(1). requirements for any other purpose.
the full range of materials involved in 982022 NPRM, 87 FR at 33684. 103ECAC 34–22 at 3. the advertising campaign, including 99ECAC 34–22 at 3. 104Id. at 4. The Commission does not find ECAC’s transcripts.’’96The Commission notes 100NFIB 33–4 at 4–5. argument persuasive. Even if a telemarketer 101Sirius 34–18 at 7. deviates from a script, fails to use the script, or the 102OCUL also generally objects to the proposed company constantly updates the scripts, there is 93See, e.g., PACE 33–15 at 2.
108Cassady 34–2; EPIC 34–23 at 4; NAAG 34–20 120FTC, Policy Statement of the Federal Trade at 5; WPF 34–21 at 2. 113Cassady 34–2. Commission on Biometric Information and Section 109NAAG 34–20 at 5. 114PACE 33–15 at 2. 5 of the Federal Trade Commission Act (May 18, 110EPIC 34–23 at 4. 115Id. 2023), available at https://www.ftc.gov/system/files/ 111Id. 1162022 NPRM, 87 FR at 33680–82, 33684. ftc_gov/pdf/p225402biometricpolicystatement.pdf 112WPF 34–21 at 2; NAAG 34–20 at 6. 1172022 NPRM, 87 FR at 33690–91. (last visited Jan 24, 2024). VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26768 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations with respect to telemarketing.121 three comments regarding this proposal, information (such as consumers’ names, Although the Commission does not and all were supportive of the phone numbers, and either their believe it has the evidence now either amendment. PACE states it believes this physical or email address, in to require the retention of voice was a ‘‘prudent measure, and many combination with goods or services they biometric recognition data in telemarketers and sellers that reward purchased) may raise privacy telemarketing or place restrictions on its prizes likely already comply with this concerns.132The Commission use, it will continue to monitor voice proposal.’’125NAAG agrees, stating the emphasizes once more that sellers and biometric use in telemarketing. requirement ‘‘reflects current business telemarketers have an obligation under EPIC requested the Commission practices’’ and telemarketers and sellers Section 5 of the FTC Act to adhere to consider requiring telemarketers and ‘‘likely keep such information in the the commitments they make about their sellers to also retain records of regular course of their business.’’126 information practices and take campaign IDs for each call, arguing it is WPF concurs, but also suggests the reasonable measures to secure necessary to tie the call detail records to Commission consider requiring sellers consumers’ data.133 a particular campaign.122The and telemarketers to retain this data in But the Commission also recognizes Commission recognizes the concern an encrypted state.127 the concerns raised by the comments. It EPIC has raised and addressed it by With respect to ‘‘Customer Records’’ agrees additional protections, similar to requiring sellers and telemarketers to under Section 310.5(a)(4), the TSR those it incorporated into the TSR when retain records that identify, for each requires sellers or telemarketers to it prohibited the sale or use of any lists call, the nature and purpose of that call, retain the ‘‘name and last known established or maintained to comply such as the seller or soliciting charity address of each customer, the goods or with the TSR’s DNC Registry or entity- for whom the telemarketing call was services purchased, the date such goods specific DNC,134should also apply to placed, the good or service sold or the or services were shipped or provided, any lists of consumers that sellers or charitable purpose of the call, and the and the amount paid by the customer telemarketers create or maintain in telemarketing script or the robocall for the goods or services.’’128Similarly, order to comply with the amended recording that was used. This the Commission proposed modifying recordkeeping provisions. information is at least as comprehensive this provision to account for current Thus, the Commission will amend as a campaign ID. The Commission business practices and require the Section 310.4(b)(2) to state it is also an believes specifying the substantive retention of the customer’s last known abusive telemarketing act or practice information sellers and telemarketers telephone number and the customer’s and a violation of the TSR for any are required to retain, rather than last known physical address or email person to sell, rent, lease, purchase, or identifying a particular data category address. The Commission also proposed use any list established to comply with such as campaign ID that may be subject adding the date the consumer purchased Section 310.5. Amending the TSR to to change over time, will more the good or service to account for the specify that the sale or use of a list effectively enable the Commission and new requirement that telemarketers and created to comply with the other regulators to enforce the TSR. sellers keep records of each consumer recordkeeping provisions is consistent Finally, EPIC requested the with whom a seller intends to assert it with the Telemarketing Act’s emphasis Commission consider requiring sellers has an EBR.129 on privacy protection. The Act and telemarketers to keep records of the The Commission received four authorizes the Commission to regulate originating or gateway comments regarding this amendment. ‘‘calls which the reasonable consumer telecommunications provider for each NAAG and PACE support this proposal, would consider coercive or abusive of campaign, rather than any service and agree it is necessary to establish such consumer’s right to privacy.’’135 provider the telemarketer is in a EBR and likely that telemarketers and The Commission agrees with sellers already retain this information in commenters that consumers would business relationship with, as the NPRM the ordinary course of business.130EPIC consider it coercive and an abuse of proposes.123The Commission believes and WPF, however, do not support this their right to privacy if telemarketers or requiring retention of the call detail amendment unless the Commission sellers are allowed to use any consumer records and records of the seller or concurrently passes commensurate information they collect and maintain telemarketer’s service providers strikes privacy protections.131 under the TSR’s recordkeeping an appropriate balance between the The Commission notes that, as it provisions for any other purpose. Commission’s interest in having recognized in the 2022 NPRM, requiring sufficient information to enforce the 4. Section 310.5(a)(5)—Established sellers and telemarketers to retain TSR and industry’s concerns regarding Business Relationship additional personal identifying burden.
3. Sections 310.5(a)(3) and (4)—Prize 125PACE 33–15 at 4. Section 310.5(a)(5) to further clarify Recipients and Customer Records 126NAAG 34–20 at 9. what records a seller must keep to 127WPF 34–21 at 3. ‘‘demonstrate that the seller has an The TSR currently requires 12816 CFR 310.5(a)(3). established business relationship’’ with telemarketers and sellers to retain the 1292022 NPRM, 87 FR at 33686. a consumer. Specifically, for each ‘‘name and last known address’’ of each 130NAAG 34–20 at 9; PACE 33–15 at 5. consumer with whom a seller asserts it prize recipient.124The 2022 NPRM 131EPIC 34–23 at 15; WPF 34–21 at 3. When proposed requiring sellers and consumer data is transferred as part of the sale, telemarketers to also retain the last assignment, or change in ownership, dissolution, or 1322022 NPRM, 87 FR at 33686. termination of the business, EPIC also urges the 133See generally Federal Trade Commission 2020 known telephone number and physical Commission to require a successor to acknowledge Privacy and Data Security Update, available at or email address for each prize liability for any TSR violations regarding the calls https://www.ftc.gov/system/files/documents/ recipient. The Commission received that those records document. EPIC 34–23 at 15–16. reports/federal-trade-commission-2020-privacy- EPIC argues that this will deter a fraudulent seller data-security-update/20210524_privacy_and_data_ or telemarketer from shutting their businesses and security_annual_update.pdf (last visited Dec. 11, 12115 U.S.C. 6102(a)(1). selling their assets, including customer lists, to a 2023). 122EPIC 34–23 at 5. sham successor as a means of evading liability. The 1342003 TSR Amendments, 68 FR at 4645. 123Id. Commission does not believe such an amendment 13515 U.S.C. 6102(a)(3)(A); see also 2002 NPRM, 12416 CFR 310.5(a)(2). is necessary at this time. 67 FR at 4510–11. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations 26769 has an established business must already collect this information in consumer provided consent, and the relationship, the seller must keep a the ordinary course of business and thus purpose for which consent was given record of the name and last known the amendment should not impose an and received.146For a copy of the phone number of that consumer, the additional burden. consent provided under Sections date the consumer submitted an inquiry 310.3(a)(3), 310.4(a)(7),
consumers who purchased a good or service from telemarketing calls when the consumer 147Id. For example, a copy of the consent the seller. 16 CFR 310.5(a)(3). Furthermore, as discussed in Section III.A.3—Prize Recipients and has registered her phone number on the provided to receive prerecorded sales messages Customer Records above, the Commission is DNC Registry.145 under Section 310.4(b)(1)(v)(A) must evidence, in amending the customer records provision to Specifically, the 2022 NPRM writing: (1) the consumer’s name, telephone include the date the consumer purchased the good proposed that for each consumer from number, and signature; (2) that the consumer stated or service to account for the new EBR she is willing to receive prerecorded messages from recordkeeping requirements. whom a seller or telemarketer states it or on behalf of a specific seller; (3) that the seller has obtained consent, sellers or obtained consent only after clearly and EPIC also urges the Commission to consider clarifying that EBR may only be asserted as an telemarketers must maintain records of conspicuously disclosing that the purpose of the written agreement is to authorize that seller to place affirmative defense if the seller or telemarketer that consumer’s name and phone prerecorded messages to that consumer; and (4) that intentionally called the consumer because it has an established business relationship with the number, a copy of the consent requested the seller did not condition the sale of the relevant consumer. EPIC 34–23 at 15. The TSR does not in the same manner and format it was good or service on the consumer providing consent currently contemplate the use of EBR in this presented to that consumer, a copy of to receive prerecorded messages. The TSR also manner but rather allows telemarketers and sellers the consent provided, the date the states that a seller must obtain consent from the to call a consumer if the seller can demonstrate it consumer, and the Commission reiterates that this has an EBR with that consumer and otherwise means a seller must obtain consent directly from meets other requirements under the TSR. Making 141The Commission also proposed adding a new the consumer and not through a ‘‘consent farm.’’ any modifications to this framework would require definition of ‘‘previous donor.’’ See supra Section 1482022 NPRM, 98 FR at 33686–87. additional consideration. II.C. 149See EPIC 34–23 at 10–11; NAAG 34–20 at 10; 138EPIC 34–23 at 15; NAAG 34–20 at 7; and 142NAAG 34–20 at 7. PACE 33–15 at 5; and WPF 34–21 at 3. PACE 33–15 at 2–3. 143WPF 34–21 at 1. 150PACE 33–15 at 5. 139OCUL 34–19 at 2; Sirius 34–18 at 5. 1442022 NPRM, 87 FR 33686–87. 151WPF 34–21 at 3. 1402022 NPRM, 87 FR at 33685. 145Id. at 33681. 152EPIC 34–23 at 10–13. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26770 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations ‘‘reduce obfuscation’’ on the ‘‘scope of consumers, perhaps because the regarding the records for verbal consent. the consumer’s consent’’ and identify consumers would recognize a brand or In the 2022 NPRM, the Commission the proper defendant if ‘‘legal action is product name but not the legal entity stated if a seller or telemarketer requests necessary.’’153 name, the seller or telemarketer may consent verbally, a telemarketing script The Commission believes WPF’s need to take extra steps to ensure the would suffice as a record of the consent recommendation is primarily applicable consumer has knowingly agreed to requested as long as no other provision to transactions involving a negative receive robocalls from the specific of the TSR required a recording.160EPIC option feature154where a consumer seller. requests the Commission make clear the may wish to cancel a subscription plan EPIC also requests the Commission reference to verbal consent only applies and revoke billing authorization. The require sellers and telemarketers to to billing authorization under Section Commission published a Notice of ‘‘retain records regarding the owner of 310.4(a)(7), and any authorization Proposed Rulemaking regarding the the website where consent was required to receive robocalls or to Negative Option Rule (‘‘Negative Option purportedly obtained’’ and a record of receive telemarketing calls to phone NPRM’’) on April 24, 2023, which also ‘‘the relevant webform completion, or of numbers on the DNC Registry must be addresses telemarketing transactions.155 some other admissible evidence of the provided in writing. EPIC also raised Because the proposed Negative Option specific consumer providing consent via concerns over whether the Rule would apply a more a specific web page on a specific date/ Commission’s statement meant that a comprehensive and consistent time.’’158For telemarketers or sellers script is an ‘‘acceptable record of the framework for negative option who obtain consumer consent via a language the caller used to request transactions regardless of the sales website, the Commission believes the consent’’ or if ‘‘the Commission is also medium, the Commission declines to new recordkeeping provision requiring suggesting that [a script] is an make any further amendments to the records of ‘‘a copy of the request for acceptable record of the consumer’s TSR to address WPF’s comment at this consent in the same manner and format grant of consent.’’161If the former, EPIC time. in which was presented to that argues using a telemarketing script as a With respect to EPIC’s request consumer’’ would require a telemarketer record of the request for consent is regarding the identification of a or seller to keep a copy of the web page insufficient when telemarketers often ‘‘specific seller,’’ the Commission stated or web pages that were used to request fail to follow the scripts.162If the latter, in the Statement of Basis and Purpose consent from the consumer. The copy of EPIC argues it would ‘‘eviscerate the finalizing the TSR amendments the web page could be maintained as recordkeeping requirement’’ when the prohibiting robocalls that it used the screenshots so long as the screenshot new consent requirements include ‘‘‘a term ‘‘specific seller’’ to ‘‘make it clear accurately reflects what a consumer copy of the request provided.’’’163EPIC that prerecorded calls may be placed also argues allowing a recording of only viewed in providing consent. Sellers only by or on behalf of the specific the consent provided without the actual and telemarketers who obtain consent seller identified in the agreement.’’156 request for consent would allow the via website will also need to keep ‘‘a The Commission wanted to ensure any telemarketer or seller to record a series copy of the consent provided’’ under the agreement to receive robocalls would be of the ‘‘word ‘yes,’ which would be new recordkeeping provisions. The limited to the seller identified in the meaningless without any context.’’164 Commission believes a screenshot of the agreement and could not be NAAG takes it a step further and urges web page a consumer completed to transferrable to any other party.157 the Commission to require recordings of provide consent could satisfy this Requiring companies to use the legal the entire telemarketing transaction requirement if the screenshot also entity name to identify the specific whenever consent is requested accurately reflects what a consumer seller in the written agreement is a verbally.165 submitted in providing consent. The natural extension of the Commission’s The 2022 NPRM specifies that, with Commission declines to specify the intention in using the term ‘‘specific respect to requests for verbal consent format a company must use to keep a seller.’’ Thus, the Commission states where no provision of the TSR requires copy of consent requested or provided now that in identifying the specific a recording, a telemarketing script to allow businesses the flexibility of seller in any written agreement, the would be sufficient for a copy of the retaining records as they would in the seller should use its legal entity name to request for consent. It did not propose ordinary course of business. Rather, it make clear any agreement to receive that a telemarketing script would be believes specifying the categories of robocalls is limited to that specific legal sufficient as a record of the consent information required to adequately entity. The Commission also states the provided. But the Commission reflect consent will provide sufficient burden will be on the seller or recognizes the concerns raised by guidance. The Commission cautions, telemarketer to ensure and prove a NAAG and EPIC, that without a however, an IP address with a consumer understands which specific recording of the consent requested, a timestamp is not sufficient as a record legal entity would be permitted to send recording of the request provided would of consent. The Commission does not the consumer robocalls. In believe any additional amendments are circumstances where the legal entity’s 1602022 NPRM, 87 FR at 33687.
name may not be recognizable to necessary at this time.159 161EPIC 34–23 at 11. EPIC and NAAG also raised concerns 162Id.
154A negative option feature is defined as ‘‘an 164Id.
offer or agreement to sell or provide any goods or 158EPIC 34–23 at 12. 165NAAG 34–20 at 10. NAAG has also urged the services, a provision under which a customer’s 159EPIC also requested that the Commission Commission to require a recording whenever a silence or failure to take an affirmative action to clarify that the TSR’s language regarding consent is telemarketing call includes a negative option offer. reject goods or services or to cancel the agreement similar to the TCPA’s language regarding consent or NAAG 34–20 at 6. It also requests that the is interpreted by the seller as acceptance of the that the consent requirements do not ‘‘lower the bar Commission require a full refund if a consumer offer.’’ 16 CFR 310.2(w). below the current requirements of the TCPA.’’ EPIC complains of unauthorized charges and the seller is 15588 FR 24716 (Apr. 24, 2023). 34–23 at 13. The new amendments to the TSR do unable to provide a recording of the transaction as 1562008 TSR Amendments 73 FR at 51186; see not alter substantive requirements for consent proof of consent. Id. Since the Commission has also supra note 147. under the TSR. They merely clarify what records issued the Negative Option NPRM, the Commission 1572008 TSR Amendments 73 FR at 51186. are necessary to maintain proof of consent. will not address this comment here. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations 26771 be meaningless. Given that industry has sellers must comply with Section technologies that sellers or stated scripts are not ‘‘set in stone’’ and 310.3(a)(3), which includes obtaining a telemarketers use to convey a verbal ‘‘[w]ell-trained telemarketers are able to consumer’s authorization to be billed in message to a consumer in telemarketing. deviate from scripts or not use them at writing or, if verbal consent is This includes, for example, service all,’’166the Commission states that, for requested, a recording of the transaction providers that telemarketers or sellers a complete record of consent that is that evidences a consumer has received use to mimic or clone the voice of an requested verbally and where no specific information. The Commission individual to deliver live and provision of the TSR requires a reiterates this rule amendment does not prerecorded outbound telemarketing recording, a telemarketer or seller must modify the requirements for consent calls. With respect to EPIC’s concerns of retain a recording of the consent outlined in the TSR; rather it clarifies ensuring service providers are also requested as well as the consent what records must be kept to complying with the TSR, as discussed provided to comply with proposed demonstrate compliance with the above in Section III.A.2—Call Detail Section 310.5(a)(8). In addition, the existing requirements. Records, the Commission believes it is recording must make clear the purpose not necessary to require records of the
preacquired account information, contract ceases.175PACE expressed The Commission received four telemarketers and sellers must fulfill the concerned one party to the contract comments on this proposal. EPIC, requirements of Section 310.4(a)(7)(i) might cease the telemarketing activity NAAG, PACE, and WPF all support the and (ii), which include recording the without informing the other party and it proposed amendment, but also entire telemarketing transaction if there would be difficult to identify when the suggested some modifications.170WPF is a free-to-pay conversion feature. For retention period is triggered.176 repeated its request the Commission use consent to receive robocalls or calls to The Commission recognizes the broader terminology than ‘‘soundboard phone numbers on the DNC Registry, potential for uncertainty in the scenario technology platforms’’ in defining telemarketers and sellers must abide by PACE raises and will modify the service providers.171EPIC repeated its the requirements of Sections recordkeeping requirements accordingly request the Commission require sellers 310.4(b)(1)(iii)(B)(1) and (b)(1)(v)(A), to require retention of any records under and telemarketers to also keep records respectively, which include obtaining a this provision for five years from the of which service provider they used for consumer’s written consent.169And for date the contract expires.177With each telemarketing campaign to ensure telemarketing transactions using certain respect to PACE’s request to limit the those service providers are also payment methods, telemarketers and recordkeeping requirements to those complying with the TSR.172 service providers with whom sellers or The Commission clarifies that service 166ECAC 34–22 at 4. telemarketers have a direct contractual providers referenced under this 167The TSR states it is an abusive practice to relationship, the Commission is not ‘‘cause billing information to be submitted for provision include any entity that persuaded that requiring records of payment, directly or indirectly, without the express provides ‘‘digital soundboard’’ informed consent of the customer or donor.’’ 16 technology rather than ‘‘soundboard service providers with which they have CFR 310.4(a)(7). This prohibition applies to all a business relationship would cause technology platforms,’’ to make clear telemarketing transactions subject to the TSR. Thus, requiring a recording of every telemarketing call that sellers and telemarketers must whenever consent is requested would essentially retain records of any entity that 173PACE 33–15 at 3. mean that all telemarketing calls subject to the TSR provides any digital or sound 174Id. would need to be recorded. 175Id.
310.4(b)(1)(iii)(B)(1), and 310.4(b)(1)(v)(A). 170EPIC 34–23 at 7–8; NAAG 34–20 at 7–8; PACE 177If, after the end of a fixed term contract, a 169The Commission reiterates that a seller or 33–15 at 3; WPF 34–21 at 2. service provider continues to provide services and telemarketer may not use an oral recording of 171WPF 34–21 at 2; see also Section III.A.2 (Call the telemarketer or seller continues to pay for those consent for any provision of the TSR that requires Detail Records). services, the Commission will consider the contract consent to be provided in writing. 172EPIC 34–23 at 8. extended until performance ceases. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26772 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations additional burden. As explained in The Commission clarifies that the PACE, and WPF generally support the more detail in Section III.A.14— new recordkeeping provision requires proposed provision, but also request Compliance Obligation, the Commission retention of the identity of the some clarifications or modifications, will allow sellers and telemarketers to telemarketing company that made the while ECAC generally objects to the allocate recordkeeping responsibilities call and not the individual telemarketer. requirement.185WPF notes it ‘‘strongly between themselves. In the scenario that This requirement is particularly support[s]’’ the proposed changes, PACE raises, a seller can simply require important for sellers or charitable noting they would ensure the ‘‘integrity their telemarketer to retain records of all organizations who engage multiple of the Do Not Call Registry.’’186ECAC the service providers it uses to make telemarketing entities to sell their good argues the Commission should not outbound telemarketing calls on the or service or seek a charitable require records of every version of the seller’s behalf. contribution through telemarketing. DNC Registry used because it ‘‘imposes Sellers or charities already should know significant costs and burdens’’ that 8. Sections 310.5(a)(10)—Entity-Specific which telemarketing entity logged the ‘‘greatly exceed any marginal benefit’’ to DNC List consumer’s request to cease receiving the Commission, particularly when calls on their behalf and ensure all their many of its members outsource The 2022 NPRM also proposed telemarketers abide by that request. scrubbing responsibilities to third requiring telemarketers and sellers to Similarly, when a telemarketer parties and may never download the maintain for five years records related to engages in telemarketing on behalf of DNC Registry in the first place.187 the entity-specific DNC list and its multiple sellers or charitable WPF requests the Commission require corresponding safe harbor provision organizations, it is important to require telemarketers to keep records of how under Section 310.4(b)(3)(iii).178 the retention of records of the purpose many times they accessed the DNC Specifically, the Commission proposed of the call any time a consumer asks a Registry or parts of the DNC Registry.188 requiring telemarketers and sellers to telemarketer to add them to the entity- PACE requests the Commission clarify retain records of: (1) the consumer’s specific DNC list. Since the entity- how it believes sellers and telemarketers name, (2) the phone number(s)
181Id. 18316 CFR 310.4(b)(3)(iii). 190Id.
182PACE 33–15 at 4. 1842022 NPRM, 87 FR at 33686. 191Id. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations 26773 redundant and burdensome. It would the state where the case is filed,’’ which two comments on this proposal. Both also address WPF’s request that sellers is two years in Ohio.201 commenters support the amendments, and telemarketers should keep records The Commission is not persuaded by but also requested clarifications or of the number of times they access the the general burden concerns modifications. DNC Registry. Presumably, sellers and commenters have raised. None of the PACE asked the Commission to clarify telemarketers only access the DNC commenters provided any information that the new amendments requiring that Registry to ensure compliance with the on what the burden would be and why time be kept in UTC format applies only TSR’s DNC prohibitions since accessing small businesses would not be able to to new records moving forward.206It the DNC Registry for any other purpose comply with the new recordkeeping also requested the Commission allow would be a violation of the TSR.192 amendments. As mentioned in Section businesses a reasonable time to III.A.2—Call Detail Records, the implement the proposed changes since
10. Time Period To Keep Records Commission provided an estimate of the it may require reprogramming software additional cost of complying with the and IT systems.207The Commission The Commission proposed changing new recordkeeping amendments but did clarifies that the new formatting the time period that telemarketers and not receive any comment or data on requirements apply only to new records sellers must keep records from two why its estimate is inaccurate. created after the proposed amendments years to five years from the date the Additionally, the Commission notes go into effect. Additionally, as stated in record is made, except for Sections the statute of limitations for the FTC to Section III.A.2—Call Detail Records, the 310.5(a)(1) and (a)(9),193where the seek civil penalties under the TSR is Commission will allow sellers and Commission proposed requiring five years and not two or three years, as telemarketers a one hundred eighty-day retention for five years from the date some commenters argued. Although the grace period to implement any new that records covered by those sections statute of limitations to seek consumer systems, software, or procedures are no longer in use. The Commission redress for TSR violations is three years necessary to comply with that new received nine comments on this under Section 19 of the FTC Act,202the provision. The Commission believes proposal.194EPIC, NAAG, and WPF applicable statute of limitations for civil that should provide companies support the proposal, citing as penalties is five years under Section 5 sufficient time to reprogram any rationales for their support the amount of the FTC Act.203As such, the software systems necessary to also of time necessary to complete an Commission believes it is appropriate comport with the new formatting investigation of TSR violations and that and necessary to require the retention of requirements. telemarketers fail to comply with records for five years. This requirement EPIC requests the Commission require litigation holds that are issued while is particularly important when, as EPIC companies to maintain records in a investigations are pending.195ECAC, has noted, not all companies will format that is easily retrievable and NFIB, OCUL, PACE, Sirius, and the US comply with a litigation hold request inexpensive to produce and make clear Chamber of Commerce (‘‘Chamber’’) all while an investigation is pending, the regulated party is responsible for the object, raising burden concerns.196 potentially leaving law enforcement cost of producing the records.208EPIC PACE stated the Commission cannot agencies with no recourse in enforcing also requests the Commission impose assume its proposal would not be the TSR.204 more specific formatting requirements unduly burdensome based on the fact and require telemarketers and sellers to
193The records covered by these two sections manual means typically retain records include advertising materials and a list of the 20315 U.S.C. 45(m); 28 U.S.C. 2462; see also of those calls in an easily retrievable United States v. MyLife.com, Inc., 567 F. Supp. 3d service providers who assisted in outbound 1152, 1166 (C.D. Cal. Oct. 19, 2021) (holding the format. The Commission believes telemarketing. See supra Sections III.A.1 (Substantially Different Advertising Materials) and statute of limitations for civil penalties under the allowing companies to retain records as III.A.7 (Other Service Providers). FTC Act is five years); United States v. Dish they would in the ordinary course of Network, LLC, 75 F. Supp. 3d 942, 1004–05 (C.D.
1942022 NPRM, 87 FR at 33686. business strikes an appropriate balance
199Sirius 34–18 at 3. 204EPIC 34–23 at 4–5. 208EPIC 34–23 at 13. 200Id. 2052022 NPRM, 87 FR at 33687. 209Id.
VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26774 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations about burden. Finally, the Commission or telemarketer out of business for a 13. Section 310.5(d)—Safe Harbor for does not believe it is appropriate to relatively minor mistake that affected Incomplete or Inaccurate Records Kept require sellers and telemarketers to many records.’’220NFIB provides an Pursuant to Section 310.5(a)(2) affirmatively bear the cost of producing example to illustrate its concerns The Commission proposed including records to private litigants regardless of describing a situation where a company a safe harbor provision for temporary the outcome of their suits as EPIC ‘‘made the relatively minor mistake of and inadvertent errors in keeping call requests,210when Congress already keeping calls in the time zone of the detail records pursuant to Section included a provision in the person called, rather than in 310.5(a)(2). Specifically, the 2022 NPRM Telemarketing Act that allows a court to Coordinated Universal Time (UTC) stated a seller or telemarketer would not award the cost of the suit and any format.’’221NFIB believes in this be liable for failing to keep records reasonable attorney or expert witness situation the company would be facing under Section 310.5(a)(2) if it can fees to the prevailing party.211 astronomically high fines for the demonstrate that: (1) it established and hundreds of thousands of calls it makes 12. Section 310.5(c)—Violation of implemented procedures to ensure a year.222Instead, NFIB argues the FTC Recordkeeping Provisions completeness and accuracy of its should provide a reasonable time period The 2022 NPRM proposed clarifying to cure these errors once discovered, records under Section 310.5(a)(2); (2) it that the failure to keep each record such as 90 days, and only commence trained its personnel in the procedures; required by Section 310.5 in a complete imposing fines for each week after the (3) it monitors compliance and enforces and accurate manner constitutes a reasonable period expires.223According the procedures, and documents its violation of the TSR.212The to NFIB, this would be a more balanced monitoring and enforcement activities; Commission received five comments on system that ‘‘avoids both the extreme and (4) any failure to keep accurate or this proposal. EPIC and NAAG support that a relatively minor design violation complete records under Section the proposal, stating it is a ‘‘common- yields an astronomical fine that puts the 310.5(a)(2) was temporary and sense approach in deterring deceptive inadvertent.226 seller or marketer out of business and telemarketers/sellers from harming The Commission received four the opposite extreme that a violation consumers’’213and ‘‘inaccurate or comments on this proposal. PACE states results in such a small fine that a seller incomplete records are of little use.’’214 a ‘‘safe harbor for maintaining call detail or marketer accepts fines as an annoying PACE also supports the proposed records is necessary’’ while Sirius states but manageable cost of doing clarification, stating the proposal is it would ‘‘provide a good foundation for business.’’224 ‘‘logical and in line with the spirit of the The Commission recognizes NFIB’s seller and telemarketer compliance TSR and its accompanying and PACE’s concerns regarding plans.’’227WPF states it does not legislation.’’215But PACE raised ‘‘object to the safe harbor proposed’’ inadvertent errors resulting in large concerns about the requirement that because it was ‘‘narrow enough to allow penalties and, thus, included a safe records be kept in an accurate and companies to make the kinds of harbor provision for call detail records complete manner, arguing that mistakes that occur in day to day in the proposed amendments. As companies who fail to keep all or some business, and provides incentives to discussed in Section III.A.13—Safe records in a complete and accurate correct the errors.’’228 Harbor for Incomplete or Inaccurate manner through inadvertent error NFIB, however, states it does not Records Pursuant to Section 310.5(a)(2)
should not be penalized in the same deem the safe harbor sufficient because below, the Commission believes it has way as telemarketers and sellers who it is ‘‘complex and limited’’ and does provided a reasonable grace period for fail to keep all or some categories of not provide a ‘‘great source of comfort sellers and telemarketers to cure any records.216Instead, PACE urges to sellers and marketers in its current inadvertent deficiencies in their leniency for situations where the failure form.’’229Because the safe harbor recordkeeping system before any civil is inadvertent rather than willful and would apply in the scenario NFIB posits penalties might apply and the proposed requests the Commission provide ‘‘a 30- above where a company fails to keep example NFIB raises would fall squarely day cure period when the alleged call times in UTC format, the within the safe harbor, provided the violation can be easily corrected.’’217 Commission believes the safe harbor company followed the other NFIB and Sirius object to this provides adequate protection against requirements of the safe harbor.
proposal.218Sirius proposes the inadvertent and temporary errors. The Regarding Sirius’s suggestion that Commission ‘‘count violations by each Commission, however, will revise this failure to retain each type of record type of record rather than by each provision to provide sellers or equal one violation, the Commission is record, as proposed.’’219NFIB argues telemarketers thirty days to cure an not persuaded imposing civil penalties allowing civil penalties for ‘‘each inadvertent error, as PACE suggests.230 for each type of record would provide erroneous error’’ is as ‘‘perverse as the sufficient incentive for companies to 14. Section 310.5(e)—Compliance evil the FTC states it is addressing, for abide by the recordkeeping provisions Obligations it would allow the FTC to put a seller given the limited number of categories The Commission proposed modifying of records sellers and telemarketers are 210Id. the compliance obligations in Section required to retain.225 21115 U.S.C. 6104(d). 310.5(e) to state that, in the event the 2122022 NPRM, 87 FR 33687. seller and telemarketer failed to allocate 213NAAG 34–20 at 10. 220NFIB 33–4 at 7.
215PACE 33–15 at 6. 222Id.
216Id. 223Id. 2262022 NPRM, 87 FR at 33687.
217Id. PACE also cites to the example NFIB 224Id. 227PACE 33–15 at 6; Sirius 34–18 at 8. provided in its comment as an example of why 225Although Sirius did not provide a definition 228WPF 34–21 at 4. PACE believes the Commission should provide for what it meant by ‘‘type of record,’’ the 229NFBI 33–4 at 8. some leniency and an opportunity to cure rather Commission interprets it to mean the categories the 230PACE 33–15 at 6; see also Section III.A.12 than penalize inadvertent errors. Commission has outlined under the amended (Violation of Recordkeeping Provisions which 218NFIB 33–4 at 6–7; Sirius 34–18 at 8. Section 310.5(a), which would limit the number of provides additional discussion about the proposed 219Sirius 34–18 at 8. categories to eleven. safe harbor). VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations 26775 maintaining the required records, the to their telemarketers would be required shows the directive to consider responsibility for complying with the to ‘‘establish and implement practices recordkeeping applies to the Act’s recordkeeping requirements would fall and procedure to ensure the mandate to promulgate rules addressing on both parties.231The Commission telemarketer is complying with the deceptive or abusive telemarketing received four comments on this [TSR’s recordkeeping provisions].’’239 practices and is not limited to the proposal. NAAG, PACE, and Sirius But given the concerns EPIC has raised, specific abusive practices identified in supported the proposal.232PACE states the Commission will modify this Section 6102(a)(3). that ‘‘not only do we consider this fair, provision to also require sellers who Section 6102(a) generally requires the but we believe it will encourage parties allocate recordkeeping responsibilities Commission to promulgate rules to negotiate their contracts and cease to their telemarketer to retain access regarding deceptive or abusive regarding TSR recordkeeping as an rights to those records so the seller can telemarketing acts or practices. Section afterthought.’’233 produce responsive records in the event 6102(a)(1) states: ‘‘[t]he Commission EPIC, however, objects to this it has hired a telemarketer overseas. shall prescribe rules prohibiting amendment and strongly urges the Requiring sellers to ensure their deceptive telemarketing acts or practices Commission to require both telemarketers are abiding by the TSR’s and other abusive telemarketing acts or telemarketers and sellers to retain recordkeeping provisions and retain practices.’’245Sections 6102(a)(2) and records rather than allowing them to access to their telemarketer’s records of (a)(3) then identify specific provisions allocate responsibilities.234Specifically, telemarketing activities on the seller’s that Congress instructs the Commission EPIC raises a concern that a seller may behalf should not impose onerous to include, or consider including, when allocate responsibilities to a obligations, and such access may never it promulgates its rules under Section telemarketer that resides outside the be necessary. Sellers likely already take 6102(a)(1). Section 6102(a)(2) directs the United States and would not be subject such steps in the ordinary course of Commission to ‘‘include in such rules to U.S. jurisdiction and process.235EPIC business, given that telemarketers are respecting deceptive telemarketing acts argues that if the Commission is acting as their agents and their or practices’’ a definition of deceptive inclined to designate only one party, it telemarketing acts or practices, which telemarketers’ violations of the TSR should be the seller who is responsible may include, among other things, credit could also expose them to liability because the seller should be accountable card laundering.246Section 6102(a)(3) under the TSR.
for the telemarketers it hires, is less directs the Commission to ‘‘include in likely to be overseas and 15. Authority To Require Recordkeeping such rules respecting other abusive undercapitalized compared to NFIB argues the new recordkeeping telemarketing acts or practices’’ specific telemarketers, and likely receives most proposals exceed the FTC’s statutory requirements including: (1) ‘‘a of the sales proceeds.236But EPIC still authority under the Telemarketing requirement that telemarketers may not believes the Commission should Act.240Section 6102(a) of the undertake a pattern of unsolicited explicitly require both sellers and Telemarketing Act directs the telephone calls which the reasonable telemarketers be responsible for Commission to: (1) prescribe rules consumer would consider coercive or recordkeeping to prevent any prohibiting deceptive or abusive abusive of such consumer’s right to gamesmanship where sellers move telemarketing acts or practices;241(2) privacy’’; (2) ‘‘restrictions on the hours overseas to avoid liability.237In the include in those rules a definition of of the day and night when unsolicited event the Commission is not persuaded, deceptive acts or abusive practices that telephone calls can be made to EPIC also argues the Commission shall include fraudulent charitable consumers’’; (3) ‘‘a requirement that any should require sellers to audit their solicitations and may include actions person engaged in telemarketing for the telemarketers, including reviewing an that constitute assisting or facilitating sale of goods or services’’ make certain actual production of preserved records, disclosures; and (4) ‘‘a requirement that such as credit card laundering;242and and require sellers who hire overseas any person engaged in telemarketing for
233PACE 33–15 at 6. 2392022 NPRM, 87 FR at 33694. 247Id. 6102(a)(3) (emphasis added). 234EPIC 34–23 at 8–10. 240NFIB 33–4 at 5–6. 248Id. 235Id at 10. 24115 U.S.C. 6102(a)(1). 249The Commission also notes that the official 236Id. 242Id. 6102(a)(2). codification of the Telemarketing Act in the United 237Id. 243Id. 6102(a)(3). States Code aligns the indentation of the statement 238Id. 244NFIB 33–4 at 6. Continued VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26776 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations NFIB’s interpretation of Section issue rules, including recordkeeping practices listed in Section 6102(a)(3), 6102(a)(3) improperly divorces that provisions, for any deceptive or abusive the TSR’s recordkeeping provisions provision from the rest of the statute. As telemarketing acts or practices it meet those criteria. The Final Rule discussed, Section 6102(a)(3) contains identifies in promulgating the TSR.254 requires recordkeeping for eleven Congress’s specific guidance regarding Congress’s silence would make sense general categories of information: (1) the types of rules the Commission must given the Commission had yet to advertisements, including telemarketing adopt or consider adopting to identify these deceptive or abusive acts scripts and robocall recordings; (2) call implement Section 6102(a)(1)’s general or practices in the TSR at the time the detail records; (3) prize recipients; (4) grant of authority to ban deceptive or Telemarketing Act was passed, and it customers; (5) customer information to abusive telemarketing practices. Section was unknown whether and what form of establish a business relationship; (6) 6102(a)(3) states when the Commission recordkeeping would be necessary to previous donors; (7) telemarketers’ ‘‘prescrib[es] the rules described’’ by ensure compliance.255Interpreting the employees; (8) consent; (9) service Congress, it ‘‘shall also consider Telemarketing Act to prohibit the providers; (10) entity-specific DNC; and recordkeeping requirements.’’ This Commission from requiring (11) versions of the FTC’s DNC. Each of provision thus authorizes the recordkeeping would contradict the these categories is necessary to ensure Commission to adopt—or not adopt— Act’s stated purpose—to ‘‘enact compliance with the provisions of the recordkeeping requirements and declare legislation that will offer consumers TSR the Commission promulgated to violations of such requirements to be an necessary protection from telemarketing address the specifics acts or practices abusive telemarketing practice. deception and abuse.’’256 identified in Section 6102(a)(3). But even if Section 6102(a)(3) did not Nothing in the text of the Act prevents For example, Section 6102(a)(3)(A) of expressly authorize the Commission to the Commission from requiring persons the Act requires the FTC to prohibit ‘‘a consider recordkeeping requirements, to keep records substantiating their pattern of unsolicited telephone calls the Commission may still require compliance with any requirement of the which the reasonable consumer would recordkeeping under Section 6102(a)(1). TSR. Nor does NFIB explain why consider coercive or abusive of such Congress’s purpose in enacting the Congress would have intended to consumer’s right to privacy.’’257 Telemarketing Act was to prevent deprive the Commission of records Accordingly, the Commission deceptive or abusive telemarketing acts essential to the enforcement of the rule. promulgated Section 310.4(b) of the TSR or practices.250As the Commission has NFIB’s interpretation would give to prohibit certain ‘‘patterns of noted over the years, recordkeeping telemarketers and sellers a perverse calls,’’258including prohibitions against provisions prevent deceptive or abusive incentive to commit deceptive and robocalls, calls to consumers who have telemarketing acts or practices because abusive practices while destroying any asked a specific seller to stop calling, they are necessary to effectively enforce record of those violations. and calls to consumers who have the TSR.251NFIB’s assertion that ‘‘the Finally, even if a court determines the registered their phone numbers on the rules for recordkeeping do not prevent Act only permits recordkeeping for rules FTC’s DNC Registry.259As explained in or address deceptive or other abusive that address the specific acts and more detail in Section II—Overview of the Proposed Amendments to the TSR telemarketing acts or practices’’ is not above, the Commission needs all eleven an accurate assertion252and it is 254See. e.g., U.S. Sugar Corp. v. EPA, 830 F.3d undermined by the Commission’s law 579, 617–18 (D.C. Cir. 2016) (upholding EPA’s categories of information set forth in the authority to require recordkeeping in regulating Final Rule, including the requirement enforcement experience and that of even though Congress was silent on that issue that sellers and telemarketers retain call other enforcers.253 because ‘‘Congress plainly intended EPA to regulate detail records to ensure compliance Even if Section 6102(a)(1) could be sources burning ‘any’ solid waste, a goal read as being silent on recordkeeping, presumably advanced by the recordkeeping with these prohibitions.260 presumption’’). Similarly, Section 6102(a)(3)(B) of the that would not prohibit the Commission 255Congress has amended the Telemarketing Act Act requires the FTC to place from including recordkeeping in any numerous times over the years but made no changes restrictions on when telemarketers can rules the Commission promulgates to the recordkeeping provision. See, e.g., supra note make unsolicited calls, while Sections under this section of the Act. Rather, 13. Given that the TSR has always included Congress directed the Commission to recordkeeping requirements since its inception in 6102(a)(3)(C) and (D) require the FTC to 1995 and the FTC has reported to Congress on its mandate certain disclosures. The FTC prescribe rules prohibiting deceptive rulemaking efforts at various congressional promulgated Section 310.4(c) of the TSR telemarketing acts or practices and the hearings, Congress’s silence on this issue can be Commission is granted authority to interpreted as agreement with the FTC’s statutory construction. See, e.g., Washington All. of Tech. 25715 U.S.C. 6102(a)(3)(A). Workers v. U.S. Dep’t of Homeland Sec., 50 F.4th 25816 CFR 310.4(b). ‘‘In prescribing the rules described in this 164, 182 (D.C. Cir. 2022) (quoting Jackson v. Modly, 25916 CFR 310.4(b)(1)(iii) and (b)(1)(v). See also paragraph, the Commission shall consider 949 F.3d 763, 772–73 (D.C. Cir. 2020)). Original TSR, 60 FR at 43854 (stating the entity- recordkeeping requirements’’ with Section 6102(a)
B. Modification of the B2B Exemption 310.3(a)(2).’’270Rapid Finance explains First, the Act defines ‘‘telemarketing,’’ The 2022 NPRM proposed narrowing its business customers are ‘‘often the as ‘‘a plan, program, or campaign which the B2B exemption to require B2B target of telemarketers seeking to peddle is conducted to induce purchases of telemarketing calls to comply with so-called debt settlement services to goods or services . . ., by use of one or Section 310.3(a)(2)’s prohibition on them.’’271 more telephones and which involves misrepresentations and Section NFIB, Revenue Based Finance more than one interstate telephone 310.3(a)(4)’s prohibition on false or Coalition (‘‘RBFC’’), Third Party call.’’279The Act exempts from the misleading statements.261The Payment Processors Association definition of telemarketing ‘‘the Commission received twelve comments (‘‘TPPPA’’), and PACE all object to this solicitation of sales through the mailing on this proposal.262Rapid Financial proposed amendment.272RBFC argues of a catalog’’ which meet certain criteria Services, LLC and Small Business amending the TSR to apply to deceptive and ‘‘where the person making the Financial Solutions, LLC (collectively, B2B telemarketing would ‘‘undermine solicitation does not solicit customers ‘‘Rapid Finance’’), EPIC, NAAG, the Supreme Court’s interpretation of by telephone but only receives calls USTelecom—The Broadband the FTC’s authority to impose initiated by customers in response to the Association (‘‘USTelecom’’), WPF, and penalties,’’273citing AMG Capital catalog during those calls. . . .’’280The three anonymous commenters all Management, LLC v. FTC.274RBFC’s Act only specifies that ‘‘telemarketing’’ support the proposal.263EPIC strongly arguments are inapposite because the must involve the use of one interstate supports the proposal, stating ‘‘there is Supreme Court’s decision in AMG telephone call but does not identify who no reason to believe that phone-based concerned the FTC’s authority to obtain must participate in the call. To the attempts to exploit small business consumer redress under Section 13(b) of extent it identifies any participant, it victims have diminished since the the FTC Act;275the decision did not uses the term customers, which pandemic began.’’264NAAG states address or implicate the Commission’s includes businesses.281 ‘‘misrepresentations and false or authority to promulgate rules under the Second, Section 6102(a)(1) directs the misleading statements, in any form, are Telemarketing Act. Commission to ‘‘prescribe rules harmful to trade and commerce in PACE and NFIB argue applying the general.’’265WPF argues ‘‘there is no TSR to B2B telemarketing exceeds the 276NFIB 33–4 at 11; PACE 33–15 at 7–9. downside to this particular update—the scope of the FTC’s authority under the 277PACE 33–15 at 8; see also NFIB 33–4 at 11 FTC Act already prohibits such (arguing all five findings in the Telemarketing Act activity.’’266The anonymous reference consumer harm and not harm to 268USTelecom 33–14 at 3–4.
commenters expressed concern over the 269Id. 278PACE 33–15 at 7–9. NFIB raises separate harm that businesses suffer from 270Rapid Finance 34–17 at 3. objections to repealing the B2B exemption based on deceptive telemarketing.267 271Id. Rapid Finance also argues that the changing market forces described in the USTelecom highlights small and amendments will close the gap between how B2B Commission’s 2022 ANPR. NFIB 33–4 at 9–10. As medium-sized businesses (‘‘SMBs’’), in sellers and B2B telemarketers are treated under the explained in the 2024 NPRM that the Commission
in other contexts, such as when it B2B telemarketing but stated, given its 2962022 NPRM, 87 FR at 33682–83. Although the enacted the Magnuson-Moss Warranty— ‘‘extensive enforcement experience Commission’s law enforcement efforts have Federal Trade Commission pertaining to deceptive telemarketing primarily focused on harms to small businesses, the Improvement Act in 1975 (‘‘Magnuson- directed to businesses,’’ it did not Commission believes that the Telemarketing Act Moss’’).286Under Title I of Magnuson- believe ‘‘an across-the-board exemption authorizes the Commission to apply the TSR to B2B telemarketing more broadly for the reasons stated for business-to-business contacts is here. Similar to the recordkeeping provision, the 28215 U.S.C. 6102(a)(1). Commission notes that Congress has amended the 28315 U.S.C. 6102(a)(2). Telemarketing Act numerous times but made no 93–151, at 3 (1973). Public Law 93–637; Public Law 28415 U.S.C. 6102(a)(3)(C) and (D) (emphasis changes to prohibit the TSR’s application to some 93–153. p. 2533 (1975) (codified as amended at 15 added). B2B telemarketing. Congress’s silence here can also U.S.C. 45 et seq.).
2018.302 including this new definition to make telephone call and financial transaction The Commission is not persuaded by clear that telemarketers are allowed to to 540 days. these arguments. The Commission notes place charity robocalls only to Æ Changing the time requirement to that requiring B2B telemarketers to consumers who have previously qualify for EBR in Section 310.2(q)(2) comply with the TSR’s prohibitions donated to that charity within the last from three months between the date of against misrepresentations would two years.307 the telephone call and the date of the provide the Commission with additional The Commission received three consumer’s inquiry or application to 90 tools to obtain monetary redress for comments on the new definition. WPF days. those harmed by illegal telemarketing supports the new definition, stating it • Adding an email address to Section and civil penalties against bad actors would ‘‘clarify the exemption for 310.7 for State officials or private who violate the law, creating a deterrent charitable donations’’ and ‘‘effectively litigants to provide notice to the effect. Importantly, the proposed close what has been a fairly significant Commission that they intend to bring an amendment refrains from imposing any loophole.’’308EPIC also supports the action under the Telemarketing Act. burdens on B2B sellers and new definition and the clarification that • Amending Section 310.5(a)(7) so it telemarketers, including recordkeeping the robocall exemption only applies to is consistent in form with the new requirements. And, as commenters have consumers who have previously proposed additions to Section 310.5(a). noted, because businesses must already donated to the soliciting charity, but it • Amending Section 310.5(f) to comply with the FTC Act, which also urges the Commission to emphasize remove an extraneous word.312 prohibits deceptive or unfair conduct, the limited scope of this exemption The Commission did not receive any complying with the TSR should not from the general prohibition against comments on the proposed create significant burden.303The robocalls.309One anonymous modifications and will implement the Commission also does not believe it commenter objected to this new amendments as proposed. should limit the prohibition against definition, arguing there should not be The Commission will also make the misrepresentations to just the five top an exemption to place robocalls to prior following additional non-substantive scams identified in the BBB’s 2018 donors in the first place.310 modifications to the Rule: report. The Commission has monitored The Commission emphasizes the • Change all references in the TSR deceptive telemarketing impacting small exemption to allow a telemarketer to from ‘‘this Rule’’ to ‘‘this part.’’ businesses since 1995 and has observed place charity robocalls is narrow in • Renumber the footnotes in the TSR not only the increase in deceptive scope and amending the TSR to add a so the first footnote starts at one. telemarketing but how easily scammers new definition of ‘‘previous donor’’ will Finally, as described in Section III.B— shift tactics and peddle different ensure the exemption remains narrow. Modification of the B2B Exemption, products or services to small The Commission understands some some commenters did not understand businesses.304Given the Commission’s consumers do not want to receive any the term ‘‘consumer’’ includes robocalls, including from charities they businesses. To address any confusion, 300TPPPA 34–14 at 2. have supported through a donation. In the Commission will change references 301RBFC 34–13 at 2–3. such cases, the Commission notes that to ‘‘consumer’’ in the amendments of 302RBFC 34–13 at 3; see also Better Business a consumer who does not want to the recordkeeping requirements and Bureau, Scams and Your Small Business Research receive such robocalls may request to be definition of EBR to the defined term Report, at 7–8 (2018), available at https:// added to that charity’s do-not-call list. If ‘‘person.’’313The Commission will also www.bbb.org/content/dam/bbb-institute-(bbbi)/ files-to-save/bbb_smallbizscamsreport-final-06- the consumer has done so, the modify the references to ‘‘consumer’’ 18.pdf (last visited Dec. 11, 2023). RBFC argues that and ‘‘business’’ in the new any application of the TSR should be limited to the 305Id. recordkeeping requirement to retain call BBB’s top five scams impacting small businesses including: ‘‘(1) bank/credit card company 3062022 NPRM, 87 FR at 33687–88. imposters, (2) directory listing and advertising 307To qualify for this narrow exemption, 311See Section 310.4(b)(1)(v)(B)(iii) (requiring services; (3) fake invoice/supplier bills; (4) fake telemarketers must also comply with the provisions sellers and telemarketers to comply with all other checks; and (5) tech support scams.’’ RBFC 34–13 of Section 310.4(b)(1)(v)(B). requirements of this part, which include the entity- at 3. 308WPF 34–21 at 1. specific do not call provisions). 303RBFC 34–13 at 2–3; WPF 34–21 at 4. 309EPIC 34–23 at 16. 3122022 NPRM, 87 FR at 33688. 304See Section II.B (B2B Telemarketing). 310Anonymous 34–7. 313310 CFR 310.2(y). VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26780 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations detail records in Section 310.5(a)(2)(iv) each unique prerecorded message; (2) experience, sellers and telemarketers to ‘‘individual consumer’’ and ‘‘business call detail records of telemarketing use technologies that can easily generate consumer.’’ While these modifications campaigns; (3) records sufficient to these records. If a seller or telemarketer do not substantively alter the scope or show a seller has an established does not use such technology, however, application of the TSR, the Commission business relationship with a consumer; and an individual telemarketer must believes they will resolve any remaining (4) records sufficient to show a manually enter a single telephone uncertainty. consumer is a previous donor to a number to initiate a call to that number, particular charitable organization; (5) then the seller or telemarketer does not IV. Paperwork Reduction Act records regarding the service providers need to retain records of the calling The current Rule contains various that a telemarketer uses to deliver number, called number, date, time, provisions that constitute information outbound calls; (6) records of a seller or duration and disposition of the collection requirements as defined by 5 charitable organization’s entity-specific telemarketing call under Sections CFR 1320.3(c), the definitional do-not-call registries; and (7) records of 310.5(a)(2)(vii) and (x) of the Final Rule provision within the Office of which version of the Commission’s DNC for those calls. The Commission made Management and Budget (‘‘OMB’’) Registry were used to ensure this modification to reduce the regulations implementing the compliance with this Rule. The Final anticipated PRA burden for those sellers Paperwork Reduction Act (PRA). 44 Rule modifies existing recordkeeping and telemarketers who manually place U.S.C. chapter 35. OMB has approved requirements by: (1) changing the time- telemarketing calls. However, as a the Rule’s existing information period for retaining records from two matter of caution, the Commission collection requirements through October years to five years;320(2) clarifying the estimates the anticipated PRA burden 31, 2025.314The 2022 NPRM’s proposed records necessary for sellers or will stay roughly the same as what was amendments made changes in the Rule’s telemarketers to demonstrate that the projected in 2022 NPRM, because that recordkeeping requirements that person it is calling has consented to estimate was largely based on the use of increased the PRA burden as detailed receive the call; and (3) specifying the automated mechanisms. Further, the below.315Accordingly, FTC staff format for records that include phone Commission’s enforcement of the Rule submitted the 2022 NPRM and the numbers, time, or call duration. and review of the comments shows few associated Supporting Statement to As explained above and in the 2022 sellers and telemarketers manually OMB for review under the PRA.316On NPRM,321the Commission believes that place telemarketing calls.322Thus, the June 16, 2022, OMB directed the FTC to for the most part, sellers and anticipated PRA burden could be resubmit its request when the proposed telemarketers already generate and significantly lower than the estimates rule is finalized.317 retain these records either because the set out below. None of the public comments TSR already requires it or because they
5. 3212022 NPRM, 87 FR at 33690–91. lists against the data in the Registry. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations 26781 recordkeeping burden of 4,385 hours for entrants, the Commission estimates that entities per year for electronic storage. established entities and 7,500 hours for the annual labor costs for new entrants This equates to roughly $18,840 in total new entrants who must develop would be approximately $116,138. for all covered entities. required record systems.324
B. Estimated Annual Labor Costs obtains call detail records from voice view, the proposed amendment would The Commission estimates annual providers when investigating potential not significantly increase the costs of labor costs by applying appropriate TSR violations, and these records are small entities that are sellers or hourly wage rates to the burden hours kept in databases with small file sizes telemarketers because the proposed described above. The Commission even when the database contains amendments primarily require these information about a substantial number estimates that established entities will entities to retain records that they are of calls. For example, the Commission employ skilled computer support already generating and preserving in the received a 2.9 gigabyte database that specialists to modify their ordinary course of business. The contained information about 56 million recordkeeping systems. Applying a Commission also did not believe that calls. The Commission also received a skilled labor rate of $30.97/hour326to the proposed amendments requiring
the estimated 184,650 burden hours for small entities that are sellers or information about 5.5 million calls.
established entities yields telemarketers to comply with the TSR’s Similarly, audio files of most approximately $5,718,611 in one-time prohibitions on misrepresentations prerecorded messages will not be very labor costs during the first year after the should impose any additional costs. large because prerecorded messages are amendments take effect. Therefore, based on available typically short in duration. Storing As described above, the Commission information, the Commission certified electronic data is very inexpensive.
estimates that with the Final Rule new that amending the Rule as proposed Electronic storage can cost $.74 per entrants will spend approximately 50 would not have a significant economic gigabyte for onsite storage including additional hours per year to establish impact on a substantial number of small hardware, software, and personnel new recordkeeping systems. Applying a entities, and provided notice of that costs.327Commercial cloud-based skilled labor rate of $30.97/hour to the certification to the Small Business storage options are less expensive and estimated 3,750 burden hours for new Administration (‘‘SBA’’).332 can cost around $.20 per gigabyte per Notwithstanding the certification, the year.328The Commission estimates the 324See Information Collection Activities; Commission also published an IRFA in non-labor costs associated with Proposed Collection; Comment Request 87 FR the 2022 NPRM and invited comment 23177 (Apr. 19, 2022). electronically storing audio files of on the impact the proposed 325See ‘‘Recordkeeping for new entrants for live prerecorded messages and call detail amendments would have on small & prerecorded calls’’ under IC (Information records will cost around $5 a year on Collection) List, available at https:// entities covered by the Rule.333The www.reginfo.gov/public/do/PRAViewIC?ref_ average for each of the 3,768 covered Commission did not receive any nbr=202208-3084-001&icID=185985 (last visited comments that provided empirical Dec. 11, 2023). 327See Gartner, Inc. ‘‘IT Key Metrics Data 2020: information on the burden the proposed 326This figure is derived from the mean hourly Infrastructure Measures—Storage Analysis.’’ wage shown for ‘‘Computer Support Specialist.’’ Gartner December 18, 2019. amendments would have on small See ‘‘Occupational Employment and Wages-May 328Amazon’s storage rate for S3 Standard— entities, but some commenters raised 2022’’ Bureau of Labor Statistics, U.S. Department Infrequent Access storage is $0.0125 per GB per of Labor, Last Modified April 25, 2023, Table 1 month. See https://aws.amazon.com/s3/pricing/ 3295 U.S.C. 601–612. (‘‘National employment and wage data from the ?nc=sn&loc=4 (last visited Dec. 11, 2023); Google’s Occupational Employment Statistics survey by storage rate for Archive Storage in parts of North 3305 U.S.C. 605.
occupation, May 2022’’) available at https:// America is $0.0012 per GB per month. See https:// 3312022 NPRM, 87 FR at 33691–92. www.bls.gov/news.release/pdf/ocwage.pdf (last cloud.google.com/storage/pricing (last visited Dec. 3325 U.S.C. 605(b). visited October 24, 2023). 11, 2023). 333Id.
VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26782 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations general burden concerns, in particular recipient of the call previously donated C. Estimated Number of Small Entities with respect to the recordkeeping to that charitable organization within to Which the Final Rule Will Apply requirement that sellers and the last two years.
A. Statement of the Need for, and number, date, time, duration, and Including Classes of Small Entities and Objectives of, the Rule disposition of the call. This Professional Skills Needed To Comply The Final Rule requires telemarketers modification should address burden The Final Rule contains new and sellers to maintain additional concerns raised for small businesses recordkeeping requirements and records regarding their telemarketing which do not employ software or other modifications to existing recordkeeping transactions. As described in the 2022 technology to automate their requirements. The new recordkeeping NPRM337and in Section II—Overview telemarketing activity and still use requirements would require sellers or of the Proposed Amendments to the manual operations. telemarketers to retain: (1) a copy of TSR, the Final Rule updates the TSR’s The Final Rule also provides a one each unique prerecorded message; (2) existing recordkeeping requirements so hundred and eighty-day grace period call detail records of telemarketing that the requirements comport with the from the date Section 310.5(a)(2)— campaigns; (3) records sufficient to substantial amendments to the TSR which requires retention of call detail show a seller has an established since the recordkeeping requirements records—is published in the Federal business relationship with a consumer; were first made. The requirements are Register so sellers and telemarketers can (4) records sufficient to show a also necessary in light of the implement any new systems, software, consumer is a previous donor to a technological advancements that have or procedures necessary to comply with particular charitable organization; (5) made it easier and cheaper for this new provision. This modification records regarding the service providers unscrupulous telemarketers to engage in similarly should alleviate commenters’ that a telemarketer uses to deliver illegal telemarketing. The Final Rule concerns regarding the time necessary to outbound calls; (6) records of a seller or also requires B2B telemarketers to come into compliance. charitable organization’s entity-specific The Final Rule also modifies the comply with the TSR’s prohibition on recordkeeping requirement regarding misrepresentations. These amendments 33816 CFR 310.2(dd). The Commission notes that, DNC compliance and now requires are necessary to help protect businesses as mandated by the Telemarketing Act, the from deceptive telemarketing practices. records of which version of the DNC interstate telephone call requirement in the rather than each version used for definition excludes small business sellers and the The Final Rule also amends the telemarketers which serve them in their local compliance, significantly reducing the definition of ‘‘previous donor’’ to clarify market area, but may not exclude some small that a seller or telemarketer may not use burden associated with this business sellers and telemarketers in multi-state requirement. With respect to the time metropolitan markets, such as Washington, DC. prerecorded messages to solicit period to retain records, the 339Telemarketers are typically classified as charitable donations on behalf of a ‘‘Telemarketing Bureaus and Other contact Commission does not believe changing charitable organization unless the Centers,’’ (NAICS Code 561422). See Table of Small the time period to retain records would Business Size Standards Matched to North impose a significant burden because American Industry Classification System Codes, 334See, e.g., NFIB 33–4 at 4–5; PACE 33–15 at 2.
E. Identification of Duplicative, The Commission has not proposed Advertising; Consumer protection; Overlapping, or Conflicting Federal any specific small entity exemption or Incorporation by reference; Reporting Rules other significant alternatives to the and recordkeeping requirements; The Telephone Consumer Protection proposed rule. The Commission has Telephone; Trade practices. Act of 1991, 47 U.S.C. 227, and its made every effort to avoid imposing For the reasons discussed in the implementing regulations, 47 CFR unduly burdensome requirements on preamble, the Federal Trade 64.1200 (collectively, ‘‘TCPA’’) contain sellers and telemarketers by limiting the Commission amends title 16 of the Code recordkeeping requirements that may recordkeeping requirements to records of Federal Regulations, part 310, as overlap with the recordkeeping that are both necessary for the follows:
requirements proposed by the new rule. Commission’s law enforcement and For example, the proposed provision typically already kept in the ordinary PART 310—TELEMARKETING SALES requiring sellers or telemarketers to course of business. As detailed above in RULE keep a record of consumers who state Sections III—Final Amended Rule and they do not wish to receive any IV—Paperwork Reduction Act, the ■1. The authority for part 310 outbound calls made on behalf of a Commission has made additional continues to read as follows: seller or telemarketer, 16 CFR modifications to the proposed Authority: 15 U.S.C. 6101–6108.
310.5(a)(10), overlaps to some degree amendments to further reduce the with the TCPA’s prohibition on a person burden on small entities of complying ■2. In §310.2, or entity initiating a call for with the Final Rule. These ■a. Revise paragraph (q); telemarketing unless such person or modifications include exempting sellers ■b. Redesignate paragraphs (aa) entity has procedures for maintaining or telemarketers from retaining some through (hh) as (bb) through (ii); lists of persons who request not to call detail records for calls that are ■c. Add a new paragraph (aa). receive telemarketing calls including a manually placed, and requiring sellers The revisions and addition read as requirement to record the request. The and telemarketers to retain records of follows: Final Rule’s recordkeeping requirements which version of the FTC’s DNC §310.2 Definitions. do not conflict with the TCPA’s Registry they used rather than each * * * * * recordkeeping requirements because version used for compliance.
simultaneously. Moreover, in the Consistent with 5 U.S.C. 552(a) and 1
5. that telephone number and name, and fictitious name must be traceable to only ■ 4. In §310.4, revise paragraph (b)(2) the time period for which such one specific employee; authorization or contract applies; and (8) All verifiable authorizations or and redesignate footnotes 664 through
American Numbering plan; and the seller are responsible for
Union’s Recommendation ITU–T E.164: that seller or telemarketer must Series E: Overall Network Operation, maintain all records required under this (a) Any attorney general or other Telephone Service, Service Operation section. In the event of any sale, officer of a State authorized by the State and Human Factors, published 11/2010 assignment, or other change in to bring an action under the (incorporated by reference, see ownership of the seller’s or Telemarketing and Consumer Fraud and paragraph (g)(1) of this section); telemarketer’s business, the successor Abuse Prevention Act, and any private
the recordkeeping required by this (b), and (c)’’; and section. When a seller and telemarketer ■b. Revise paragraph (b)(7) to read as ■d. Section 310.8(a), (b), and (e); and have entered into such an agreement, follows: ■e. Section 310.9. VerDate Sep<11>2014 16:18 Apr 15, 2024 Jkt 262001 PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 E:\FR\FM\16APR1.SGM 16APR1 SELUR 26786 Federal Register/Vol. 89, No. 74/Tuesday, April 16, 2024/Rules and Regulations By direction of the Commission. Bleiweiss, Attorney, Media Bureau, frequency as the primary station, and Joel Christie, Audio Division, (202) 418–2785, have been limited to rebroadcasting the Acting Secretary. Irene.Bleiweiss@fcc.gov. For additional primary station’s signal in its entirety information concerning the Paperwork (i.e., no transmission of original [FR Doc. 2024–07180 Filed 4–15–24; 8:45 am] Reduction Act (PRA) information content). Historically, the sole use of FM BILLING CODE 6750–01–P collection requirements contained in boosters has been to improve signal this document, contact Cathy Williams strength of primary FM stations in areas at (202) 418–2918, Cathy.Williams@ where reception is poor due to terrain DEPARTMENT OF THE TREASURY fcc.gov. or distance from the transmitter. The Internal Revenue Service SUPPLEMENTARYINFORMATION: This is a R&O amends the Commission’s rules to summary of the Commission’s Report allow FM and low power FM (LPFM) 26 CFR Parts 1 and 301 and Order (R&O), MB Docket No. 20– broadcasters to employ FM booster 401; FCC 24–35, adopted on March 27, stations to originate programming for up [TD 9988] 2024, and released on April 2, 2024. The to three minutes per hour. This RIN 1545–BQ63 full text of this document will be represents a change from current available via the FCC’s Electronic requirements of 47 CFR 74.1201(f) and Elective Payment of Applicable Credits Comment Filing System (ECFS), https:// 74.1231 which, respectively, define FM www.fcc.gov/cgb/ecfs/. Documents will booster stations as not altering the signal Correction be available electronically in ASCII, they receive from their primary FM In rule document 2024–04604, Microsoft Word, and/or Adobe Acrobat. station and prohibit FM boosters from beginning on page 17546, in the issue of Alternative formats are available for making independent transmissions. Monday, March 11, 2024, the title is people with disabilities (braille, large 2. GeoBroadcast Solutions, LLC corrected to read as set for above. print, electronic files, audio format), by (GBS), the proponent of the rule [FR Doc. C1–2024–04604 Filed 4–15–24; 8:45 am] sending an email to fcc504@fcc.gov or changes, has developed technology BILLING CODE 0099–10–D calling the Commission’s Consumer and designed to allow licensees of primary Governmental Affairs Bureau at (202) FM and LPFM broadcast stations to 418–0530 (voice), (202) 418–0432 ‘‘geo-target’’ a portion of their FEDERAL COMMUNICATIONS (TTY). The Commission published the programming by using FM boosters to COMMISSION notice of proposed rulemaking (NPRM) originate different content for different at 86 FR 1909 on January 11, 2021. parts of their service areas. Prior to 47 CFR Parts 11, 73, and 74 proposing rule changes, GBS tested its Paperwork Reduction Act of 1995 technology under different conditions in [MB Docket No. 20–401; FCC 24–35; FR ID Analysis three radio markets and concluded that 213398] This document does not contain new the technology could be deployed for or modified information collection Program Originating FM Broadcast limited periods of time within the requirements subject to the Paperwork Booster Stations primary station’s protected service Reduction Act of 1995 (PRA), Public contour without causing any adjacent- AGENCY: Federal Communications Law 104–13. In addition, therefore, it channel interference, and that any Commission. does not contain any new or modified resulting co-channel interference (self- ACTION: Final rule. information collection burdens for small interference to the licensee’s own business concerns with fewer than 25 signal) would be manageable and not SUMMARY: In a Report and Order, the employees, pursuant to the Small detrimental to listeners. GBS filed a Federal Communications Commission Business Paperwork Relief Act of 2002, Petition for Rulemaking (Petition)
(Commission) finds that allowing FM Public Law 107–198, see 44 U.S.C. seeking to allow FM boosters to booster stations to originate content on 3506(c)(4).
I. Background clause; or to represent that the worker business entity.15In addition, the final is subject to a non-compete clause.8The rule does not apply where a cause of A. Summary of the Final Rule’s Commission describes the basis for its action related to a non-compete accrued Provisions finding that these practices are unfair prior to the effective date.16The final The Commission proposed the Non- methods of competition in Parts IV.B.1 rule further provides that it is not an Compete Clause Rule on January 19, through IV.B.3. unfair method of competition to enforce 2023 pursuant to sections 5 and 6(g) of or attempt to enforce a non-compete or The final rule provides that, with the FTC Act.1Based on the to make representations about a non- respect to a senior executive, it is an Commission’s expertise and after careful compete where a person has a good- unfair method of competition for a review and consideration of the entire faith basis to believe that the final rule person to enter into or attempt to enter rulemaking record—including empirical is inapplicable.17 into a non-compete clause; to enforce or research on how non-competes affect The final rule does not limit or affect attempt to enforce a non-compete clause competition and over 26,000 public enforcement of State laws that restrict entered into after the effective date; or comments—the Commission adopts this non-competes where the State laws do to represent that the senior executive is final rule addressing non-competes. not conflict with the final rule, but it subject to a non-compete clause, where The final rule provides that it is an the non-compete clause was entered preempts State laws that conflict with unfair method of competition—and into after the effective date.9The the final rule.18Furthermore, the final therefore a violation of section 5—for Commission describes the basis for its employers to, inter alia, enter into non- 10§910.1.
compete clauses with workers on or 11Id.
after the final rule’s effective date.2The 4See Part IV.C.3. 13Id.
Commission thus adopts a 5§910.2(a)(1)(ii). 14Id.
1Non-Compete Clause Rule, NPRM, 88 FR 3482 7§910.2(b)(4). 16§910.3(b).
(Jan. 19, 2023) (hereinafter ‘‘NPRM’’). 8§910.2(a)(1). 17§910.3(c); see also Part V.C. 2§910.2(a)(1)(i) and §910.2(a)(2)(i). 9§910.2(a)(2). 18§910.4. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38343 rule includes a severability clause attention to the hardship he may later on a widespread basis.32Workers came clarifying the Commission’s intent that, suffer through loss of his livelihood.’’24 forward to recount how—by blocking if a reviewing court were to hold any For these reasons, State courts often them from taking a better job or starting part of any provision or application of characterize non-competes as their own business, and subjecting them the final rule invalid or unenforceable— ‘‘disfavored.’’25 to threats and litigation from their including, for example, an aspect of the employers—non-competes derailed Furthermore, as ‘‘contract[s] . . . in terms or conditions defined as non- their careers, destroyed their finances, restraint of trade,’’26non-competes have competes, one or more of the particular and upended their lives.33 always been subject to our nation’s restrictions on non-competes, or the Yet despite the mounting empirical antitrust laws.27As early as 1911, in the standards for or application to one or and qualitative evidence confirming formative antitrust case of United States more category of workers—the these harms and the efforts of many
B. Context for the Rulemaking the ‘‘constantly recurring’’ use of non- approximately one in five American competes, among other practices.28 1. Growing Concerns Regarding the workers—or approximately 30 million Harmful Effects of Non-Competes Concerns about non-competes have workers—is subject to a non-compete.34 increased substantially in recent years The evidence also indicates that The purpose of this rulemaking is to in light of empirical research showing employers frequently use non-competes address conduct that harms fair that they tend to harm competitive even when they are unenforceable competition. Concern about non- conditions in labor, product, and service under State law.35This suggests that competes dates back centuries, and the markets. Changes in State laws employers may believe workers are evidence of harms has increased governing non-competes29in recent unaware of their legal rights; that substantially in recent years. However, decades have allowed researchers to employers may be seeking to take the existing case-by-case and State-by- better isolate the effects of non- advantage of workers’ lack of knowledge State approaches to non-competes have competes, giving rise to a body of of their legal rights; or that workers are proven insufficient to address the empirical research documenting these unable to enforce their rights through tendency of non-competes to harm harms. This research has shown that the case-by-case litigation.36In addition, the competitive conditions in labor, use of non-competes by employers tends ability of States to regulate non- product, and service markets.
bargaining power and because the Hernandez, 175 P.3d 899, 904 (Mont. 2008); Bybee employee is likely to give scant v. Isaac, 178 P.3d 616, 621 (Idaho 2008); Softchoice, 32See, e.g., Dave Jamieson, Jimmy John’s Makes Low-Wage Workers Sign ‘Oppressive’ Noncompete
experience and thereby forestall new entry.’’) the-noncompete-clause-gets-a-closer-look- 1711). The court likewise emphasized ‘‘the great (internal citation omitted). 11626872430.
abuses these voluntary restraints’’ are subject to— for example, ‘‘from masters, who are apt to give 28221 U.S. 106, 181–83 (1911). 34See Part I.B.2. As described therein, this is their apprentices much vexation’’ by using ‘‘many 29See NPRM at 3494 (describing recent legislative likely a conservative estimate. indirect practices to procure such bonds from them, activity at the State level). 35See Part IV.B.2.b.i. lest they should prejudice them in their custom, 30See Parts IV.B.3.a and IV.C.2.c.ii. 36See id. when they come to set up for themselves.’’ Id. 31See Parts IV.B.3.b and IV.C.2.c.i. 37See Part IX.C.2. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38344 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations and the conditions under which their Commission’s complaint alleged the academics and researchers. Federal, use may be inconsistent with the firm’s imposition of non-competes took State, and local governmental antitrust laws.’’38In January 2020, the advantage of the unequal bargaining representatives also submitted public Commission held a public workshop on power between the firm and its comments. non-competes. The speakers and employees, including low-wage security Among these comments, over 25,000 panelists who participated in the guard employees, and thus reduced expressed support for the Commission’s workshop—and the hundreds of public workers’ job mobility; limited proposal to categorically ban non- comments the Commission received in competition for workers’ services; and competes. Among the public response to the workshop—addressed a ultimately deprived workers of higher commenters were thousands of workers wide range of issues, including statutory wages and more favorable working who described how non-competes and judicial treatment of non-competes; conditions.44 prevented them from taking a better job the economic literature regarding the Based on the feedback obtained from or starting a competing business, as well effects of non-competes; and whether years of extensive public outreach and as numerous small businesses who the Commission should initiate a fact-gathering, in January 2023, the struggled to hire talented workers. Federal rulemaking on non-competes.39 Commission published a notice of Commenters stated that non-competes The Commission also sought public proposed rulemaking (NPRM) have suppressed their wages, harmed comment on non-competes as part of an concerning non-competes.45The working conditions, negatively affected August 2021 solicitation for public proposed rule would have categorically their quality of life, reduced the quality comment on contract terms that may banned employers from using non- of the product or service their company harm competition and a December 2021 competes with all workers and required provided, prevented their business from public workshop on competition in rescission of all existing non- growing and thriving, and created a labor markets.40The Commission has competes.46 climate of fear that deters competitive also addressed non-competes in In response to the NPRM, the activity. The following examples are connection with its merger review Commission received over 26,000 illustrative of the comments the work.41 public comments.47The comments Commission received:50 reflected a diverse cross-section of the In 2021, the Commission initiated • I currently work in sales for an asphalt U.S. The Commission received investigations into the use of non- company in Michigan. The company had me comments from employers and workers competes. In 2023, the Commission sign a two year non-compete agreement to in a wide range of industries and from secured final consent orders settling not work for any other asphalt company charges that certain firms engaged in an every State;48from small, medium, and within 50 miles if I decide to resign. After unfair method of competition in large businesses; and from workers with two years with the company I have been wide-ranging income levels.49The disheartened at how poorly customers are violation of section 5 because their use Commission also received comments being treated and how often product quality of non-competes tended to impede from representatives of different is sub-par. I would love to start my own rivals’ access to the restricted industries through trade and business because I see this as an opportunity employees’ labor, harming workers, to provide a better service at a lower cost. professional groups as well as from consumers, and competitive However, the non-compete agreement stands conditions.42 in the way even though there are no trade The Commission also secured a final Drop Noncompete Restrictions That They Imposed secrets and too many customers in this on Workers (Mar. 8, 2023), https://www.ftc.gov/ consent order settling charges that news-events/news/press-releases/2023/03/ftc- ma • rk [ e I] t . s 5 i 1 g ned a non-compete clause for another firm violated section 5 by using approves-final-order-requiring-michigan-based- non-competes with its employees.43The security-companies-drop-noncompete-restrictions. power-washing out of duress. My boss said 44FTC, Analysis of Agreement Containing that if I didn’t sign before the end of the Consent Order to Aid Public Comment, In re week, not to come in the next week. . . . I’d 38Hearings on Competition and Consumer Prudential Sec., Inc. et al. at 1 (Jan. 4, 2023). like to start my own business but I would Protection in the 21st Century, Notice, 83 FR 38307, 45NPRM, supra note 1. have to find another job and wait 5 years. All 38309 (Aug. 6, 2018).
(Dec. 6–7, 2021), https://www.regulations.gov/ jointly represent the opinions or interests of many. • In October 2020, I started working as a docket/FTC-2021-0057/comments. 48This reflects information provided by bartender at a company called [REDACTED] 41See NPRM at 3498–99. commenters. Commenters self-identify their State for $10 an hour. On my first day, I 42FTC, Press Release, FTC Approves Final Orders and are not required to include geographic Requiring Two Glass Container Manufacturers to information. Drop Noncompete Restrictions That They Imposed 49Though most commenters identifying as 50To be clear, the Commission does not rely on on Workers (Feb. 23, 2023), https://www.ftc.gov/ workers did not provide information regarding their any particular individual comment submission for news-events/news/press-releases/2023/02/ftc- income or compensation levels, many provided its findings, but rather provides here (and approves-final-orders-requiring-two-glass-container- information about their particular jobs or industries throughout this final rule) examples of comments manufacturers-drop-noncompete-restrictions; FTC, from which the Commission was able to infer a that were illustrative of themes that spanned many Press Release, FTC Approves Final Order Requiring broad range of income levels based on occupational comments. The Commission’s findings are based on Anchor Glass Container Corp. to Drop Noncompete data from the Bureau of Labor Statistics (‘‘BLS’’). consideration of the totality of the evidence, Restrictions That It Imposed on Workers (June 2, BLS wage data for each year can be found at including its review of the empirical literature, its 2023), https://www.ftc.gov/news-events/news/press- Occupational Employment and Wage Statistics, review of the full comment record, and its expertise releases/2023/06/ftc-approves-final-order-requiring- Tables Created by BLS, https://www.bls.gov/oes/ in identifying practices that harm competition. anchor-glass-container-corp-drop-noncompete- tables.htm (hereinafter ‘‘BLS Occupational 51Individual commenter, FTC–2023–0007–2215. restrictions-it. Employment and Wage Statistics’’). The Comment excerpts have been cleaned up for 43FTC, Press Release, FTC Approves Final Order Commission used data from the May 2022 National grammar, spelling, and punctuation. Requiring Michigan-Based Security Companies to XLS table, generally for private ownership. 52Individual commenter, FTC–2023–0007–12689. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38345 unknowingly signed a 2-year non-compete, own. However, when I was offered a job at find themselves trapped by such contracts as slipped between other paperwork while my another company, my former company mine.60 boss rushed me, and downplayed its threatened them and my offer was rescinded. • Non competes are awful. I am being sued importance. . . . At[ REDACTED], I was I was unable to find gainful employment for right now for going into business on my own sexually harassed and emotionally abused. I months, despite opportunities in my field, in Boston, Massachusetts, by my former needed money, so I searched for a new job and had to utilize unemployment when I employer who says I signed a non-compete while remaining at [REDACTED] for one otherwise would not have needed it. To find in 2003, 20 years ago. . . . I amf ighting year. I was eventually offered a bartending work, I ultimately had to switch fields, start them in court. Hopefully I will prevail. . . . job at a family-owned bar with better wages, part time somewhere, and just continue to [The] corporation I worked for is a billion- conditions, and opportunities. Upon work my way up. All of this because I was dollar corporation. And they just keep trying resigning, I was threatened with a non- laid off to no fault of my own.57 scare tactics to make me back down. They compete I didn’t know existed. Still, I • I was terminated by a large hospital went as far as trying to get a preliminary couldn’t take it anymore, so believing it was injunction ordered against me. And the judge organization suddenly with a thriving, full an unenforceable scare tactic, I took the new refused but I still have to spend $1,000 an Pediatric practice. . . . Myl awyer and I job, thinking our legal system wouldn’t allow hour to defend myself.61 a massive company with over 20 locations to believe the non-compete does not apply in • I have been working in the field of multi- my circumstances and that the noncompete sue a young entry-level worker with no media in the DC/Baltimore region since the is overly broad, restrictive and harmful to the degree. In December 2021, I was sued for early 2000s. . . . Iw as 26 when I first public (my patients). I started seeing my $30,000 in ‘‘considerable and irreparable became employed, and at that time a patients mostly gratuitously in their homes damages’’ for violating the non- requirement was that I sign a non-compete so they would not go without the care they compete. . . .53 agreement. . . . This means I can’t be an • I am a physician in a rural underserved wanted and needed . . . The judge awarded entrepreneur- which kills any opportunities area of Appalachia. . . . ‘‘[N]on-compete’’ the order and I was told I cannot talk to for me to grow something of my own- which clauses have become ubiquitous in the patients on the phone, text patients, zoom could potentially provide jobs for others in healthcare industry. With hospital systems visits or provide any pediatric care within the future. So what this non-compete does is merging, providers with aggressive non my non-compete area. Patients are angry and basically enables businesses to be small compete clauses must abandon the panicked. I’m worried every day about my monopolies. I could literally have a new community that they serve if they chose to patients and how I can continue to care for lease on my career if non competes were leave their employer. . . . Healthcare them. . . . Patients have a right to choose abolished. As of now, when I think of providers feel trapped in their current and keep their doctor. The trust built working someplace else I have to consider employment situation, leading to significant between a patient and his doctor is crucial changing careers altogether.62 burnout that can shorten their career to keeping a patient healthy. It’s not a • A former employer had me sign a non- longevity. Many are forced to retire early or relationship that can or should be compete when I started employment at an take a prolonged pause in their career when replaced. . . . Patients should always come internship in college. It was a part-time they have no other recourse to combat their first and that is not happening.58 position of 20 hours of work as an electrical employer.54 • When I first graduated veterinary school engineer, while I finished university. After • I am a practicing physician who signed I signed a noncompete clause that was for 7 university, I worked for this employer an employment contract containing a years. I tried to negotiate it to a more another 4 years full time, but then found a noncompete agreement in 2012, entering into reasonable time period but the employer better job in another state. It was not a this agreement with an organization that no wouldn’t budge. There weren’t many job competitor, but a customer of my former longer exists. My original employer merged openings for new graduates at the time and employer. My former employer waited till with, and was made subsidiary to, a new I had student loans to pay back so I signed the day after my 4-week notice to tell me that organization that is run under religious it. . . . I moved back home to a small town I had signed a non-compete agreement and principles in conflict with my own. . . . I and took a job that required a 10-radial-mile, that it [barred] me from working for any would have never signed such an agreement 2-year noncompete (this is currently competitor, customer or any potential with my new employer, yet I am bound to considered ‘‘reasonable/standard’’ in my customer up to 5 years after leaving the this organization under threat of legal industry). Unfortunately since it’s a rural area company with no geographic limitations. coercion. To be clear, the forced compromise the 10 miles blocked me out of the locations This was effectively the entire semi- of my religious principles does direct harm of all other veterinary clinics in the county conductor industry and put my entire career to me. My only recourse to this coercion is and I had to commute an hour each way to at risk.63 to give up medical practice anywhere work in the next metropolitan area. This put • Non-competes serve little more purpose covered by my current medical license, a lot of stress on my family since I have than to codify and entrench inefficiencies. I which is injurious to the patients in my care, young children. Some days I didn’t even get have seen this firsthand in the context of a and to myself.55 • I am the owner of a small-midsize freight to see them when they were awake.59 sophisticated management consulting • I work for a large electronic health environment where company owners brokerage, and non-competes of large brokerages have time and time again records company . . . that is known for provided ever less support in terms of constrained talent from my business. hiring staff right out of college, myself contributing to projects or even to sales of Countless employees of [a] mega brokerage included. I was impressed with their starting new business while still feeling secure . . . have left and applied for our company salary and well-advertised benefits, so I was through agreements that substantially limited and we must turn them away. These are quick to accept their offer. After accepting anyone from working in the relevant industry for two years on a global basis after skilled brokers that are serving the market their offer, I was surprised to receive a leaving. . . . The reality is that there are and their clients well due to THEIR contract outlining a strict non-compete innumerable retention mechanisms (such as skillsets. . . . These non-competes affect not agreement . . . I feel disappointed that this good working conditions, compensation, just me but the clients they work with as information was not made apparent to me culture, management, growth trajectory and/ these skilled brokers are forced out of the prior to my acceptance of the position, and or strategy) that can contribute to loyal entire logistics market for an entire year and now I feel stuck in a job that I’ve quickly employees without the need for non- possibly a lifetime when they pick up a new discovered is not a good long-term fit for me. competes.64 career in a different field because of these I am certain that many other recent graduates aggressive non-competes. . . .56 often find themselves in a similar position— The Commission has undertaken • I was laid off from my company in 2008 they accept shiny offers from a workplace, careful review of the public comments due to the economy, not to any fault of my not knowing whether the company and position will be the right fit for them, and 60Individual commenter, FTC–2023–0007–10729. 53Individual commenter, FTC–2023–0007–8852. 61Individual commenter, FTC–2023–0007–10871. 54Individual commenter, FTC–2023–0007–0026. 57Individual commenter, FTC–2023–0007–15497. 62Individual commenter, FTC–2023–0007–10968. 55Individual commenter, FTC–2023–0007–9671. 58Individual commenter, FTC–2023–0007–14956. 63Individual commenter, FTC–2023–0007–16347. 56Individual commenter, FTC–2023–0007–6142. 59Individual commenter, FTC–2023–0007–0922. 64Individual commenter, FTC–2023–0007–3963. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38346 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations and the entirety of the rulemaking sophisticated and highly-paid workers. establishments use non-competes for at record. Based on this record and the It finds that, among workers without a least some of their employees, and 32% Commission’s experience and expertise bachelor’s degree, 14% of respondents of such establishments use non- in competition matters, the Commission reported working under a non-compete competes for all of their employees.76 issues this final rule pursuant to its at the time surveyed and 35% reported Other estimates of non-compete use authority under sections 5 and 6(g) of having worked under one at some point cover subsets of the U.S. labor force. the FTC Act. in their lives.70For workers earning less One 2022 study is based on National than $40,000 per year, 13% of Longitudinal Survey of Youth (NLSY) 2. Prevalence of Non-Competes respondents were working under a non- data.77The NLSY is an often-used labor Based on its own data analysis, compete and 33% worked under one at survey conducted by the Bureau of studies published by economists, and some point in their lives.71Furthermore, Labor Statistics (‘‘BLS’’) that consists of the comment record, the Commission this survey finds that 53% of workers a nationally representative sample of finds that non-competes are in covered by non-competes are hourly 8,984 men and women born from 1980– widespread use throughout the workers.72The survey suggests that a 84 and living in the U.S. at the time of economy and pervasive across large share of workers subject to non- the initial survey in 1997; it is a subset industries and demographic groups, competes are relatively low-earning of the workforce by age of worker.78The albeit with some differences in the workers. In addition, a survey from the 2022 study using NLSY data reports magnitude of the prevalence based on Federal Reserve Board of Governors prevalence of non-competes to be 18%, industries and demographics. The found that 11.4% of workers have non- in line with the number estimated based Commission estimates that competes, including workers with on the 2014 survey of workers directed approximately one in five American relatively low earnings and low levels of solely at calculating the prevalence of workers—or approximately 30 million education. The survey finds some non-competes.79 workers—is subject to a non-compete.65 degree of geographic heterogeneity, Non-competes are pervasive across As described in Part II.F, the inquiry though it finds that large numbers of occupations. For example, a survey of as to whether conduct is an unfair workers in all regions of the country independent hair salon owners finds method of competition under section 5 have non-competes (including 7.0% of that 30% of hair stylists worked under focuses on the nature and tendency of workers in States which broadly do not a non-compete in 2015.80A survey of the conduct, not whether or to what enforce non-competes).73 electrical and electronic engineers finds degree the conduct caused actual Furthermore, a survey of workers that 43% of respondents signed a non- harm.66Although a finding that non- conducted in 2017 estimates that 24.2% compete.81A different study finds that competes are prevalent is not necessary of workers are subject to a non- 45% of physicians worked under a non- to support the Commission’s compete.74This survey also finds that compete in 2007.82One study published determination that the use of non- non-competes are often used together in 2021 finds that 62% of CEOs worked competes by employers is an unfair with other restrictive employment under a non-compete between 1992 and method of competition, the Commission agreements, including non-disclosure 2014.83Another, published in 2023, finds that non-competes are prevalent agreements (‘‘NDAs’’) and non- supports that finding and reflects an and in widespread use throughout the recruitment and non-solicitation upward trend in the use of non- economy, which is why researchers agreements.75A methodological competes among executives— have observed such significant negative limitation of this survey is that it is a specifically, the proportion of actual effects from non-competes on convenience sample of individuals who executives working under a non- competitive conditions in labor markets visited Payscale.com during the time compete rose from ‘‘57% in the early and markets for products and services.67 period of the survey and is therefore 1990s to 67% in the mid-2010s.’’84The A 2014 survey of workers finds that unlikely to be fully representative of the 2014 survey reports industry-specific 18% of respondents work under a non- U.S. working population. While rates ranging from 9% in the Agriculture compete and 38% of respondents have weighting based on demographics helps, and Hunting category to 32% in the worked under one at some point in their it does not fully mitigate this concern. lives.68This study has the broadest and Additionally, a 2017 survey of 76Colvin & Shierholz, supra note 65 at 1.
likely the most representative coverage business establishments with 50 or more 77Donna S. Rothstein & Evan Starr, Noncompete of the U.S. labor force among the employees estimates that 49% of such Agreements, Bargaining, and Wages: Evidence from prevalence studies discussed here.69 the National Longitudinal Survey of Youth 1997, This study reports robust results 70Id. at 63. June 2022 Mthly. Lab. Rev. (2022). contradicting the prior assumptions of 71Id. 78BLS, NLSY97 Data Overview, https:// some that non-competes were, in most 72Michael Lipsitz & Evan Starr, Low-Wage www.bls.gov/nls/nlsy97.htm. cases, bespoke agreements with Workers and the Enforceability of Noncompete 79Rothstein & Starr, supra note 77 at 1. Agreements, 68 Mgmt. Sci. 143, 144 (2022) 80Matthew S. Johnson & Michael Lipsitz, Why (analyzing data from the Starr, Prescott, & Bishara Are Low-Wage Workers Signing Noncompete 65This is likely a conservative estimate. Surveys survey). Agreements?, 57 J. Hum. Res. 689, 700 (2022). of workers likely underreport the share of workers 73Tyler Boesch, Jacob Lockwood, Ryan Nunn, & 81Matt Marx, The Firm Strikes Back: Non- subject to non-competes, since many workers may Mike Zabek, New Data on Non-Compete Contracts Compete Agreements and the Mobility of Technical not know they are subject to a non-compete. See, and What They Mean for Workers (2023), https:// Professionals, 76 a.m. Socio. Rev. 695, 702 (2011). e.g., Alexander J.S. Colvin & Heidi Shierholz, Econ. www.minneapolisfed.org/article/2023/new-data-on- Calculated as 92.60% who signed a non-compete of Policy Inst., Noncompete Agreements, Report (Dec. non-compete-contracts-and-what-they-mean-for- the 46.80% who were asked to sign a non-compete. 10, 2019) at 3. workers. 82Kurt Lavetti, Carol Simon, & William D. White, 66See infra note 288 and accompanying text. 74Natarajan Balasubramanian, Evan Starr, & The Impacts of Restricting Mobility of Skilled 67See Parts IV.A through IV.C (describing this Shotaro Yamaguchi, Employment Restrictions on Service Workers: Evidence from Physicians, 55 J. evidence). Resource Transferability and Value Appropriation Hum. Res. 1025, 1042 (2020). 68Evan P. Starr, J.J. Prescott, & Norman D. from Employees (Jan. 18, 2024), https:// 83Omesh Kini, Ryan Williams, & Sirui Yin, CEO Bishara, Noncompete Agreements in the US Labor papers.ssrn.com/sol3/papers.cfm?abstract_ Noncompete Agreements, Job Risk, and Force, 64 J. L. & Econ. 53, 53 (2021). id=3814403. Compensation, 34 Rev. Fin. Stud. 4701, 4707 69The final survey sample of 11,505 responses 75Id. at 11 (reporting that if a worker has a non- (2021). represented individuals from nearly every compete, there is a 70%–75% chance that all three 84Liyan Shi, Optimal Regulation of Noncompete demographic in the labor force. Id. at 58. restrictive covenants are present). Contracts, 91 Econometrica 425, 447 (2023). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38347 Information category.85The the average wage is below $13 per hour NPRM.102However, the commenter did Balasubramaian et al. survey reports use non-competes for all their not provide the data underlying its industry-specific rates ranging from workers.93 claims. The Retail Industry Leaders 12% in the Arts, Entertainment, and Several trade organizations included Association stated that a recent survey Recreation category to 30% in the information in their comments about the of its members indicated that, among Professional, Scientific, and Technical percentage of their members that use members that use non-competes, the category.86The same survey also reports non-competes for at least some of their majority do so with less than 1% of occupation-specific rates ranging from workers, based on surveys of their their workforce and an additional 8% in the Community and Social membership. For the National quarter use non-competes with less than Services category to 32% in the Association of Wholesaler-Distributors, 10% of their workforce.103Additionally, Computer and Mathematical category.87 this figure was 80%;94for the a commenter referenced a survey of In addition, commenters presented Independent Lubricant Manufacturing small business owners finding that 48% survey data on the prevalence of non- Association, 69%;95for the Michigan use non-competes for their own competes in various occupations and Chamber of Commerce, 73%;96for the business.104 industries. The Commission does not Gas and Welding Distributors Several commenters misrepresented rely on these surveys to support its Association, 80%;97and for the the Commission’s finding related to finding that non-competes are in National Association of Manufacturers, prevalence as based on ‘‘a single study widespread use throughout the 70%.98One industry organization said from 2021’’ (Starr, Prescott, and Bishara, economy. Because the Commission its survey found that 57% of 2021), which relied on survey data from lacked access to a detailed description respondents require workers earning 2014. The Commission’s finding is not of the methodology for these surveys over $150,000 to sign non-competes.99 based on a single study. The NLSY (unlike for the surveys described A survey by the Authors Guild finds study reaches similar conclusions about previously), the Commission cannot that 19.2% of respondents reported that the prevalence of non-competes across evaluate how credible their research non-competes prevented them from the economy,105and the occupation- designs are. However, they generally publishing a similar or competing specific studies indicate that non- confirm the Commission’s finding that book.100The HR Policy Association competes are pervasive in various non-competes are in widespread use stated that 75% of respondents occupations.106Furthermore, despite its throughout the economy and pervasive indicated they use non-competes for methodological limitations, the data across industries and demographic less than 10% of their workers, and submitted by commenters generally groups. nearly one third indicated they use non- comport with the estimates reported in For example, commenters reported competes for less than 1% of their the academic literature. One commenter that 33% of practitioners in the applied workers.101The association stated that stated the respondents to the Starr, behavioral analysis field reported being its survey covered 3 million workers Prescott, and Bishara survey were not subject to a non-compete,88along with and argued that its survey finding less necessarily representative of the 68% of cardiologists,8942% of usage of non-competes was more population. The Commission believes colorectal surgeons,9072% of members representative than studies cited in the that the weighting of the data of the American Association of Hip and sufficiently addresses this concern. Knee Surgeons,91and 31% of wireless 93Colvin & Shierholz, supra note 65 at 13. Another commenter argued that telecommunications retail workers.92 94Comment of Nat’l Assoc. of Wholesaler- individuals may misunderstand Distribs., FTC–2023–0007–19347, at 2. The Other commenters cited a 2019 study comment did not provide a citation to the survey contracts that they have signed, leading finding that 29% of businesses where or the underlying data, including the number of them to mistakenly believe they are respondents. bound by a non-compete. The 85Starr, Prescott, & Bishara, supra note 68 at 67. 95Comment of Indep. Lubricant Mfrs. Ass’n, Commission does not find this to be a FTC–2023–0007–19445, at 3. The comment did not 86Balasubramanian et al., supra note 74 at 47. provide a citation to the survey or the underlying plausible explanation for the high 87Id. data, including the number of respondents. numbers of workers, businesses, and 88Kristopher J. Brown, Stephen R. Flora, & Mary 96Calculated as 77%*95% (assuming that the trade associations that report that non- K. Brown, Noncompete Clauses in Applied 95% reported in their comment applies to the 77% Behavior Analysis: A Prevalence and Practice who reported using restrictive covenants). competes are prevalent. Impact Survey, 13 Behavioral Analysis Practice 924 Comment of Mich. Chamber of Com., FTC–2023– The Commission appreciates the (2020) (survey of 610 workers). 0007–20855. The comment did not provide a additional estimates provided by 89Comment of Am. Coll. of Cardiology, FTC– citation to the survey or the underlying data, commenters. The comments broadly 2023–0007–18077, at 2. The comment did not including the number of respondents. corroborate the Commission’s finding provide a citation to the survey or the underlying 97Comment of Gas and Welding Distribs. Ass’n, data, including the number of respondents or the FTC–2023–0007–20934, at 2–3. The comment did that non-competes are used across the time period. not provide a citation to the survey or the workforce, with some heterogeneity in 90William C. Cirocco. Restrictive Covenants in underlying data. The comment said the survey took the magnitude of the prevalence. The Physician Contracts: An American Society of Colon place after the NPRM was proposed and had 161 and Rectal Surgeons’ Survey, 54 Diseases of the respondents. Colon and Rectum 482 (2011). The survey 98Comment of Nat’l Ass’n of Mfrs., FTC–2023– 102Id. examined 157 colorectal surgeons who had 0007–20939, at 2 (citing Nat’l Ass’n of Mfrs., 103Comment of Retail Indus. Leaders Ass’n, FTC– completed their residency in the prior decade. Noncompete Survey Data Report, https:// 2023–0007–20989, at 6. The comment did not 91Comment of Am. Ass’n of Hip and Knee www.nam.org/wp-content/uploads/2023/03/ provide a citation to the survey or the underlying Surgeons, FTC–2023–0007–21076, at 4. The Noncompete_Survey_Data_Report.pdf). The survey data, including the number of respondents or the comment said the internal poll was conducted in had 150 respondents. time period. early 2023, but the comment did not provide a 99Comment of Soc. for Hum. Res. Mgmt., FTC– 104Comment of Sm. Bus. Majority, FTC–2023– citation to the survey or the underlying data, 2023–0007–20903, at 5 n.2. The comment did not 0007–21093 (citing Small Business Majority, including the number of respondents. provide a citation to the survey or the underlying Opinion Poll: Small Business Owners Support 92Comm. Workers of Am. and Nat’l Employment data, including the number of respondents. Banning Non-Compete Agreements (Apr. 13, 2013), L. Project, Broken Network: Workers Expose Harms 100Comment of The Authors Guild, FTC–2023– https://smallbusinessmajority.org/sites/default/ of Wireless Telecom Carriers’ Outsourcing to 0007–20854, at 7. The comment did not provide a files/research-reports/2023-non-compete-poll- ‘Authorized Retailers’ (Feb. 2023), https://cwa- citation to the survey or the underlying data, but report.pdf). union.org/sites/default/files/2023-02/20230206_ said it had 630 respondents. 105See Rothstein & Starr, supra note 77 and BrokenNetwork.pdf, at 12. The survey had 204 101Comment of HR Policy Ass’n, FTC–2023– accompanying text. respondents. 0007–20998, at 8. 106See supra notes 80–87 and accompanying text. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38348 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations Commission finds that this ‘‘unfair methods of competition.’’112In prohibition on ‘‘unfair or deceptive acts heterogeneity is insufficient to warrant particular, Congress wanted the or practices.’’120And in 1975, Congress industry-specific exclusions from Commission to apply a standard that amended the phrase ‘‘in commerce’’ in coverage under the final rule in part would reach conduct not captured by section 5 to ‘‘in or affecting commerce,’’ because employers’ use of non-competes other antitrust laws and the rule of a change that was ‘‘specifically designed is prevalent across labor markets and for reason, which courts applied when to expand the Commission’s jurisdiction the reasons discussed in Part V.D interpreting the Sherman Act, making it . . . to make it coextensive with the regarding requests for exclusions. ‘‘impossible to predict with any constitutional power of Congress under certainty’’ whether courts would the Commerce Clause.’’121 II. Legal Authority condemn the many ‘‘practices that Congress gave careful thought to the seriously interfere with structure of the FTC as an independent A. The History of the Commission and competition.’’113Allowing the agency entrusted with this considerable Section 5 of the FTC Act Commission to prevent unfair methods responsibility. The Commission would The FTC Act was enacted in 1914.107 of competition would also help the consist of five members, no more than Section 5 of that Act ‘‘declared’’ that Commission achieve a core purpose of three of whom could be part of the same ‘‘unfair methods of competition in the Act: to stop ‘‘trade restraints in their political party, who would serve for commerce’’ are ‘‘unlawful,’’ and it incipiency’’ before they grew into terms of seven years.122The ‘‘empowered and directed’’ the violations of other antitrust laws.114 Commission would draw on trained Commission ‘‘to prevent’’ entities By design, the new phrase ‘‘unfair expert staff to develop the body of law subject to its jurisdiction from ‘‘using’’ methods of competition’’ did ‘‘not regarding what constitutes unfair such methods.108Congress removed ‘admit of precise definition.’’’115 methods of competition (and, later, Congress intentionally gave the unfair and deceptive practices),123both certain enumerated industries, Commission flexibility to adapt to through acting as ‘‘a quasi judicial activities, or entities—such as changing circumstances.116The body’’124that determines whether banks109—from the Commission’s Supreme Court has affirmed the more conduct is an unfair method of jurisdiction but otherwise envisioned a inclusive scope of section 5 on competition in adjudications and Commission whose purview would numerous occasions117and has through authority to promulgate cover commerce across the national affirmed the Commission’s power under legislative rules delineating conduct economy.
adjudication under section 5(b) or seek declaring it a UMC and UDAP to a rule declaring it a UMC and UDAP to an injunction in Federal court under misrepresent nonprismatic instruments make certain misrepresentations about section 13(b) against a party that has as prismatic;134(4) a rule declaring it a engaged in an unfair method of UMC and UDAP to advertise or market transistors in radios;144(14) a rule competition.128As explained below, it dry cell batteries as ‘‘leakproof;’’135(5) declaring it a UDAP to fail to disclose may also promulgate rules prohibiting a rule declaring it a UMC and UDAP to certain effects about inhaling certain unfair methods of competition. The misrepresent the ‘‘cut size’’ as the aerosol sprays;145(15) a rule declaring Commission cannot obtain civil finished size of tablecloths and similar it a UMC and UDAP to misrepresent the penalties or other monetary relief products;136(6) a rule declaring it a length or size of extension ladders;146 against parties for using an unfair UMC and UDAP to misrepresent that (16) a rule declaring it a UDAP to make method of competition, although it can belts are made of leather if they are certain misrepresentations, or fail to obtain civil penalties in court if a party made of other materials;137(7) a rule disclose certain information, about is ordered to cease and desist from a declaring it a UMC and UDAP to games of chance;147(17) a rule violation and fails to do so.129 represent used lubricating oil as new;138 declaring it a UMC and UDAP to mail B. The Commission’s Authority To (8) a rule declaring it a UDAP to fail to unsolicited credit cards;148(18) a rule disclose certain health warnings in Promulgate the Rule declaring it a UMC and UDAP to fail to cigarette advertising and on cigarette disclose the minimum octane number Alongside section 5, Congress packaging (‘‘Cigarette Rule’’);139(9) a on gasoline pumps (‘‘Octane Rule’’);149 adopted section 6(g) of the Act, in rule declaring it a UMC and UDAP to
127Congress has authorized the FTC to seek civil 62 FR 61225 (Nov. 17, 1997). 146Deceptive Advertising and Labeling as to monetary remedies against parties who engage in 136Deceptive Advertising and Labeling as to Size Length of Extension Ladders, 34 FR 929 (Jan. 22, unfair or deceptive acts or practices under some of Tablecloths and Related Products, 29 FR 11261 circumstances. See 15 U.S.C. 45(m); 15 U.S.C. 57b. (Aug. 5, 1964), repealed by 60 FR 65530 (Dec. 20, 1969), repealed by 60 FR 65533 (Dec. 20, 1995). 128See 15 U.S.C. 45(b); 15 U.S.C. 53(b). 1995). 147Games of Chance in the Food Retailing and 129See 15 U.S.C. 45(l). 137Misbranding and Deception as to Leather Gasoline Industries, 34 FR 13302 (Aug. 16, 1969), 13015 U.S.C. 46(g). Content of Waist Belts, 29 FR 8166 (Jun. 27, 1964), repealed by 61 FR 68143 (Dec. 27, 1996). 131As explained in more detail later in this Part, repealed by 61 FR 25560 (May 22, 1996). 148Unsolicited Mailing of Credit Cards, 35 FR Congress added section 18 to the FTC Act in 1975, 138Deceptive Advertising and Labeling of 4614 (Mar. 17, 1970), repealed by 36 FR 45 (Jan. 5, and that section provides the process the Previously Used Lubricating Oil, 29 FR 11650 (Aug. 1971). This rule was rescinded in response to an Commission must go through to promulgate rules 14, 1964), repealed by 61 FR 55095 (Oct. 24, 1996). amendment to the Truth in Lending Act that defining unfair or deceptive acts or practices. See 139Unfair or Deceptive Advertising and Labeling prohibited similar conduct. See Public Law 91–508, Magnuson-Moss Warranty—Federal Trade of Cigarettes in Relation to the Health Hazards of 84 Stat. 1126 (1970). Commission Improvement Act, Public Law 93–637, Smoking, 29 FR 8324 (July 2, 1964), repealed by 30 149Posting of Minimum Octane Numbers on 88 Stat. 2183 (Jan. 4, 1975) (hereinafter ‘‘Magnuson- FR 9485 (July 29, 1965). As explained in more Gasoline Dispensing Pumps, 36 FR 23871 (Dec. 16, Moss Act’’); 15 U.S.C. 57a. Congress provided, detail herein, Congress superseded this rule with 1971), repealed by 43 FR 43022 (Sept. 22, 1978). however, that ‘‘[a]ny proposed rule under section legislation. This rule was superseded by the Petroleum 6(g) . . . with respect to which presentation of data, 140Incandescent Lamp (Light Bulb) Industry, 35 Marketing Practices Act, Public Law 95–297, 92 views, and arguments was substantially completed FR 11784 (Jul. 23, 1970), repealed by 61 FR 33308 Stat. 333 (June 19, 1978). A similar regulation was before’’ section 18 was enacted ‘‘may be (Jun. 27, 1996). promulgated under that law at 16 CFR part 306. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38350 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations instructions;150(20) a rule declaring a by the tobacco industry,160Congress Act. This new section introduced UMC and UDAP for a grocery store to supplanted the Commission’s regulation special procedures, beyond those offer products for sale at a stated price with the Cigarette Labeling and required under the Administrative if those products will not be readily Advertising Act but did not disturb the Procedure Act, for promulgating rules available to consumers (‘‘Unavailability Commission’s rulemaking authority.161 for unfair or deceptive acts or practices, Rule’’);151(21) a rule declaring it a UMC The Unavailability Rule was likewise and it eliminated the Commission’s and UDAP for a seller to fail to make front-page news upon its release in authority to issue such rules under certain disclosures in connection with a 1971, and Congress left it intact.162 section 6(g).167But Congress pointedly negative option plan (‘‘Negative Options In National Petroleum Refiners chose not to restrict the Commission’s Rule’’);152(22) a rule declaring it a Association v. FTC (‘‘Petroleum authority to promulgate rules regulating UDAP for door-to-door sellers to fail to Refiners’’), the D.C. Circuit expressly unfair methods of competition under furnish certain information to upheld the Octane Rule as a proper section 6(g). That choice was deliberate. buyers;153(23) a rule declaring it a UMC exercise of the Commission’s power While considering this legislation, and UDAP to fail to make certain under section 6(g) to make rules Congress knew that the Commission had disclosures about sound power regulating both unfair methods of promulgated rules regulating unfair amplification for home entertainment competition and unfair or deceptive acts methods of competition and that the products;154(24) a rule declaring it a or practices.163After construing ‘‘the D.C. Circuit in Petroleum Refiners had UDAP for sellers failing to include words of the statute creating the confirmed the Commission’s authority certain contract provisions preserving Commission and delineating its to do so.168And Congress expressly claims and defenses in consumer credit powers,’’ the court held ‘‘that under the considered—but rejected—an contracts (‘‘Holder Rule’’);155(25) a rule terms of its governing statute . . . and amendment to the FTC Act under which declaring it a UMC or UDAP to solicit under Section 6(g) . . . the Federal ‘‘[t]he FTC would have been prohibited mail order merchandise from a buyer Trade Commission is authorized to from prescribing rules with respect to unless the seller can ship the promulgate rules defining the meaning unfair competitive practices.’’169 merchandise within 30 days (‘‘Mail of the statutory standards of the Instead, the enacted section 18 Order Rule’’);156and (26) a rule illegality the Commission is empowered confirmed the Commission’s authority declaring it a UDAP for a franchisor to to prevent.’’164That interpretation was to make rules under section 6(g). The fail to furnish a franchisee with certain also ‘‘reinforced by the construction law expressly preserved ‘‘any authority information.157 courts have given similar provisions in of the Commission to prescribe rules Some of these rules attracted the authorizing statutes of other (including interpretive rules), and significant attention. For instance, the administrative agencies.’’165The general statements of policy, with Commission began the rulemaking Seventh Circuit later agreed with the respect to unfair methods of process to require warnings on cigarette D.C. Circuit’s decision and competition in or affecting packages just one week after the ‘‘incorporate[d] [it] by reference’’ when commerce.’’170Congress also made Surgeon General’s ‘‘landmark report’’ rejecting a challenge to the Mail Order clear that Section 18 ‘‘shall not affect that determined smoking is a health Rule.166 the validity of any rule which was Following such rulemakings and the hazard,158and that rule was front-page promulgated under section 6(g).’’171 D.C. Circuit’s confirmation of the news.159Following a lobbying campaign And it provided that ‘‘[a]ny proposed Commission’s rulemaking power in rule under section 6(g)’’ with certain Petroleum Refiners, Congress in 1975 components that were ‘‘substantially 150Care Labeling of Textile Wearing Apparel, 36 enacted a new section 18 of the FTC FR 23883 (Dec. 16, 1971). completed before’’ section 18’s 151Retail Food Store Advertising and Marketing enactment ‘‘may be promulgated in the Practices, 36 FR 8777 (May 13, 1971). 160Tobacco Inst., Tobacco—A Vital U.S. Industry same manner and with the same validity (1965), https://acsc.lib.udel.edu/exhibits/show/ 152Use of Negative Option Plans by Sellers in legislation/cigarette-labeling. as such rule could have been Commerce, 38 FR 4896 (Feb. 22, 1973).
Rule, or MITOR. See 79 FR 55619 (Sept. 17, 2014). Marketing Practices Rule, 79 FR 70053–01 (Nov. 25, The updates to the rule were based on the 2014). that defined an unfair method of Commission’s authority to regulate unfair or 163Nat’l Petroleum Refiners Ass’n v. FTC, 482 competition and evinces Congress’s deceptive acts or practices. F.2d 672 (D.C. Cir. 1973). 157Disclosure Requirements and Prohibitions 164Nat’l Petroleum Refiners, 482 F.2d at 674, 698; 167Magnuson-Moss Act, 88 Stat. 2183; see 15 Concerning Franchising and Business Opportunity see also Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957, U.S.C. 57a. Ventures, 43 FR 59614 (Dec. 21, 1978). 967 (D.C. Cir. 1985) (concluding, after extensive 168S. Rep. No. 93–151, at 32 (1973).
or price of goods or services,’’ or ‘‘have Where Congress wished to limit the Second, some commenters contended a significant impact upon’’ persons and scope of the Commission’s authority that the validity of non-competes is a consumers.178Section 22(b) of the Act over particular entities or activities, it major question that Congress has not similarly contemplates authority to given the Commission the authority to did so expressly, demonstrating its make legislative rules by imposing address. And third, some commenters intent to give the Commission broad regulatory analysis obligations on any argued that Congress had impermissibly enforcement authority over activities in rules that the Commission promulgates delegated to the Commission authority or affecting commerce outside the scope under section 6.179The specific to promulgate nationwide rules of the enumerated exceptions.188That obligations in section 22(b), such as the governing methods of competition. A section 22 of the FTC Act requires the requirement for the Commission to smaller number of comments asserted Commission to perform a regulatory conduct a cost-benefit analysis, assume other, miscellaneous reasons the analysis for amendments to rules based that section 6(g) authorizes substantive Commission allegedly lacked authority on, inter alia, ‘‘their annual effect on the and economically significant rules.
18) that would have certain substantial Court has laid it to rest in A.L.A. effects on the national economy, the Some commenters also objected that Schechter Poultry Corp. v. United price of goods or services, or regulated Congress violated the non-delegation States.239Schechter Poultry marked one entities and consumers.226Congress doctrine by empowering the of two occasions ‘‘in this country’s thus anticipated—and intended—that Commission to promulgate rules history’’ that the Supreme Court ‘‘found the Commission’s rulemaking power regulating unfair methods of a delegation excessive,’’ and ‘‘in each carried the potential to affect the competition. The Commission disagrees. case . . . Congress had failed to economy in considerable ways, and The non-delegation doctrine provides articulate any policy or standard to Congress already considered and that ‘‘Congress generally cannot delegate confine discretion.’’240The Court specified the necessary steps and checks its legislative power to another offered the FTC Act, however, as a to ensure the Commission’s exercise of Branch.’’231But the Constitution does counterexample of proper Congressional that power is appropriate. For all these not ‘‘prevent Congress from obtaining delegation. The Court recognized that reasons, the final rule does not involve the assistance of its coordinate the phrase ‘‘unfair methods of a ‘‘major question’’ as the Supreme Branches.’’232‘‘So long as Congress competition’’ in the FTC Act was ‘‘an Court has used that term. shall lay down by legislative act an expression new in the law’’ without Even if the final rule does present a intelligible principle to which the ‘‘precise definition,’’ but that Congress major question, the final rule passes person or body authorized to [exercise had empowered the Commission to muster because the FTC Act provides the delegated authority] is directed to ‘‘determine[] in particular instances, clear authorization for the Commission’s conform, such legislative action is not a upon evidence, in the light of particular action. In cases involving major forbidden delegation of legislative competitive conditions and of what is questions, courts expect Congress to power.’’233Applying this rule, the found to be a specific and substantial ‘‘speak clearly’’ if it wishes to assign the Supreme Court has ‘‘over and over public interest’’ whether a method of disputed power.227Congress did so upheld even very broad delegations’’ competition is unfair.241The FTC Act when it ‘‘declared unlawful’’ in the FTC including those directing agencies ‘‘to stood in contrast, the Court explained, Act ‘‘[u]nfair methods of competition’’ regulate in ‘the public interest,’ . . . to to the National Industrial Recovery Act and empowered the Commission ‘‘to set ‘fair and equitable’ prices and ‘just (‘‘NIRA’’), which the Court held make rules and regulations for the and reasonable’ rates,’’ and ‘‘to issue included an unconstitutional purpose of carrying out the provisions whatever air quality standards are delegation.242 of th[e] Act.’’228Congress ‘‘[i]n large ‘requisite to protect the public The Commission recognizes that measure’’ left ‘‘the task of defining health.’’’234‘‘The Supreme Court has’’ Schechter Poultry approved of the FTC ‘unfair methods of competition’ . . . to also ‘‘explained that the general policy Act’s adjudicatory process for the Commission.’’229That is precisely and boundaries of a delegation ‘need not determining unfair methods of what the Commission has done here, for be tested in isolation’’’ and ‘‘[i]nstead, competition without commenting on the the reasons elaborated in Part IV. the statutory language may derive Act’s rulemaking provision. But the Finally, there is no doubt that the content from the ‘purpose of the Act, its ‘‘unfair method of competition’’ Commission has expertise in the field factual background and the statutory authority the Court approvingly cited in (competition) it is regulating here.230 context in which they appear.’’’235 Schechter Poultry is the same For these reasons, even if the final rule Here, Congress ‘‘declared unlawful’’ intelligible principle the Commission is involves a major question, Congress has any ‘‘unfair methods of competition in applying in this rulemaking. And just as or affecting commerce’’ and the adjudication process provides for a ‘‘empowered and directed’’ the within the past few years enjoining a ‘‘formal complaint, for notice and Commission ‘‘to prevent’’ entities pharmaceutical company from entering into reverse hearing, for appropriate findings of fact payment settlement schemes. Impax Labs., Inc. v. within its jurisdiction ‘‘from using supported by adequate evidence, and for FTC, 994 F.3d 484 (5th Cir. 2021). In the century unfair methods of competition.’’236 judicial review,’’243the APA between, the Commission has found section 5 Congress also instructed the violations based on false advertising, monopoly rulemaking process provides for a Commission to ‘‘make rules and maintenance, exclusive dealing, and more in public notice of proposed rulemaking, diverse sectors throughout the country. regulations for the purpose of carrying the opportunity to ‘‘submi[t] . . . 22615 U.S.C. 57b–3; see also Part II.B. out the provisions’’ of the FTC Act.237 written data, views, or arguments,’’ 227W. Va. v. EPA, 597 U.S. 697, 716, 723 (2002). Congress’s stated purpose and policy in agency consideration of those 228FTC Act of 1914, 38 Stat. at 721–22; see 15 section 5 provides the Commission with U.S.C. 45(a), 46(g); see also Part II.A (discussing the comments, and judicial review.244If Commission’s rulemaking authority). Congress may permissibly delegate the 231Mistretta v. United States, 488 U.S. 361, 372 229FTC v. Texaco, Inc., 393 U.S. 223, 225 (1968).
230Cf. W. Va. v. EPA, 597 U.S. at 729 (noting the 232Id. 238As the D.C. Circuit noted in Nat’l Petroleum Court’s view that the EPA had traditionally lacked Refiners Ass’n v. FTC, ‘‘the Supreme Court has the expertise needed to develop the rule at issue); 233Id. (alteration in original). ruled that the powers specified in Section 6 do not
Ala. Ass’n of Realtors v. HHS, 594 U.S. 758, at 764– 234Gundy v. United States, 139 S. Ct. 2116, 2121 stand isolated from the Commission’s enforcement 65 (2021) (questioning the link between the Center (2019) (citing Nat’l Broadcasting Co. v. United and law applying role laid out in Section 5.’’ 482 for Disease Control and an eviction moratorium); States, 319 U.S. 190, 216 (1943); N.Y. Cent. Secs. F.2d 672, 677 (D.C. Cir. 1973) (citing United States see also Part II.A (discussing Congress’s creation of Corp. v. United States, 287 U.S. 12, 24 (1932); v. Morton Salt Co., 338 U.S. 632 (1950)). t I e h V x e . p C l C a ( o i d n m i i s n m c g u i s s th s s i i e o n n n g e t a g h s a e a t i r n v a e e ti x o e p f n f e a e r l c t e t b s f o o n d r o y t n h ) - ; e c P o r a m u r l t p e s e a I t V n es d .B h a a n v d e Y F U e a .S d k . . u 5 P s 9 o v 1 w . ( e U 1 r n 9 C 4 it o 4 e m ) d ; m a S n t ’n a d t v e W s . , h H 3 i o t 2 m p 1 e a U n N . S a v . t . u 4 A r 1 m a 4 l , . G 4 T a 2 r s u 2 c C ( k 1 o i 9 . n , 4 g 3 4 2 ); 0 Sta 23 te 9 s A , . 2 L 9 .A 5 . U S . c S h . e 4 c 9 h 5 t e (1 r 9 P 3 o 5 u ) l . t ry Corp. v. United on competition). The Commission also notes that Ass’ns, 531 U.S. 457, 472 (2001)). 240Gundy, 588 U.S. at 2129 (internal quotation through, inter alia, the roundtables and 235TOMAC, Taxpayers of Mich. Against Casinos omitted); cf. also Panama Refin. Co. v. Ryan, 293 enforcement actions described in Part I.B, and v. Norton, 433 F.3d 852, 866 (D.C. Cir. 2006) U.S. 388 (1935) (finding impermissible delegation). through this rulemaking process, it has acquired (quoting Am. Power & Light Co. v. SEC, 329 U.S. 241Schechter Poultry, 295 U.S. at 532–33. expertise on non-competes specifically. The 90, 104 (1946)). 242Id. at 529–42. Commission further notes that non-competes are, 23615 U.S.C. 45(a)(1)–(2). 243Id. at 533. inherently, a method of competition. 23715 U.S.C. 46(g). 2445 U.S.C. 553, 702. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38355 authority to determine through competes by employers substantially issue, but the text of the final rule adjudication whether a given practice is affects commerce as that term is defined provides regulated parties with an unfair method of competition, it may in the FTC Act. The final rule is sufficient notice of what the law also permit the Commission to do the therefore a lawful exercise of Congress’s demands to satisfy any due process same through rulemaking.245 delegated power.249 vagueness concerns. For these reasons, the Commission Relatedly, one commenter objected
promulgate rules regulating unfair Amendment, which provides that ‘‘[t]he methods of competition is not an powers not delegated to the United Some commenters also contended impermissible delegation of legislative States by the Constitution, nor that the Commission has not complied authority. prohibited by it to the States, are with the Administrative Procedure Act reserved to the States respectively, or to (‘‘APA’’).254At a high level, the APA 4. Other Challenges to the Commission’s the people.’’250But as just explained, requires prior public notice, an Authority the Constitution grants Congress the opportunity to comment, and Finally, a handful of comments raised power to regulate interstate commerce, consideration of those comments before other, miscellaneous arguments and pursuant to that power Congress an agency can promulgate a legislative contending that the Commission lacks granted the Commission authority to rule.255The Commission has engaged in authority to promulgate the rule. The prevent unfair methods of competition that process, which has led to this final Commission has reviewed and in or affecting commerce. The rule and the accompanying explanation. considered these comments and Commission is not intruding on any Some comments failed to recognize the concludes they do not undercut the power reserved to the States. NPRM was a preliminary step that did Commission’s authority to promulgate Some commenters objected that the not fossilize the Commission’s the final rule. rule infringes on the right to contract. consideration of arguments or weighing The Commission received several One of these commenters acknowledged of evidence. Moreover, the APA ‘‘limits comments about the Commerce Clause. that the Constitution’s Contracts Clause causes of action under the APA to final That clause allows Congress ‘‘to regulate does not apply to the Federal agency action.’’256It is this final rule, Commerce with foreign Nations, and government.251Regardless, even not the NPRM, that constitutes final among the several States, and with the assuming the Constitution protects a agency action. Before adopting this final Indian tribes.’’246Consistent with that right to contract that can be asserted rule, the Commission reviewed and clause, the FTC Act empowers the against a Federal regulation, that right considered all comments received. In Commission to prevent unfair methods sounds in substantive due process, and many instances, the Commission has of competition ‘‘in or affecting the Commission must offer only a made changes relative to the proposed commerce,’’ which the Act also defines rational basis for the rule.252As relevant rule to address concerns that consistently with the Constitution.247 here, the final rule advances the commenters raised. In all cases, One commenter wrote to support the Commission’s congressional mandate to however, the Commission has complied rule and emphasized that non-competes prevent unfair methods of competition with the APA. restrict the free flow of interstate and will promote competition and
1. Generally Commission explicitly exempt State and Act specifically for the healthcare industry. They pointed to the Certain entities that would otherwise local governments from the rule. The prevalence of healthcare organizations be subject to the final rule may fall commenter pointed to conflicts-of- registered under section 501(c) of the outside the FTC’s jurisdiction under the interest policies used by some State Internal Revenue Code claiming tax- FTC Act. The FTC Act exempts certain agencies to preclude former employees exempt status as nonprofits.
entities or activities from the from working on related projects or jobs Commenters contended that these Commission’s enforcement jurisdiction, in the private sector, which the organizations are categorically outside which otherwise applies to ‘‘persons, commenter stated do not implicate the the Commission’s authority under the partnerships, or corporations.’’257For policy concerns the FTC seeks to FTC Act. In fact, under existing law, example, the Act exempts ‘‘banks’’ and address in the rule. The commenter also these organizations are not categorically ‘‘persons, partnerships, or corporations noted the complexity of when the beyond the Commission’s jurisdiction. insofar as they are subject to the Packers Commission’s jurisdiction might extend To dispel this misunderstanding, the and Stockyards Act.’’258And the Act to State and local governments. The Commission summarizes the existing excludes from its definition of Commission clarifies in the definition of law pertaining to its jurisdiction over ‘‘corporation’’ any entity that is not ‘‘person’’ in §910.1 that the final rule non-profits.
‘‘organized to carry on business for its applies only to a legal entity within the own profit or that of its members.’’259 a. Comments Received Commission’s jurisdiction. The The NPRM explained that, where an Business and trade industry Commission also explains in Part III.E employer is exempt from coverage commenters from the healthcare under the FTC Act, the employer would that the definition of ‘‘person’’ is industry, including, for example, not be subject to the rule.260The NPRM coextensive with the Commission’s hospitals, physician practices, and also explained State and local authority to issue civil investigative surgery centers, focused on whether the government entities—as well as some demands. Nothing in this rule changes Commission has jurisdiction over private entities—may not be subject to the extent of the Commission’s nonprofit organizations registered under the rule when engaging in activity jurisdiction over State and local section 501(c)(3) of the Internal Revenue protected by the State action governments. The Commission declines Code in light of the FTC Act’s definition doctrine.261Some commenters stated to specify all circumstances under of ‘‘corporation.’’ Section 501(c)(3) that the Commission should restate, which a governmental entity or quasi- exempts from taxation certain religious, clarify, interpret, or limit the reach of its governmental entity would or would not charitable, scientific, educational, and authority under the FTC Act in the rule. be subject to the Commission’s other corporations, ‘‘no part of the net In response, the Commission explains jurisdiction and, thus, this final rule. In earnings of which inure[] to the benefit that the final rule extends to covered any event, with respect to the of any private shareholder or persons that are within the government ethics policies referenced individual.’’263An entity is a Commission’s jurisdiction. The by the commenter, to the extent the ‘‘corporation’’ under the FTC Act only Commission does not believe restating commenter is referring to traditional if it is ‘‘organized to carry on business or further specifying each jurisdictional ‘‘cooling off’’ policies that preclude for its own profit or that of its limit in the final rule’s text is necessary;
b. The Final Rule Alternatively stated, the Commission of private, independent physicians and The final rule applies to the full scope looks to both ‘‘the source of the income, private, small group practices.277That of the Commission’s jurisdiction. Many i.e., to whether the corporation is association was organized for the of the comments about nonprofits organized for and actually engaged in pecuniary benefit of its for-profit erroneously assume that the FTC’s business for only charitable purposes, members because it ‘‘contract[ed] with jurisdiction does not capture any entity and to the destination of the income, payers, on behalf of its [for-profit] claiming tax-exempt status as a i.e., to whether either the corporation or physician members, for the provision of nonprofit. Given these comments, the its members derive a profit.’’271This physician services for a fee.’’278Under Commission summarizes Commission test reflects the Eighth Circuit’s analysis IRS precedent in the context of precedent and judicial decisions in Community Blood Bank of Kansas purportedly tax-exempt nonprofit construing the scope of the City Area, Inc. v. FTC and ‘‘the hospitals and other related entities that Commission’s jurisdiction as it relates to analogous body of federal law which partner with for-profit entities, where entities that claim tax-exempt status as governs treatment of not-for-profit the purportedly nonprofit entity ‘‘has nonprofits and to other entities that may organizations under the Internal ceded effective control’’ to a for-profit or may not be organized to carry on Revenue Code.’’272Under this test, a partner, ‘‘conferring impermissible business for their own profit or the corporation’s ‘‘tax-exempt status is private benefit,’’ the entity loses tax- profit of their members. certainly one factor to be considered,’’ exempt status.279The IRS has also Congress empowered the Commission but that status ‘‘does not obviate the rejected claims of nonprofit tax-exempt to ‘‘prevent persons, partnerships, or relevance of further inquiry into a status for entities that pay unreasonable corporations’’ from engaging in unfair [corporation’s] operations and compensation, including percentage- methods of competition.265To fall goals.’’273 based compensation, to founders, board within the definition of ‘‘corporation’’ Merely claiming tax-exempt status in members, their families, or other under the FTC Act, an entity must be tax filings is not dispositive. At the insiders.280 ‘‘organized to carry on business for its same time, if the Internal Revenue These examples are illustrative. As own profit or that of its members.’’266 Service (‘‘IRS’’) concludes that an entity has been the case for decades, under These FTC Act provisions, taken does not qualify for tax-exempt status, Commission precedent and judicial together, have been interpreted in such a finding would be meaningful to Commission precedent267and judicial the Commission’s analysis of whether 275In the Matter of Preferred Health Servs., Inc., the same entity is a corporation under decisions268to mean that the FTC No. 41–0099, 2005 WL 593181, at *1 (Mar. 2, Commission lacks jurisdiction to the FTC Act. Administrative 2005). prevent section 5 violations by a proceedings and judicial decisions 276Id. at *1. involving the Commission or the IRS274 277In the Matter of Boulder Valley Individual corporation not organized to carry on have identified numerous private Prac. Assoc., 149 F.T.C. 1147, 2010 WL 9434809, at business for its own profit or that of its *2 (Apr. 2, 2010). benefits that, if offered, could render an members. 278Boulder Valley, 2010 WL 9434809, at *2. The The Commission stresses, however, entity a corporation organized for its Commission has similarly exercised jurisdiction that both judicial decisions and own profit or that of its members under where an entity claiming nonprofit tax-exempt the FTC Act, bringing it within the status provides pecuniary benefit to for-profit Commission precedent recognize that entities or individuals. See, e.g., In the Matter of not all entities claiming tax-exempt Mem’l Hermann Health Network Providers, 137 status as nonprofits fall outside the 269Blood Bank, 405 F.2d at 1018; see also, e.g., F.T.C. 90, 92 (2004); Preferred Health, 2005 WL Commission’s jurisdiction. As the FTC v. Nat’l Comm’n on Egg Nutrition, 517 F.2d 593181, at *1–*2; Advoc. Health Partners, F.T.C. 485, 488 (7th Cir. 1975). No. 31–0021, 2007 WL 643035, at *3–*4 (Feb. 7, Eighth Circuit has explained, ‘‘Congress 270Coll. Football Ass’n, 117 F.T.C. at 998. 2007); Conn. Chiropractic Ass’n, F.T.C. No. 71– took pains in drafting §4 [15 U.S.C. 44] 271Id. at 994 (internal quotation and citation 0074, 2008 WL 625339, at *2 (Mar. 5, 2008); Am. to authorize the Commission to regulate omitted). Med. Ass’n v. FTC, 638 F.2d 443 (2d Cir. 1980), so-called nonprofit corporations, 272Id. at 994. aff’d, 455 U.S. 676 (1982). 273In the Matter of the Am. Med. Assoc., 94 F.T.C. 279Redlands Surgical Servs. v. Comm’r, 242 F.3d 701, 1979 WL 199033, at *221 (FTC Oct. 12, 1979). 904, 904–05 (9th Cir. 2001); see also St. David’s 26515 U.S.C. 45(a)(2). The Commission focuses on 274The Commission offers examples of decisions Health Care Sys. v. United States, 349 F.3d 232, 239 coverage as ‘‘corporations’’ in this section. from the IRS and Tax Court as examples that the (5th Cir. 2003). 26615 U.S.C. 44. Commission may deem persuasive. Although 280See Fam. Tr. of Mass., Inc. v. United States, 267In the Matter of Coll. Football Ass’n, 117 ‘‘[r]ulings of the Internal Revenue Services are not 892 F. Supp. 2d 149, 155–156 (D.D.C. 2012); I.R.S. F.T.C. 971, 992–999 (1990). binding upon the Commission,’’ the Commission G.C.M. 39,674 (Oct. 23, 1987); Bubbling Well 268California Dental Ass’n v. FTC, 526 U.S. 756, has recognized that ‘‘a determination by another Church of Universal Love, Inc. v. Comm’r, No. 766 (1999); Cmty. Blood Bank of Kansas City Area, Federal agency that a respondent is or is not 5717–79X, 1980 WL 4453 (T.C. June 9, 1980) Inc. v. FTC, 405 F.2d 1011, 1016 (8th Cir. 1969); organized and operated exclusively for (‘‘[E]xcessive payments made purportedly as FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214 (11th eleemosynary purposes should not be disregarded.’’ compensation constitute benefit inurement in Cir. 1991). Am. Med. Assoc., 1979 WL 199033 at *221. contravention of section 501(c)(3).’’). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38358 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations decisions construing the scope of the may also be present if the conduct is Instead, the inquiry examines whether Commission’s jurisdiction, any entity otherwise restrictive or exclusionary, the conduct has a tendency to satisfying the two-prong test falls within depending on the circumstances, such negatively affect competitive conditions, the Commission’s jurisdiction. Such as the nature of the commercial setting including by raising prices, reducing entities would thus be bound by the and the current and potential future output, limiting choice, lowering final rule.281 effects of the conduct.286Notably, quality, reducing innovation, impairing section 5 does not limit indicia of or excluding other market participants, F. The Legal Standard for Unfair unfairness to conduct that benefits one reducing the likelihood of potential or Methods of Competition Under Section or more firms and necessarily nascent competition, reducing labor disadvantages others. Instead, restrictive mobility, suppressing worker In section 5 of the FTC Act, ‘‘unfair and exclusionary conduct may also be compensation or degrading working methods of competition in or affecting unlawful where it benefits specific firms conditions for workers. These concerns commerce’’ are ‘‘declared unlawful.’’282 while tending to negatively affect may arise when the conduct is In enacting section 5, Congress competitive conditions.287 examined in the aggregate along with intentionally did not mirror either the The second prong, whether conduct the conduct of others engaging in the common law or the text or judicial tends to negatively affect competitive same or similar conduct.289Section 5 interpretations of the Sherman Act, but conditions, focuses on the nature and does not require a separate showing of instead adopted this new term.283As tendency of the conduct. It does not market power or market definition.290 the Supreme Court has confirmed, this turn on whether the conduct directly Nor does section 5 import the rule-of- different term reflects a distinct caused actual harm in the specific reason analysis applied under other standard.284Under section 5, the instance at issue and therefore does not antitrust laws, including in some Commission assesses two elements: (1) require a detailed economic analysis or Sherman Act cases.291 whether the conduct is a method of current anticompetitive effects.288 The Commission weighs the two competition, as opposed to a condition elements—indicia of unfairness and of the marketplace, and (2) whether it is economic power in one market to curtail unfair, meaning that it goes beyond competition in another . . . . bolstered by actual tendency to negatively affect threats and coercive practices’’ was an unfair competitive conditions—on a sliding competition on the merits. The latter method of competition); FTC v. Texaco, 393 U.S. scale. Where the indicia of unfairness inquiry has two components: (a) 223, 228–29 (1968) (finding that use of ‘‘dominant are clear, conduct may be an unfair whether the conduct has indicia of economic power . . . in a manner which tended to unfairness and (b) whether the conduct foreclose competition’’ is an unfair method of method of competition with only a competition); E.I. du Pont de Nemours v. FTC limited showing of a tendency to tends to negatively affect competitive (Ethyl), 729 F.2d 128, 137, 140 (2d Cir. 1984) negatively affect competitive conditions. These two components are (finding that unfair methods of competition conditions.292For example, conduct weighed according to a sliding scale. includes practices that are ‘‘collusive, coercive, Indicia of unfairness include the predatory, restrictive or deceitful’’ as well as that is coercive and exploitative evinces extent to which the conduct may be ‘‘exclusionary’’). facial unfairness and weighs heavily as coercive, exploitative, collusive, 286See, e.g., Motion Picture Advert. Serv. Co., 344 clear indicia of unfairness.293Where abusive, deceptive, predatory, or 8 U 4 .S 7, . 8 at 6 3 0 9 – 5 6 – 1 9 ( 6 3 ; d L C u i r r i . a 1 B 9 r 6 o 8 s ) . . & A s C t o h . e v . S F u T p C re , m 38 e 9 C F o . u 2 r d t indicia of unfairness are less clear, involve the use of economic power of a has made clear, the inquiry into the nature of the conduct may still violate section 5 similar nature.285Indicia of unfairness commercial setting does not, however, require where it tends to negatively affect market definition or proof of market power. See, e.g., Atl. Refin. Co., 381 U.S. at 371 (finding it 281The Commission cannot predict precisely how ‘‘unnecessary to embark upon a full scale economic or obstruct competition. Under the Federal Trade many entities claiming nonprofit tax-exempt status analysis of competitive effect’’). On November 10, Commission Act, industry agreements and practices may be subject to the final rule. The Commission 2022, the Commission issued a policy statement have been enjoined without an actual showing of finds that the benefits of the final rule justify describing the key principles of general injury to competition . . . .’’). See also Sperry & implementing it no matter how many nonprofit applicability concerning whether conduct is an Hutchinson Co., 405 U.S. at 244 (‘‘[U]nfair entities claiming tax-exempt status it ultimately unfair method of competition under section 5. FTC, competitive practices [are] not limited to those reaches—including under the unlikely assumption Policy Statement Regarding the Scope of Unfair likely to have anticompetitive consequences after that it does not reach any of them. Methods of Competition Under Section 5 of the the manner of the antitrust laws.’’); Ethyl, 729 F.2d 28215 U.S.C. 45(a)(1). Federal Trade Commission Act (Nov. 10, 2022) at 138 (finding that evidence of actual harm is not required); In re Coca-Cola Co., 117 F.T.C. 795, 915 283The Clayton Antitrust Act (38 Stat. 730, ch. (hereinafter ‘‘FTC Policy Statement’’). The FTC n.25 (1994) (rejecting argument that section 5 323, Pub. L. 63–212, Oct. 15, 1914) was signed into Policy Statement cites a number of cases explaining violation requires showing of ‘‘anticompetitive law weeks after the FTC Act of 1914, 38 Stat. 717. that section 5 does not require market definition or effects’’).
III. Section 910.1: Definitions Commission declines to adopt a ‘‘employment’’ better clarifies that an functional test for the definition of employment relationship exists, for Section 910.1 sets forth definitions of ‘‘business entity.’’ As described in purposes of the final rule, regardless of several terms used in the final rule.
A. Definition of ‘‘Business Entity’’ business exception in the final rule does exists under another law, such as a The Commission adopts the definition not contain a 25% ownership threshold, Federal or State labor law. of ‘‘business entity’’ as proposed. so employers will not have an incentive
1. Proposed Definition smaller legal entities in order to fall The Commission proposed to define The Commission proposed to define within the sale-of-a-business exception. employer as a ‘‘person, as defined in 15 ‘‘business entity’’ as ‘‘a partnership, The Commission also believes replacing U.S.C. 57b–1(a)(6) [section 20 of the corporation, association, limited the current bright-line definition of FTC Act], that hires or contracts with a liability company, or other legal entity, ‘‘business entity’’ with a functional test worker to work for the person.’’316 or a division or subsidiary thereof.’’309 would make it more difficult for Section 20 defines ‘‘person’’ as ‘‘any The term ‘‘business entity’’ was used in workers and employers to know natural person, partnership, two places: (1) in proposed §910.3, whether a given non-compete is corporation, association, or other legal which contained an exception for enforceable in the context of the sale of entity, including any person acting certain non-competes entered into in the a business. The Commission concludes under color or authority of State context of a sale of a business by a adding the terms ‘‘general partnerships’’ law.’’317The Commission clarified in substantial owner of, or substantial and ‘‘trusts’’ to the definition is the NPRM that a person meeting the member or substantial partner in, the unnecessary, because the phrase ‘‘other definition of an employer under business entity,310and (2) in proposed legal entity’’ already includes those proposed §910.1(c) would be an §910.1(e), which defined ‘‘substantial entity types. employer regardless of whether the owner, substantial member, or person meets another legal definition of
2. Comments Received regardless of whether an employment worker’s employer is the same legal Two commenters specifically relationship exists under another law, entity that hired or contracted with the addressed the definition of business such as a Federal or State labor law.315 worker. These commenters contended entity. One commenter suggested a new The final rule clarifies the definitions to the proposed definition would not cover definition using a functional test that better reflect that intent. arrangements such as when a worker is the commenter asserted would prevent While commenters generally did not employed through a contractual employers from structuring their address the proposed definition of relationship with a professional businesses as several smaller legal ‘‘employment,’’ many commenters employer organization or staffing entities in order to fall within the sale- expressed concern that the proposed agency; under a short-term ‘‘loan-out of-a-business exception. Another definition of ‘‘employer’’ would exclude arrangement,’’ during which a worker commenter also suggested that the workers hired by one entity to work for hired by one employer may work for definition be amended to explicitly another, such as workers hired through another employer; under contract with a include ‘‘general partnerships’’ and a staffing agency. To avoid excluding parent, subsidiary, or affiliate of the trusts. such workers, and consistent with the business who hired them; or by persons Commission’s intent to cover workers or entities who share common control 3. The Final Rule irrespective of whether they are over the worker’s work. A few of these The Commission adopts the definition classified as in an ‘‘employer-employee’’ commenters also stated that the of ‘‘business entity’’ as proposed. The relationship under other State and proposed definition creates a loophole Federal laws, the final rule defines allowing evasion of the rule through (D.C. Cir. 2005); 2000 Collaboration Guidelines, sec. ‘‘employment’’ as ‘‘work for a person’’ third-party hiring. Most commenters 3.36b. See also Union Circulation Co. v. FTC, 241 and makes corresponding changes to the that addressed this issue suggested F.2d 652, 658 (2d Cir. 1957) (‘‘The agreements here definition of ‘‘employer,’’ described in listing one or more such arrangements went beyond what was necessary to curtail and eliminate fraudulent practices.’’). Part III.C. This definition of in the definition of ‘‘employer’’ to 309NPRM, proposed §910.1(a).
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38361 ensure these kinds of arrangements are language is designed to capture indirect limited to post-employment restraints covered. employment relationships as a general (i.e., restrictions on what the worker One worker advocacy group argued matter without regard to the label used. may do after the conclusion of the the term ‘‘hires or contracts’’ in the worker’s employment) and would not
2. Final Rule their employment ends—could have the whether written or oral.’’ Similar to the same effects as a contractual non- After considering the comments, the proposed rule, the final rule applies to compete even if they are not Commission has revised the definitions terms and conditions that expressly enforceable, because workers may of ‘‘non-compete clause’’ and ‘‘worker’’ prohibit a worker from seeking or believe they are bound by the policy.
as described in Parts III.D and III.G. accepting other work or starting a The Commission sought comment on These revisions make the definition of business after their employment ends, whether the term ‘‘non-compete clause’’ ‘‘employer’’ unnecessary, so the as well as agreements that penalize or should expressly include a provision in Commission is not finalizing a effectively prevent a worker from doing a workplace policy.323 definition of ‘‘employer.’’ the same.
through complex employment non-competes between two 322Id. relationships, and the need to specify businesses.320The Commission further 323Id. at 3510.
myriad fact-specific scenarios. The explained the definition would be 324Id. at 3509. 325Id.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38362 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations restrictive employment agreements to be additional types of restrictive and supported the Commission’s de facto non-competes.327 employment agreements altogether. A recognition of overbroad NDAs as Proposed §910.1(b)(2) accordingly few commenters asked the Commission functional non-competes. In contrast, sought to clarify that the definition in to broaden proposed §910.1(b)(1) and some commenters contended that by proposed §910.1(b)(1) includes (2) by replacing the terms ‘‘prevent’’ and covering functional non-competes, the contractual terms that are de facto non- ‘‘prohibit’’ with ‘‘restrains’’ and proposed rule would limit their ability competes because they have the effect of ‘‘limits.’’ to use NDAs. Some commenters argued prohibiting the worker from seeking or In contrast, many commenters who that providing that overbroad NDAs accepting employment with a person or generally opposed the NPRM stated that may be functional non-competes would operating a business after the proposed §910.1(b)(2) was be inconsistent with the proposed rule’s conclusion of the worker’s employment overinclusive. Many such commenters separate preliminary finding that NDAs with the employer. It then provided two also asserted the definition was vague are less restrictive alternatives to non- illustrative, non-exhaustive examples of and could lead to confusion and competes. Similarly, some commenters contractual terms that may be such significant litigation. Several comments contended that a functional test may functional non-competes: (1) an NDA suggested clarifications, such as frustrate employers’ ability to use NDAs between an employer and a worker including additional examples of to protect legitimate trade secrets or to written so broadly that it effectively functional non-competes; creating safe enjoin a former worker employed with precludes the worker from working in harbors for certain restrictive a competitor under the Defend Trade the same field after the conclusion of employment covenants; replacing Secrets Act of 2016, in part because they the worker’s employment with the proposed §910.1(b)(2) with a standard would be concerned about potential employer; and (2) a training-repayment based on antitrust law’s ‘‘quick look’’ legal liability. Some commenters agreement (‘‘TRAP’’) that requires the test;330or revising the provision to contended that the example of an worker to pay the employer or a third- focus on the ‘‘primary purpose’’ of a overbroad NDA in proposed party entity for training costs if the restrictive employment covenant. §910.1(b)(2) would discourage the use worker’s employment terminates within Several commenters argued the of NDAs, including the use of narrowly a specified time period, where the Commission failed to cite evidence that tailored NDAs, and undermine required payment is not reasonably functional non-competes are anti- confidence in their enforceability. Some related to the costs the employer competitive. Other commenters commenters stated that reference to incurred to train the worker.328 expressed concern that prohibiting cases, including Brown v. TGS functional non-competes would Management Co.331and similar cases, 2. Coverage of the Definition undermine the rule’s intent to permit represent outliers that are likely to cause a. Comments Received less restrictive alternatives to non- more confusion than clarity. competes. Other commenters addressed the Most of the comments on the At least one commenter argued that proposed definition’s application to definition of ‘‘non-compete clause’’ proposed §910.1(b)(2) should be TRAPs, which are agreements in which addressed whether, and under what removed because it was redundant, as the worker agrees to pay the employer circumstances, the rule should apply to the proposed definition of non-compete for purported training expenses if the functional non-competes.329Many clause in proposed §910.1(b)(1) already worker leaves their job before a certain commenters that generally supported captured any term that prevents an date. Several commenters asked the the NPRM agreed the definition of non- employee from seeking alternative Commission to ban all forms of TRAPs. compete clause should cover other employment, without regard to how the These commenters argued that restrictive employment agreements term is labeled. Some commenters who employers are increasingly adopting when they function as non-competes. generally supported the NPRM also TRAPs and that abusive TRAPs are These commenters argued that, when expressed concern that ambiguity in pervasive throughout the economy. restraints on labor mobility are banned, proposed §910.1(b)(2) could enable Some commenters asserted millions of companies switch to functionally employers to intimidate workers by workers are likely bound by TRAPs. equivalent restraints. Some commenters suggesting that restrictive employment Commenters stated TRAPs may impose asked the Commission to adopt a agreements used to evade a final rule are penalties that are disproportionate to broader definition of functional non- not non-competes under the functional the value of training workers received or competes or to expand the rule to ban test. Other commenters who generally require the worker to pay alleged supported the rule asked for greater training expenses for on-the-job 327Wegmann v. London, 648 F.2d 1072, 1073 (5th specificity in proposed §910.1(b)(2) to training. Some commenters contended Cir. 1981) (holding that liquidated damages prevent adverse judicial interpretations TRAPs may be even more harmful than provisions in a partnership agreement were de facto non-compete clauses ‘‘given the prohibitive that could undermine the effectiveness non-competes, because while non- magnitudes of liquidated damages they specify’’); of the rule. competes prohibit or prevent workers Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, Many commenters addressed issues from seeking or accepting other work or 306, 319 (Cal. Ct. App. 2020) (holding that an NDA specific to other types of restrictive starting a business after they leave their that defined ‘‘confidential information’’ ‘‘so broadly as to prevent [the plaintiff] in perpetuity from doing employment agreements, including job, TRAPs can prevent workers from any work in the securities field’’ operated as a de NDAs (also sometimes referred to as leaving their job for any reason. facto non-compete clause and therefore could not confidentiality agreements), TRAPs, Some commenters expressed concern be enforced under California law, which generally non-solicitation agreements, and garden that the example in proposed prohibits enforcement of non-compete clauses).
329While the NPRM generally used the term ‘‘de With respect to NDAs, some functional non-compete was too narrow, facto non-competes,’’ the final rule uses the term commenters stated that the Commission and that the Commission should not ‘‘functional non-competes.’’ The Commission rightly identified overbroad NDAs as a imply that TRAPs with penalties that believes this term more clearly conveys that certain potential method of evasion of the rule are reasonably related to an employer’s terms are considered non-competes under the final training expenses cannot be functional rule where they function to prevent workers from seeking or accepting other work or starting a 330See, e.g., Cal. Dental Ass’n v. FTC, 526 U.S. business after their employment ends. 756, 770–71 (1999). 331See supra note 327 and accompanying text. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38363 non-competes. One commenter asked undermine employers’ confidence in the Many commenters also addressed the the Commission to adopt the standard enforceability of non-solicitation application of the rule to garden leave for TRAPs in the Uniform Restrictive agreements and asked that the final rule agreements. In using the term ‘‘garden Employment Agreement Act.332 clarify that non-solicitation agreements leave,’’ commenters seemed to be Another commenter suggested that the are generally not prohibited, or exclude referring to a number of different types Commission ban TRAPs below an them altogether. of agreements. Some commenters income threshold of $75,000. Another Some comments addressed no-hire referred to garden leave agreements as commenter asked the Commission to clauses, which bar former workers from those in which, before a worker left clarify that costs that are inherent in any hiring their former colleagues. One their job, they remained employed and employer-employee relationship—such employment lawyer stated that these are received full pay for a specified period as time spent by a supervisor training a less restrictive than non-compete of time but their access to co-workers new employee how to perform routine clauses. Other commenters stated that and company facilities was restricted. In business procedures typical for their no-hire clauses can still limit careers or contrast, other commenters considered position or role—should not be make it hard for new businesses to find ‘‘garden leave’’ an arrangement to make considered costs that are ‘‘reasonably staff. Some commenters expressed payments to a worker after their related to the costs’’ of training. concerns with no-business or non- employment concluded. Commenters At least one commenter urged the dealing clauses, which bar former used different terminology to refer to Commission to treat as functional non- workers from doing business with these kinds of agreements, including competes other employment terms former clients or customers even if the severance pay, partial pay, and full pay similar to TRAPs such as equipment clients or customers sought them out. akin to administrative leave, in loans, where employers provide These commenters stated such exchange for an agreement not to employees with a loan to purchase agreements limit the options of clients compete. Some commenters argued it is equipment that the worker needs in and customers. coercive for a worker to sign a non- order to perform their job, and damages compete in exchange for severance pay provisions containing open-ended costs Many commenters raised questions and argued garden leave arrangements related to the employee’s departure— about forfeiture-for-competition clauses, are non-competes because they limit a including hiring and training which they stated are often a component worker’s options to work for a replacements or vague harms such as of deferred compensation arrangements competitor. Some commenters asked the reputational damages, loss of good will for executives. Commenters stated that Commission to adopt a durational limit or lost profits. In contrast, some deferred compensation plans often for garden leave. At least one commenters argued that TRAPs should include forfeiture clauses, or commenter also urged the Commission be excluded from coverage under contingencies on receiving the promised to clarify that an employer cannot proposed §910.1(b)(2) because they are compensation, to incentivize their unilaterally terminate garden leave.
not unfair or anti-competitive. recipients to act in ways that benefit the Other commenters requested Regarding non-solicitation employer. These commenters stated that clarification that garden leave was not a agreements—which prohibit a worker agreements not to compete for a period non-compete on the basis that garden from soliciting former clients or of time after employment ends are a leave does not create a legal obligation customers of the employer—a few common feature of forfeiture clauses. on the part of the worker to refrain from commenters expressed concern that Some commenters stated that such competing. Some commenters requested overbroad non-solicitation agreements forfeiture-for-competition clauses are a specific exclusion for garden-leave may be permitted because they were not non-competes and have the same arrangements. They argued that by listed in the regulatory text for proposed negative effects as non-competes forcing employers to pay workers, §910.1(b)(2) as examples of functional because they are contingent on garden leave would reduce the overuse non-competes (although the competition—they require workers to of non-competes. One talent industry Commission described them in the give up bonus pay or other post- commenter argued that the rule should preamble to the proposed rule as employment benefits if they work for a expressly allow for ‘‘fee tails,’’ which restrictive employment agreements that competing employer or start a require talent agents to pay a portion of may fall within the definition of non- competing business, and they keep future commissions to former compete clause if they restrain such an other employers from being able to hire employers.
unusually large scope of activity that those workers. Other commenters stated they are de facto non-compete forfeiture-for-competition clauses are a b. The Final Rule clauses).333These commenters asked common and important component of the Commission to revise proposed deferred compensation arrangements for After considering the comments, the §910.1(b)(2) to expressly cover non- highly compensated employees and Commission has slightly modified the solicitation agreements that prohibit senior executives.334Other commenters definition of non-compete clause to clarify its scope. In the final rule, workers from doing business with argued the clauses allow workers to §910.1 defines ‘‘non-compete clause’’ as prospective or actual customers to an choose between receiving the deferred a term or condition of employment that extent that would effectively preclude compensation and forfeiting it if they either ‘‘prohibits’’ a worker from, them from continuing to work in the choose to work for a competitor, and ‘‘penalizes’’ a worker for, or ‘‘functions same field or that prevent a worker from thus they are not non-competes. Other to prevent’’ a worker from (A) seeking doing business with their former commenters urged the Commission to or accepting work in the United States employer’s client where the client either clarify that forfeiture-for- with a different person where such work solicits the worker directly. Other competition clauses are not non- would begin after the conclusion of the commenters, however, expressed competes or to carve them out employment that includes the term or concern that the proposed rule could explicitly. condition; or (B) operating a business in the United States after the conclusion of 332See ULC, Uniform Restrictive Employment 334Commenters also provided purported business Agreement Act (2021), sec. 14. justifications for forfeiture-for-competition clauses, the employment that includes the term 333NPRM at 3509. which are addressed in Part IV.D.2. or condition. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38364 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations Pursuant to the term ‘‘prohibits,’’ the prohibition or requires the worker to triggered by these specific undertakings. definition applies to terms and pay liquidated damages.338 This prong of the definition does not conditions that expressly prohibit a Another example of a term that categorically prohibit other types of worker from seeking or accepting other ‘‘penalizes’’ a worker, under §910.1, is restrictive employment agreements, for work or starting a business after their an agreement that extinguishes a example, NDAs, TRAPs, and non- employment ends. Examples of such person’s obligation to provide promised solicitation agreements. These types of compensation or to pay benefits as a agreements do not by their terms agreements would be a contractual term result of a worker seeking or accepting prohibit a worker from or penalize a between a national sandwich shop other work or starting a business after worker for seeking or accepting other chain and its workers stating that, for they leave their job. One example of work or starting a business after they two years after the worker leaves their such an agreement is a forfeiture-for- leave their job, and in many instances job, they cannot work for another competition clause, which, similar to may not have that functional effect, sandwich shop within three miles of the agreement with liquidated damages either. However, the term ‘‘functions to any of the chain’s locations,335or a described previously, imposes adverse prevent’’ clarifies that, if an employer contractual term between a steelmaker financial consequences on a former adopts a term or condition that is so and one of its executives prohibiting the employee as a result of the termination broad or onerous that it has the same executive from working for any of an employment relationship, functional effect as a term or condition competing business anywhere in the expressly conditioned on the employee prohibiting or penalizing a worker from world for one year after the end of the seeking or accepting other work or seeking or accepting other work or executive’s employment.336The vast starting a business after their starting a business after their majority of existing agreements covered employment ends. An additional employment ends, such a term is a non- by the final rule fall into this category example of a term that ‘‘penalizes’’ a compete clause under the final rule. of agreements that expressly prohibit a worker under §910.1 is a severance In response to the comments alleging worker from seeking or accepting other arrangement in which the worker is that covering ‘‘de facto’’ or ‘‘functional’’ work or starting a business after their paid only if they refrain from non-competes is overinclusive or vague, employment ends. competing. The Commission also notes the Commission notes that the that a payment to a prospective definition’s three prongs—‘‘prohibit,’’ Pursuant to the term ‘‘penalizes,’’ the competitor to stay out of the market may ‘‘penalize,’’ and ‘‘function to prevent’’— definition also applies to terms and also violate the antitrust laws even if it are consistent with the current legal conditions that require a worker to pay is not a non-compete under this rule.339 landscape governing whether a a penalty for seeking or accepting other The common thread that makes each particular agreement is a non-compete. work or starting a business after their of these types of agreements non- In addition to generally accepted employment ends. One example of such compete clauses, whether they definitions of non-competes a term is a term providing that, for two ‘‘prohibit’’ or ‘‘penalize’’ a worker, is encompassing the ‘‘prohibits’’ prong of years after the worker’s employment that on their face, they are triggered the definition, terms that ‘‘penalize’’ ends, the worker may not engage in any where a worker seeks to work for workers for seeking or accepting other business within a certain geographic another person or start a business after work or starting a business after they area that competes with the employer they leave their job—i.e., they prohibit leave their job (for example, by unless the worker pays the employer or penalize post-employment work for requiring them to pay liquidated liquidated damages of $50,000.337 another employer or business. As damages) are typically considered non- Because such an agreement penalizes elaborated in Part IV, such non- competes under State law.340And the the worker for seeking or accepting competes are inherently restrictive and ‘‘functions to prevent’’ prong of the other work or for starting a business exclusionary conduct, and they tend to definition is likewise consistent with after the worker leaves their job, it negatively affect competitive conditions legal decisions holding that restrictive in both labor and product and service employment agreements other than non- would be a non-compete clause under markets by restricting the mobility of competes may be analyzed under the §910.1. Indeed, where an agreement workers and preventing competitors State law test applicable to non- restricts who a worker can work for or from gaining access to those workers. competes where they function similarly their ability to start a business after they Pursuant to the term ‘‘functions to to non-competes.341As the First Circuit leave their job, State courts generally prevent,’’ the definition of non-compete stated in a recent opinion, ‘‘[O]verly characterize the agreement as a non- clause also applies to terms and broad nondisclosure agreements, while compete, regardless of whether the conditions that restrain such a large not specifically prohibiting an employee agreement contains an express scope of activity that they function to from entering into competition with the prevent a worker from seeking or former employer, raise the same policy 335This example is based on the agreements accepting other work or starting a new concerns about restraining competition described in Jamieson, supra note 32. The company business after their employment ends, as noncompete clauses where, as here, agreed to remove the non-competes in 2016 as part although they are not expressly they have the effect of preventing the of a settlement. Office of the Att’y Gen. of the State defendant from competing with the of N.Y., Press Release, A.G. Schneiderman Announces Settlement With Jimmy John’s To Stop 338See, e.g., Wichita Clinic, P.A. v. Louis, 185 plaintiff.’’342The fact that whether a Including Non-Compete Agreements In Hiring P.3d 946, 951 (Kan. Ct. App. 2008); Grayhawk given restrictive covenant rises to the Packets (June 22, 2016), https://ag.ny.gov/press- Homes, Inc. v. Addison, 845 SE2d 356 (Ga. Ct. App. level of being a functional non-compete release/2016/ag-schneiderman-announces- 2020); Salewski v. Pilchuck Veterinary Hosp., Inc., will turn on the facts and circumstances settlement-jimmy-johns-stop-including-non- 359 P.3d 884 (Wash. Ct. App. 2015). compete. 339See., e.g., Palmer v. BRG of Ga., Inc., 498 U.S. 336This example is based on AK Steel Corp. v. 46, 49–50 (1990) (‘‘[A]greements between 340See supra note 338 and accompanying text. ArcelorMittal USA, LLC, 55 NE3d 1152, 1156 (Ohio competitors to allocate territories to minimize 341See, e.g., Brown v. TGS Mgmt. Co., LLC, 57 Ct. App. 2016). competition are illegal’’ (citing United States v. Cal. App. 5th 303, 306, 316–19 (Cal. Ct. App. 2020); 337This example is based on Press-A-Dent, Inc. v. Topco Assocs., Inc., 405 U.S. 596 (1972)); FTC v. Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir. Weigel, 849 NE2d 661, 668–70 (Ind. Ct. App. 2006) Actavis, Inc., 570 U.S. 136, 154 (2013) (‘‘payment 1981); TLS Mgmt. & Mktg. Servs. v. Rodriguez- (holding that the agreement was an unlawful non- in return for staying out of the market’’ may violate Toledo, 966 F.3d 46, 59–60 (1st Cir. 2020). compete). the antitrust laws). 342TLS Mgmt. & Mktg. Servs., 966 F.3d at 57. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38365 of particular covenants and the with the legal landscape employers Under the final rule’s definition of surrounding market context does not generally face today. The Commission non-compete clause, the same inquiry render this aspect of the final rule nevertheless here responds to comments applies to non-solicitation agreements. overinclusive or vague. Such covenants regarding the restrictive clauses that Non-solicitation agreements are would be subject to case-by-case commenters contended should be generally not non-compete clauses adjudication for whether they constitute expressly addressed in the final rule. under the final rule because, while they an unfair method of competition even in As noted in this Part III.D, restrictive restrict who a worker may contact after the absence of the final rule. employment agreements other than non- they leave their job, they do not by their In response to the comments alleging competes—such as NDAs, non- terms or necessarily in their effect the Commission failed to cite evidence solicitation agreements, and TRAPs—do prevent a worker from seeking or that functional non-competes harm not by their terms or necessarily in their accepting other work or starting a competition, the Commission disagrees. effect prevent a worker from seeking or business. However, non-solicitation This final rule is based on a robust accepting work with a person or agreements can satisfy the definition of evidentiary record that includes operating a business after the worker non-compete clause in §910.1 where significant empirical evidence and leaves their job. For example, a garden- they function to prevent a worker from thousands of public comments, as well variety NDA in which the worker agrees seeking or accepting other work or as the Commission’s longstanding not to disclose certain confidential starting a business after their expertise in evaluating competition information to a competitor would not employment ends. Whether a non- issues. Based on this record, the prevent a worker from seeking work solicitation agreement—or a no-hire Commission finds that non-competes with a competitor or from accepting agreement or a no-business agreement, are restrictive and exclusionary conduct such work after the worker leaves their both of which were referenced by that tends to negatively affect job. Put another way, an NDA would not commenters, as discussed previously— competitive conditions in labor markets be a non-compete under §910.1 where meets this threshold is a fact-specific and markets for products and the NDA’s prohibitions on disclosure do inquiry. The Commission further notes services.343In addition, the Commission not apply to information that (1) arises that—like all the restrictive employment finds that, with respect to workers other from the worker’s general training, agreements described in this Part III.D— than senior executives, non-competes non-solicitation agreements, no-hire, knowledge, skill or experience, gained are exploitative and coercive.344The and no-business agreements are subject on the job or otherwise; or (2) is readily Commission finds that the functional to section 5’s prohibition of unfair ascertainable to other employers or the equivalents of non-competes—because methods of competition, irrespective of general public.345 they prevent workers from engaging in whether they are covered by the final However, NDAs may be non-competes the same types of activity—are likewise rule.
compete clause that reflects the need for 346This example is based on Brown v. TGS related to leaving employment, or to case-by-case consideration of whether Mgmt., 57 Cal. App. 5th at 316–19 (‘‘Collectively, exempt such provisions altogether. The certain restrictive covenants rise to the these overly restrictive provisions [in the NDA at Commission agrees with comments level of being functional non- issue] operate as a de facto noncompete provision; raising substantial concerns about the they plainly bar Brown in perpetuity from doing competes—which is fully consonant any work in the securities field.’’).
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38366 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations potential effects of such agreements on employment restriction. Instead, the this time to enumerate every competitive conditions. As noted in the worker continues to be employed, even circumstance that may arise. As noted, summary of the comments, commenters though the worker’s job duties or access a restrictive employment covenant may cited TRAPs that impose penalties to colleagues or the workplace may be be a non-compete clause under §910.1 disproportionate to the value of training significantly or entirely curtailed. if it expressly prohibits a worker from, workers received and/or that claimed Furthermore, where a worker does not or penalizes a worker for, seeking or training expenses for on-the-job meet a condition to earn a particular accepting other work or starting a training. However, the evidentiary aspect of their expected compensation, business, or if it does not do so record before the Commission like a prerequisite for a bonus, the expressly but is so broad or onerous in principally relates to non-competes, Commission would still consider the scope that it functionally has the same meaning on the present record the arrangement ‘‘garden leave’’ that is not effect of preventing a worker from doing Commission cannot ascertain whether a non-compete clause under this final the same. there are any legitimate uses of TRAPs rule even if the employer did not pay
do not penalize or function to prevent ‘‘prevent’’ with ‘‘restrains’’ or ‘‘limits.’’ Some commenters raised concerns a worker from seeking or accepting work Commenters generally did not express about the cross-border movement of with a person or operating a business concern about the term ‘‘prevent’’ and workers. A research center commenter after the worker leaves their job. For the Commission is concerned that asserted there is a global shortage of example, a provision requiring the different language could greatly expand science and technology workers and repayment of a bonus if the worker the scope of the definition and reduce stated that the final rule’s adoption leaves before a certain period of time its clarity.
condition under which a worker loses consider the primary purpose of a Some commenters argued that legal accrued sick leave when their restrictive employment agreement. The systems in the People’s Republic of employment ends would not function to Commission believes that it can be China or other jurisdictions provide prevent a worker from seeking or difficult to establish an employer’s insufficient protection for U.S. accepting work with a person or subjective ‘‘purpose’’ in entering into an companies’ trade secrets, confidential operating a business after the worker agreement. In addition, such a test could information, or patent rights, and leaves their job. allow extremely overbroad agreements contended employers need non- With respect to garden leave that dramatically restrict a worker’s competes as ex ante protection. These agreements, as noted previously, ability to compete against the commenters generally say that trade commenters used the term ‘‘garden employer—and have the negative effects secrets litigation is more challenging in leave’’ to refer to a wide variety of described in Parts IV.B and IV.C—as some jurisdictions outside the U.S., for agreements. The Commission declines long as the employer entered into the example because of less extensive to opine on how the definition of non- agreement without the subjective intent discovery processes, less frequent use of compete clause in §910.1 would apply to restrict competition. preliminary injunctions, insufficient in every potential factual scenario.
2022.352 working or starting a business outside technology from other governments by Some of these commenters made the U.S. It also clarifies that the final not banning non-competes that restrict recommendations for the final rule. A rule would not invalidate non-competes the movement of workers to and in law firm suggested that the final rule entered into by foreign companies with other jurisdictions, neither the NPRM prevent evasion by barring employers foreign workers unless they restrict a nor the final rule is inconsistent with from selecting the law of non-U.S. worker’s ability to work or start a the BIS rule. The final rule will not jurisdictions to govern employment business inside the U.S. Other questions affect BIS’s ability to grant or decline to contracts with U.S.-based workers. A about the final rule’s application to grant a license. With respect to the trade association requested that the final cross-border or non-U.S. employment commenter that suggested the rule rule cover only agreements subject to are also addressed by the Foreign Trade would violate TRIPS, the Commission the law of a U.S. State. An academic Antitrust Improvements Act, codified at has found that U.S. law provides commenter suggested revisions to the 15 U.S.C. 45(a)(3). alternative means of protecting trade text of the proposed rule to ensure the The Commission agrees with the secrets,354and TRIPS does not require final rule applies only within the U.S. academic commenter that, for non- enforcement of non-competes. The commenter also recommended competes that apply outside the U.S., With respect to the commenter that stating that a non-compete restricting the law of the relevant jurisdiction stated that the final rule should include should govern any issue other than 351Agreement on Trade-Related Aspects of restricting work or starting a business in 353Implementation of Additional Export Controls: Intellectual Property Rights, Apr. 15, 1994, the U.S. However, the Commission Certain Advanced Computing and Semiconductor Marrakesh Agreement Establishing the World Trade Manufacturing Items; Supercomputer and declines to adopt a balancing test for Organization, Annex 1C, sec. 7, art. 39, para. 2, 33 Semiconductor End Use; Entity List Modification, I.L.M. 81 (as amended Jan. 23, 2017). non-competes restricting a worker’s Interim Final Rule, 87 FR 62186 (Oct. 13, 2022). 35250 U.S.C. 1709. ability to work or start a business 354See Part IV.D.2. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38368 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations a choice-of-law provision to prevent potentially ambiguous without pointing workers whereby a worker agrees to evasion, there is an existing body of law to any specific features of the definition. remain employed with an employer for in the U.S. governing choice of law and a fixed term and the employer agrees to
4. Other Issues Relating to the Definition workplace policy, whether written or §910.1(b) defined non-compete clause a. Comments Received oral.’’ The Commission finds that as a contractual term that ‘‘prevents the employers have used restrictions in worker from seeking or accepting While most commenters focused on handbooks, workplace policies, or other employment with a person . . . after the the proposed definition’s application to vehicles that are not formal written conclusion of the worker’s employment functional non-competes or contracts to successfully prevent with the employer.’’ Because, as a international application, some workers from seeking or accepting other technical matter, non-competes can also commenters addressed other issues employment or starting a new business. prevent workers from seeking or relating to the proposed definition. The Commission finds, consistent with accepting future employment with Several commenters stated that the the views expressed by commenters, another person before their work for definition should cover workplace that such restrictions in handbooks, their previous employer has concluded, policies or handbooks, to minimize workplace policies, or other such the Commission has clarified the confusion and make clear that vehicles have the same tendency to relevant language to read ‘‘that prevents employers are prohibited from negatively affect competitive conditions a worker from seeking or accepting work including non-competes in workplace as a formal binding contract term. To in the United States with a different policies or handbooks, even if such provide that such conduct is covered by person where such work would begin clauses are unenforceable because they the definition of non-compete clause, after the conclusion of the employment are not formal binding contracts. Some this language clarifies that the definition that includes the term or condition’’ and commenters stated that such policies or of non-compete clause is not limited to ‘‘that prevents a worker from operating handbooks can affect a worker’s clauses in written, legally enforceable a business in the United States after the decision to leave their job to work with contracts and applies to all forms a non- conclusion of the employment that a competitor or start their own compete might take, including includes the term or condition’’ businesses. Others stated the same about workplace policies or handbooks and (emphases added). oral agreements. One commenter stated informal contracts. Given the comments In addition, in response to comments that the definition should not cover expressing concern about oral expressing concern about evasion of the workplace policies because they apply representations, the Commission rule through third-party hiring,355the only during, not after, employment. clarifies in the definition of non- Commission has revised the phrase compete clause that clauses that purport ‘‘after the conclusion of the worker’s A few commenters said the to bind a worker are covered, whether employment with the employer’’ to read Commission should state explicitly in written or oral, and provides in ‘‘after the conclusion of the employment the definition of ‘‘non-compete clause’’ §910.2(a)(1) and (2) that it is an unfair that includes the term or condition.’’ that restrictions on concurrent method of competition to make The Commission recognizes that non- employment, such as prohibitions on representations that a worker is subject competes can cover workers who are ‘‘moonlighting’’ with competitors, are to a non-compete. (However, as hired by one party but work for another, excluded. Other commenters urged the explained in Part V.C, such such as workers hired through staffing Commission to expand the definition to representations are not prohibited agencies. The Commission intends for include restraints on concurrent where the person has a good-faith basis the final rule to apply to such non- employment because workers often to believe that the final rule is competes, and for this revision to need to take additional jobs during inapplicable.) eliminate any ambiguity as to whether economic downturns, and low-wage The Commission declines to extend such clauses are covered by the workers generally need to take on the reach of the final rule to restraints definition of non-compete clause in additional jobs.
An organized labor commenter argued several commenters raised this issue, With respect to the comment about that no-raid agreements, which the the evidentiary record before the union no-raid agreements, the commenter described as agreements Commission at this time principally Commission notes that the definition between labor organizations not to relates to post-employment restraints, would apply only to the extent the attempt to organize workers already not concurrent-employment restraints. agreement is a ‘‘term or condition of under representation by another union, The fact that the Commission is not employment’’ and only if the agreement should be exempted from the definition. covering concurrent-employment ‘‘prevents a worker from seeking or An industry trade organization asked restraints in this final rule does not accepting work in the United States the Commission to clarify whether the represent a finding or determination as with a different person where such work definition would apply to non-competes to whether these terms are beneficial or would begin after the conclusion of the in agreements between motor carriers harmful to competition. The employment that includes the term or and brokers in the trucking industry. In Commission relatedly clarifies that addition, a few commenters stated that fixed-duration employment contracts, 355These comments are described in greater proposed §910.1(b)(1) was too broad or i.e., contracts between employers and detail in Part III.G. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38369 condition’’ or ‘‘operating a business in F. Definitions Related to Senior to evade the rule’s requirements.363The the United States after the conclusion of Executives Commission explained it had no reason the employment that includes the term to believe non-competes that apply to With respect to existing non- or condition.’’356The Commission’s workers who are treated as independent competes, i.e., non-competes entered understanding is that union no-raid contractors under the FLSA or interns into before the final rule’s effective date, agreements are not terms and conditions the Commission adopts a different tend to negatively affect competitive of employment that prevent workers approach for ‘‘senior executives’’ than conditions to a lesser degree than non- from seeking or accepting work or for other workers. Existing non- competes that apply to employees, and operating a business. competes with senior executives can that such non-competes may, in fact, be more harmful to competition, given that With respect to the comment asking remain in force; the final rule does not these other types of workers tend to whether the definition would apply to cover such agreements.357For workers have shorter working relationships.364 non-competes in agreements between who are not senior executives, existing In addition, the Commission explained motor carriers and brokers in the non-competes are no longer enforceable that the purported business trucking industry, the Commission after the final rule’s effective date.358 justifications for applying non-competes notes as a general matter that the The Commission describes its rationale to independent contractors would not definition would not apply to non- for the final rule’s differential treatment be different or more cognizable from competes between businesses, but the of senior executives in Part IV.C. those related to employees.365 Commission declines to opine on Section 910.1 defines the term ‘‘senior Proposed §910.1(f) also stated the specific factual circumstances. executive’’ as well as related terms. term worker ‘‘does not include a Because the Commission’s rationale for franchisee in the context of a franchisee-
E. Definition of ‘‘Person’’ the final rule’s differential treatment of franchisor relationship.’’366The senior executives provides important The proposed rule did not separately Commission explained that the context for these definitions, the define the term ‘‘person.’’ Instead, relationship between a franchisor and Commission describes these definitions franchisee may in some cases be more proposed §910.1(c)—the proposed in Part IV.C.4. analogous to the relationship between definition of ‘‘employer’’—stated that an employer ‘‘means a person, as defined G. Definition of ‘‘Worker’’ two businesses than the relationship between an employer and a worker, and in 15 U.S.C. 57b–1(a)(6), that hires or
clarifies that only persons within the 357See Part IV.C.3. 366Id. at 3511, 3520. 358See §910.2(a)(1)(i). 367Id.
Commission’s jurisdiction are subject to 359NPRM, proposed §910.1(f). 368Id.
the final rule.
356§910.1. 362Id. 371Id.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38370 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations commenters specifically urged the industry trade organizations and an franchisees to evade the rule’s Commission to adopt a final definition academic commenter stated that requirements. Some commenters that includes all categories of workers independent contractors should be suggested incorporating the ‘‘ABC’’ regardless of whether they are classified excluded from coverage under the rule test—a common law test designed to as employees, including independent to avoid ‘‘free riding,’’ in which a determine whether a worker is an contractors, ‘‘gig’’ workers, and others. contractor working for one firm can use employee based on fact-specific These commenters pointed to the that firm’s assets—like tools or conditions—into the definition of Commission’s preliminary finding that databases—to benefit another firm. ‘‘worker’’ to prevent evasion.372 non-competes are widely used across Several commenters suggested Some commenters requested that the the economy. They cited employers’ changes to the definition of ‘‘worker’’ to Commission revise the definition of frequent misclassification of workers as maximize the rule’s coverage and close ‘‘worker’’ to exclude or include certain independent contractors, agreeing with potential loopholes. One worker workers from coverage under the rule. concerns raised in the NPRM that, if advocacy group noted that, combined These comments are addressed in Part ‘‘worker’’ excludes independent with the proposed definition of IV.C (comments requesting an exclusion contractors, employers may misclassify ‘‘employer,’’ the proposed definition of for senior executives) and in Part V.D workers as independent contractors to ‘‘worker’’—a natural person who works (comments requesting exclusions for avoid complying with the rule. Many ‘‘for an employer’’—appeared to exclude other categories of workers). commenters stated that millions of workers who work for a person other
services outside the scope of their suggested that, for clarity, ‘‘worker’’ The Commission has made two employers’ expertise and thus have should specifically exclude a additional changes to the definition for greater access to sensitive information ‘‘substantial owner, member or partner’’ clarity. First, the Commission has than other workers. Other industry as defined in the sale-of-business revised the phrase ‘‘individual classified organizations contended that small exception. as an independent contractor’’ to businesses employ more independent Several State attorneys general, local ‘‘independent contractor.’’ Second, the contractors than their larger rivals. government commenters, academic Commission has added ‘‘a natural These commenters stated that, to protect commenters, and a worker advocacy person who works for a franchisee or small businesses from being impacted group warned that categorically disproportionately by the rule, the excluding franchisees from the 372See, e.g., Dynamex Operations W. v. Superior definition of ‘‘worker’’ should exclude definition of ‘‘worker’’ would lead Ct., 4 Cal. 5th 903, 955–957 (Cal. 2018). independent contractors. Finally, a few employers to misclassify workers as 373See §910.2(b). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38371 franchisor’’ to the non-exclusive list of independent contractors may have more ‘‘worker’’ could increase employers’ examples of types of workers that would bargaining power vis-a`-vis employers incentive to misclassify workers as be covered by the definition. This than employees do, they do not provide independent contractors. Indeed, language is simply moved from empirical evidence to support that misclassification is often motivated by elsewhere in the definition. Third, the assertion. Furthermore, as described by attempts to evade the application of Commission has removed the sentence a report from the Treasury Department laws. reading ‘‘[n]on-competes between that was based on an extensive literature Because there is no reason to believe franchisors and franchisees would review, independent contractors may non-competes that apply to independent remain subject to Federal antitrust law have less bargaining power than contractors or sole proprietors tend to as well as all other applicable law’’ from employees in many respects.374 negatively affect competitive conditions the definition to avoid the implication The Commission is also not to a lesser degree, or are restrictive, that only such non-competes remain persuaded that non-competes are exclusionary, exploitative, or coercive to subject to Federal antitrust law and necessary to prevent ‘‘free riding’’ by a lesser degree, than non-competes that other applicable law. independent contractors who use one apply to employees—and in light of The Commission declines to specify firm’s assets to benefit another. The substantial evidence of widespread that a ‘‘worker’’ includes an owner who final rule prohibits agreements that employee misclassification—the provides services to or for the benefit of restrain a worker from working after the Commission declines to exclude their business because the definition scope of employment has ended and independent contractors from the already encompasses the same. does not prohibit agreements which definition of ‘‘worker.’’ For this reason, The Commission is not persuaded by prevent a worker from working for two the Commission also declines to commenters’ arguments that firms simultaneously. In addition, any incorporate the ‘‘ABC’’ test or other tests independent contractors or sole ‘‘free riding’’ may be addressed through designed to differentiate between proprietors are inherently different from less restrictive means, including independent contractors and employees.
other kinds of workers with respect to through agreements prohibiting an non-competes, and therefore declines to independent contractor from using IV. Section 910.2: Unfair Methods of exclude them from the definition of assets provided by one firm to benefit Competition ‘‘worker.’’ Commenters did not present another.
to other workers. As noted by employ more independent contractors However, the Commission sought commenters who supported including than larger ones.
independent contractors, non-competes’ The Commission agrees with the comment on whether it should adopt tendency to negatively affect commenters who contended that different standards for non-competes competitive conditions by restricting excluding independent contractors may with senior executives, and, if so, how workers’ ability to change jobs or start have the effect of excluding it should define senior executives.376 businesses is not contingent on whether misclassified workers, who may be Based on the totality of the evidence, the worker is an employee or an among the most vulnerable to including its review of the empirical independent contractor. While some exploitation and coercion. The recent literature, its review of the full comment commenters contended that overview by the U.S. Department of record, and its expertise in identifying independent contractors have more Labor (‘‘DOL’’) of the evidence on practices that harm competition, the independence and more access to misclassification led it to conclude that Commission in this final rule finds that intellectual property than other workers, although the prevalence of non-competes with all workers are an commenters did not provide evidence misclassification of employees as unfair method of competition—although that this is the case. Moreover, even independent contractors is unclear, its rationale differs with respect to were this to be true, it would not justify there is evidence that it is nonetheless workers who are and are not senior an exclusion, because the Commission ‘‘substantial’’ and has a disproportionate executives. generally declines to exclude workers effect on workers who are people of The final rule provides that it is an based on their access to intellectual color or immigrants because of the unfair method of competition—and capital or their independence for the disparity in occupations most affected therefore a violation of section 5—for reasons explained in Part V.D. by misclassification, which include jobs employers to, inter alia, enter into non- Furthermore, whether a worker is an in construction, trucking, delivery, competes with workers on or after the employee or an independent contractor home care, agriculture, personal care, final rule’s effective date.377The does not impact employers’ ability to ride-hailing services, and janitorial and Commission thus adopts a exploit imbalances of bargaining power building services.375The Commission comprehensive ban on new non- or limit employers’ ability to use less also agrees with commenters’ competes with all workers. With respect restrictive alternatives to non-competes contentions that excluding independent to existing non-competes, i.e., non- to protect their intellectual property. contractors from the definition of competes entered into before the final While commenters who supported rule’s effective date, the Commission excluding independent contractors 374U.S. Treasury Dep’t, Report, The State of adopts a different approach for senior contended that independent contractors Labor Market Competition (Mar. 7, 2022) executives378than for other workers. have more bargaining power than other (hereinafter ‘‘Treasury Labor Market Competition Report’’).
workers, this contention is not backed 375Employee or Independent Contractor 376NPRM at 3519.
by evidence. While some economists Classification Under the Fair Labor Standards Act, 377See §910.2(a)(1)(i) and §910.2(a)(2)(i). hypothesize that, theoretically, 89 FR 1638, 1735 (Jan. 10, 2024). 378See §910.1 (defining ‘‘senior executive’’). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38372 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations Existing non-competes with senior competitive conditions in product and the effects of non-competes vary widely. executives can remain in force; the final service markets. In this final rule, based on the rule does not cover them.379For • The use of non-competes is Commission’s longstanding expertise workers who are not senior executives, restrictive and exclusionary conduct assessing empirical evidence relating to existing non-competes are no longer that tends to negatively affect the effects of various practices on enforceable after the final rule’s competitive conditions in labor markets. competition, the Commission gives effective date.380Employers must The final rule allows existing non- more weight to studies with provide such workers with existing non- competes with senior executives to methodologies that it finds are more competes notice that the non-competes remain in force. Because the harm of likely to yield accurate, reliable, and will not be enforced after the final rule’s these non-competes is principally that precise results. In evaluating studies, effective date.381 they tend to negatively affect the Commission utilized the following Specifically, with respect to workers competitive conditions (rather than five principles that reflect best practices who are not senior executives, the exploiting or coercing the executives in the economic literature. Commission determines that it is an themselves), and due to practical First, the Commission gives more unfair method of competition for a concerns with extinguishing existing weight to studies examining the effects person to enter into or attempt to enter non-competes for such executives, the of a change in legal status or a change into a non-compete clause; enforce or final rule prohibits employers only from in the enforceability of non-competes, attempt to enforce a non-compete entering into or enforcing new non- and less weight to studies that simply clause; or represent to the worker that competes with senior executives. compare differences between workers the worker is subject to a non-compete Parts IV.B and IV.C set forth the who are subject to non-competes and clause.382The Commission finds that findings that provide the basis for the those who are not. Studies that look at with respect to these workers, these Commission’s determinations that the what happens before and after a change practices are unfair methods of foregoing practices are unfair methods in State law that affects the competition in several independent of competition under section 5 for these enforceability of non-competes provide ways: two categories of workers, a reliable way to study the effects of the • The use of non-competes is respectively.383In these sections, the change. This is especially true when restrictive and exclusionary conduct Commission also describes and only the enforceability of non-competes that tends to negatively affect responds to comments regarding the changes, and not other factors affecting competitive conditions in labor markets. preliminary findings in the NPRM that firms and workers. If other substantial • The use of non-competes is informed its preliminary determinations changes do not also occur around the restrictive and exclusionary conduct related to unfair methods of same time, this study design often that tends to negatively affect competition. allows the researcher to infer that the competitive conditions in product and change caused the effects—since the service markets. 2. Analytical Framework for Assessing likelihood that confounding variables • The use of non-competes is Empirical Evidence are driving the effects or outcomes is exploitative and coercive conduct that Before turning to the basis for its minimal.386 tends to negatively affect competitive findings, the Commission describes the In contrast, other studies of the use of conditions in labor markets. analytical framework it has applied in non-competes compare a sample of • The use of non-competes is assessing the empirical evidence on workers who are subject to non- exploitative and coercive conduct that non-competes. In the NPRM, the competes with a sample of workers who tends to negatively affect competitive Commission discussed the existing are not subject to non-competes. The conditions in product and service empirical literature on non-competes shortcoming of these studies is that they markets. and its assessment of those studies, cannot easily differentiate between In contrast, with respect to senior including its preliminary view of which correlation and causation. For example, executives, the Commission determines studies were more robust and thus if such a study shows that workers with that it is an unfair method of should be given more weight.384In non-competes earn more, there could be competition for a person to enter into or response, some commenters argued the many confounding reasons for this attempt to enter into a non-compete Commission gave too much weight to result. For example, employers may be clause; enforce or attempt to enforce a certain studies or too little weight to more likely to enter into non-competes non-compete clause entered into after others.385 with workers who earn more. In the effective date; or represent that the The Commission notes that the contrast, a study showing that workers’ senior executive is subject to a non- methodologies of empirical studies on earnings increase or decrease when non- compete clause, where the non-compete clause was entered into after the 383In addition to the findings described in Parts 386In Parts IV.B and C, the Commission describes how these ‘‘enforceability’’ studies show that effective date. The Commission does not IV.B and C, the Commission finds that the use of increased enforceability of non-competes results in find that non-competes with senior non-competes by employers substantially affects various harms, such as reduced earnings, new commerce as that term is defined in section 5 and executives are exploitative and coercive. business formation, and innovation. Notably, the burdens a not insubstantial portion of commerce.
With respect to senior executives, the The findings in Parts IV.B and C apply with respect available evidence also shows that workers are chilled from engaging in competitive activity even Commission finds that non-competes to senior executives and other workers, whether where a non-compete is likely unenforceable—for are unfair methods of competition in considered together or respectively. The evidence example, because they are unaware of the law or establishes that non-competes affect labor mobility, two independent ways: unable to afford a legal battle against the employer. • The use of non-competes is w in o n r o k v e a r t s i ’ o e n a , r i n n i c n l g u s d , i n n e g w e m bu p s i i r n ic e a s l s e fo v r id m e a n t c io e n , and S n e o e t a P d a j r u t s I t V t . h B e . i 3 r . a b . e i. h T av h i e o f r a i c n t r th es a p t o m n a s n e y t o w c o h r a k n e g rs e s m i a n y restrictive and exclusionary conduct specifically identifying cross-border effects with State-level enforceability of non-competes suggests that tends to negatively affect respect to earnings, see infra notes 464–468 and that the final rule could result in even greater accompanying text, and innovation, see infra note effects than those observed in the research, 563 and accompanying text. particularly because it would require employers to 379See Part IV.C.3. 384See NPRM at 3484–93. provide workers with notice that their non-compete 380See §910.2(a)(1)(ii) and §910.2(a)(1)(iii). 385The Commission discusses comments is no longer in effect, which would help correct for 381See §910.2(b). addressing specific studies in Parts IV.B, IV.C, and workers’ lack of knowledge of the law. See 382See §910.2(a)(1). IV.D. §910.2(b).
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38373 competes are made more or less compared—‘‘use’’ studies are inherently enforceability overall (e.g., scales which enforceable provides much stronger unreliable due to confounding effects. simply assign States to ‘‘enforcing’’ or evidence regarding the effect of non- For example, because employers enter ‘‘non-enforcing’’ categories) and for competes, in isolation. Researchers into non-competes more often with elements of enforceability (e.g., scales studying non-competes are aware of this highly paid workers, all ‘‘use’’ studies which assess whether a non-compete is bias and frequently caution that related to worker earnings are enforceable if a worker is fired with a estimates of the correlation between inherently unreliable, although studies yes or no answer). While no scale is outcomes and the use of non-competes that utilize data on the use of non- perfect, scales which allow for should not be misinterpreted as competes but employ a design that multidimensionality and granularity causal.387 plausibly identifies a causal effect may measure non-compete enforceability Second, the Commission gives more be less unreliable. (and thus the effects that stem from it) weight to studies examining the effects Third, the Commission gives more with a higher degree of accuracy.389 of changes in non-compete weight to studies assessing changes in Fifth, the Commission gives more enforceability and less weight to studies the enforceability of non-competes in weight to studies in which the outcome that simply compare economic multiple States. This reduces the studied by the researchers is the same outcomes between States where non- possibility that the observed change in as the outcome the Commission is competes are more enforceable and economic outcomes was driven by an interested in or is an effective proxy for States where non-competes are less idiosyncratic factor unique to a the outcome the Commission is enforceable. This latter category of particular State. For example, assume interested in. It gives less weight to studies is known as ‘‘cross-sectional State X changed its laws to make non- studies that use ineffective proxies. For studies of enforceability.’’ Like studies competes less enforceable, and new example, some outcomes are relatively based on the use of non-competes, these business formation subsequently easy to study. There is extensive data on cross-sectional studies of enforceability increased compared with other States. workers’ earnings at the State level, so cannot easily differentiate between However, around the same time it researchers can simply use this data to correlation and causation. This is changed its non-compete law, State X study how changes in non-compete because differences between States that also enacted legislation to provide enforceability affect workers’ earnings are unrelated to non-competes and their attractive tax incentives to in a State. Other outcomes, however, enforceability can easily pollute entrepreneurs. It would be difficult to may be more challenging to quantify comparisons. For example, non- isolate the effect of the change in non- directly, and thus researchers may use competes are less enforceable in compete law from the effect of the tax proxies for understanding the effect they California than in Mississippi, and the law change. For this reason, the are studying. For example, there is no cost of living is higher in California than Commission gives more weight to single metric that measures innovation in Mississippi. However, the difference studies that analyze the effects of in the economy. For this reason, to learn in the cost of living is likely to be due multiple changes in enforceability. For about how non-competes affect to underlying differences between the example, if a study shows that, innovation, a researcher might study the economies and geographies of the two compared with other States that did not effect of changes in non-compete States, rather than being attributable to change their non-compete laws, new enforceability on the number of patents non-competes. In contrast, studies business formation rose not only in issued in the State as a proxy for examining how changes in State X, but also in several other States innovation. However, proxies can enforceability of non-competes affect that changed their laws to make non- sometimes be ineffective or inapt. For various outcomes—studies that look at competes less enforceable, the example, a study that analyzes the effect what happens within States before and Commission would be more confident of non-compete enforceability on the after a change in State law that affects inferring that changes in non-compete number of patents issued is generally a the enforceability of non-competes— law caused these effects. weaker proxy for innovation than a allow researchers to infer that the Fourth, the Commission gives more study that also takes into account the change caused the effects.388 weight to studies that use sophisticated, quality of patents issued. For this Despite having this limitation, the nuanced measures of enforceability, reason, the Commission gives more Commission believes that cross- such as non-binary measures of non- weight to studies that measure the exact sectional studies of enforceability are compete enforceability that capture outcome of interest or studies that use still superior to the ‘‘use’’ studies multiple dimensions of non-compete effective proxies.
described under the first principle. This enforceability. This fourth guiding While these five guiding principles is because although comparisons of principle ensures accuracy and are important indicators of the relative different States may have unreliable granularity in the measurement of non- strength of empirical studies evaluated results due to confounding variables— compete enforceability. by the Commission for the purpose of depending on which States are A variety of different factors affect the this final rule, the Commission’s enforceability of non-competes from assessment of empirical studies was 387See, e.g., Starr, Prescott, & Bishara, supra note State to State, including (among others) holistic and relied on its economic 68 at 73 (‘‘Our analysis of the relationships between the permissible geographic scope and expertise. In addition to the guiding noncompete use and labor market outcomes . . . is duration of non-competes and how high best taken as descriptive and should not be principles described in this Part IV.A.2, the employer’s burden of proof is to interpreted causally.’’); Johnson & Lipsitz, supra the Commission’s holistic, expert note 80 at 711 (‘‘These regressions [of firm establish that a non-compete is assessment of the empirical evidence investment on non-compete use] should be enforceable. Given the different factors interpreted as correlations rather than causation, involved, the overall level of non- also included considering since the decisions to make these investments and characteristics of studies important in compete enforceability from State to use [non-competes] are made jointly.’’). any context, such as data quality, 388Matthew S. Johnson, Kurt J. Lavetti, & Michael State falls along a spectrum; it is not as statistical precision, and other factors. Lipsitz, The Labor Market Effects of Legal simple as whether non-competes are Restrictions on Worker Mobility, Nat’l Bureau of enforceable or not. Thus, scales which Econ. Rsch. 2 (2023) (‘‘. . . cross-sectional variation 389Jonathan M. Barnett & Ted Sichelman, The use binary measures miss nuance in enforceability might be correlated with other Case for Noncompetes, 87 U. Chi. L. Rev. 953 unobserved differences across states.’’). between States. This is true for (2020). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38374 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations In some instances, the Commission 1. The Commission Finds That Non- The restrictions that non-competes cites studies beyond those discussed in Competes Are a Method of Competition, impose on workers are often substantial. the NPRM. The Commission cites such Not a Condition of the Marketplace Non-competes can severely restrict a studies only where they check or worker’s ability to compete against a With respect to the first element, confirm analyses discussed in the whether the conduct is a method of former employer. For most workers, the NPRM, or where the Commission is competition, the Commission most natural alternative employment responding to comments raising them. preliminarily found in the NPRM that options are jobs in the same geographic The Commission’s findings do not rest non-competes are a method of area and in the same field. These are the on these studies, however, and they are competition under section 5 because very jobs that non-competes typically not necessary to support its findings. they are specific conduct undertaken by prevent workers from taking.
B. Section 910.2(a)(1): Unfair Methods an actor in a marketplace, as opposed to Furthermore, for most workers, the most of Competition—Non-Competes With merely a condition of the practical entrepreneurship option is Workers Other Than Senior Executives marketplace.392No commenters starting a business in the same field. disagreed with this finding, and the This is the very opportunity that non- The Commission now turns to the Commission reaffirms its preliminary competes typically prevent workers basis for its findings that non-competes finding that non-competes are a method from pursuing. Moreover, the record with workers other than senior of competition. before the Commission reflects that non- executives are an unfair method of competes are often so broad as to force competition. As explained in Part II.F, 2. The Commission Finds That Non- a worker to sit out of the labor market under section 5, the Commission Competes Are Facially Unfair Conduct altogether.
assesses two elements: (1) whether the The Commission finds that non- In the NPRM, the Commission used conduct is a method of competition, as competes are facially unfair conduct the term ‘‘restrictive’’ to encompass both opposed to a condition of the under section 5 because they are restrictive and exclusionary conduct.396 marketplace, and (2) whether it is restrictive and exclusionary. The In this final rule, in addition to finding unfair, meaning that it goes beyond Commission further finds that non- that they are restrictive conduct, the competition on the merits. The latter competes are facially unfair under Commission separately finds that non- inquiry has two components: (a)
they are restrictive and exclusionary, non-competes are restrictive conduct.394 For the foregoing reasons, the and because they are exploitative and No commenters disputed this analysis, Commission finds that the use of non- coercive. And as described in Part and the Commission reaffirms its competes with workers other than IV.B.3, such non-competes tend to preliminary finding that non-competes senior executives is facially unfair negatively affect competitive conditions are restrictive. under section 5 because it is conduct in labor markets and markets for The restrictive nature of non- that is restrictive or exclusionary. products and services. As explained in competes is evident from their name Part II.F, the legal standard for an unfair and function: non-competes restrict b. Non-Competes Are Exploitative and method of competition under section 5 competitive activity. They do so by Coercive Conduct requires only a tendency to negatively restricting a worker’s ability to seek or Conduct may violate section 5 where affect competitive conditions. The accept other work or start a business it is exploitative or coercive and tends inquiry does not turn on whether the after the worker leaves their job, and by to negatively affect competitive conduct directly caused actual harm in restricting competitors from hiring that conditions.397Indeed, where conduct is a specific instance. Here, the tendency worker. Because non-competes facially exploitative or coercive, it evidences of non-competes to impair competition restrict competitive activity, courts have is obvious from their nature and long held they are restraints of trade and violated Sections 1 and 2 of the Sherman Act due function. And even if this tendency proper subjects for scrutiny under the to the collective effect of six of the companies’ were not facially obvious, the evidence antitrust laws.395 practices, one of which was the ‘‘constantly confirms that non-competes do in fact recurring’’ use of non-competes); Newburger, Loeb & Co., Inc., 563 F.2d 1057, 1082 (2d Cir.)
have a negative effect on competitive analyze non-competes with particular populations (‘‘Although such issues have not often been raised conditions. of workers. In each of the studies described in Part in the federal courts, employee agreements not to The Commission finds that the IV.B, non-competes with workers other than senior compete are proper subjects for scrutiny under empirical research described in this Part executives represented a large enough segment of section 1 of the Sherman Act. When a company IV.B supports findings related to the sample that the study supports findings related interferes with free competition for one of its former to the effects of non-competes for such workers. employee’s services, the market’s ability to achieve workers other than senior executives.391 Studies that focus primarily on non-competes for the most economically efficient allocation of labor senior executives are described in Part IV.C, which is impaired. Moreover, employee-noncompetition 390For the sake of readability, in this Part IV.B, explains the Commission’s findings related to non- clauses can tie up industry expertise and the Commission refers to non-competes with competes with senior executives. experience and thereby forestall new entry.’’) workers other than senior executives as ‘‘non- 392NPRM at 3504. (internal citation omitted). competes.’’ 393See Part II.F. 396NPRM at 3500 (‘‘Non-competes also restrict 391Some of the studies described in Part IV.B 394NPRM at 3500. rivals from competing against the employer to analyze non-competes between employers and 395See, e.g., Am. Tobacco Co., 221 U.S. 106, 181– attract their workers.’’). workers across the labor force. Other studies 83 (1911) (holding that several tobacco companies 397See Part II.F. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38375 clear indicia of unfairness, and less may were experienced in, damaging or As the report notes, some of these be necessary to show a tendency to derailing their careers; into moving factors are inherent in the firm-worker negatively affect competitive away from their home, uprooting or relationship. The report states that conditions.398 separating their families; or into workers are at an informational In the NPRM, the Commission enduring long-distance commutes, disadvantage relative to firms, often not preliminarily found that non-competes which made it harder to care for and knowing what other workers earn or the with workers other than senior spend precious time with their loved competitive wages for their labor.403 executives were exploitative and ones. Many workers described how this The report states further that workers coercive because in imposing them on fear hung above them even if they often have limited or no ability to workers, employers take advantage of thought the non-compete was overbroad switch locations and occupations their unequal bargaining power.399The and probably unenforceable under State quickly and may lack the financial Commission also preliminarily found law, because having to defend a lawsuit resources to support themselves while that non-competes are exploitative and from an employer for any length of time they search for jobs that pay more and coercive at the time of the worker’s would devastate their finances. better match their skills and abilities.404 potential departure, because they force Based on the entirety of the record, for According to the report, these a worker to either stay in a job the the following reasons, the Commission conditions often enable firms to exert worker wants to leave or force the finds non-competes with workers other market power even in labor markets that worker to bear other significant harms than senior executives are exploitative are not highly concentrated.405 and costs, such as leaving the workforce In addition to factors inherent to the and coercive because they are or their field for a period of time; employer-worker relationship, the unilaterally imposed by a party with relocating to a different area; violating report concludes that firms use a wide superior bargaining power, typically the non-compete and facing the risk of range of practices to restrain without meaningful negotiation or expensive and protracted litigation; or competition for workers, including compensation, and because they trap attempting to pay the employer to waive sharing wage information and workers in worse jobs or otherwise force the non-compete.400 conspiring to fix wages with other firms; workers to bear significant harms and The Commission received an agreeing not to hire other firms’ costs.
outpouring of comments on the question workers; and adopting non-competes, of whether non-competes were i. Non-Competes With Workers Other mandatory arbitration agreements, and exploitative or coercive. Thousands of Than Senior Executives Are Unilaterally overbroad NDAs.406The report also workers described non-competes as Imposed states that practices such as outsourcing pernicious forces in their lives that took and worker misclassification have The Commission finds that employers advantage of their lack of bargaining further diminished workers’ market almost always unilaterally impose non- power and forced them to make choices power.407Overall, the report finds that competes, exploiting their superior detrimental to their finances, their employers’ labor market power has bargaining power to impose—without careers, and their families. Above all, resulted in a 20% decrease in wages any meaningful negotiation or the predominant themes that emerged relative to the level in a fully compensation—significant restrictions from the comments were powerlessness competitive market.408 on workers’ abilities to leave for better and fear. The Commission finds that employers jobs or to engage in competitive activity.
that even where they wanted a job with The Treasury Department, in a report 404Id. better pay or working conditions, or to based on an extensive literature review, 405Id. strike out on their own, the fear of finds that firms generally have 406Id. 407Id. at ii.
litigation from a deep-pocketed considerable labor market power.401The 408Id.
employer or the fear of being without report states that concentration in 409See, e.g., Samuel Stores, Inc. v. Abrams, 108 work prevented them from doing so. particular industries and locations can A. 541, 543 (Conn. 1919); Sunder Energy, LLC v. Hundreds of workers described how this increase employers’ labor market Jackson, 305 A.3d 723, 753 (Del. Ct. Chancery fear coerced them into remaining in jobs power.402However, the report explains 2023). 410Starr, Prescott, & Bishara, supra note 68 at 72 with poor conditions or pay, including that, even in the absence of (‘‘Taken together, the evidence in this section dangerous or toxic work environments; concentration, firms have significant indicates that employers present (or employees into leaving an industry or profession labor market power due to a variety of receive) noncompete proposals as take-it-or-leave-it that they invested, trained, studied, or factors. propositions.’’). 411See, e.g., Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38377 compete. Very few workers said they Few workers who submitted and workers and force workers to stay were able to decline signing a non- comments reported being compensated in jobs they want to leave or otherwise compete and still be hired or employed. for signing a non-compete. Among those bear significant harms or costs. It also An employment law firm also agreed workers who did report receiving does not alter the Commission’s concern with the Commission and stated that compensation, most still said they that non-competes tend to negatively non-competes are rarely subject to considered their non-competes to be affect competitive conditions. Moreover, negotiation. exploitative or coercive. For example, the Commission notes that the available Confirming the research described in some workers said they were laid off evidence indicates that many workers this Part IV.B.2.b.i, many workers— and then required to sign a non-compete are not aware of the applicable law including highly paid and highly skilled as a condition for receiving severance. A governing non-competes or their rights workers—stated that they did not few workers said their employer had under those laws.425In addition, many receive notice that they would be threatened to withhold their commenters stated that non-competes required to sign a non-compete until commissions and/or pay on departure if were not disclosed to them before they after accepting a job offer. Some workers they did not sign a non-compete. One started their job. Furthermore, the said they were told of the non-compete worker reported never receiving the Commission addresses why trade secret after accepting the job but before compensation associated with a non- law is a less restrictive alternative for starting work. Many workers who compete, because they were terminated protect employers’ legitimate interests described when they were notified of a two months after signing. in Part IV.D.2. non-compete said it was on their first In addition, the Commission finds A few commenters stated that unequal day of work or even later. Many workers that employers frequently impose non- bargaining power does not constitute an stated that they were required to sign competes even when they are unfair method of competition. In their non-compete after a merger or unenforceable under State law. An response, the Commission notes that it acquisition—i.e., after they were already economist suggested that non-competes does not find that unequal bargaining on the job but there was a change in may be used in States in which they are power itself is an unfair method of ownership of the company. For unenforceable because the employer competition; rather, unequal bargaining example, a trade organization stated that hopes the State’s policy might change, power informs its analysis of it is common for the purchaser of a or the employer might be able to forum- exploitation and coercion.
business to impose non-competes on its shop to apply the law of another The comment record indicates that workers, which may trap workers in an jurisdiction more favorable to non- while some highly paid workers may organization different from the one they competes. Some commenters stated that seek the assistance of counsel when originally agreed to work for. An firms may remind workers they are negotiating non-competes, many do not.
employment law firm commented that subject to a non-compete upon Commenters did not present studies or even highly paid or highly skilled departure even when those non- other quantitative evidence that workers do not always receive notice of competes are unenforceable because undermines the finding in Starr, non-competes with the employment they hope that workers and competitors Prescott, & Bishara that less than 8% of offer. will abide by them.
ii. Non-Competes With Workers Other another local station. . . . [E]ven if these medical scribe. Originally she was working Than Senior Executives Trap Workers in clauses are unenforceable, as we’ve all heard with a medical scribe company in Indiana Jobs or Force Them to Otherwise Bear before, who can afford the legal prior to Covid. Due to COVID and graduating representation to go up against a corporation from college she then moved to our home in Significant Harms and Costs and their lawyers when the lawsuit threat Oregon. She applied for a medical scribe job The Commission finds that non- comes? My life would have been very in Oregon with a company that did not competes are exploitative and coercive different if I weren’t trapped by non- provide any scribe services in Indiana. But because they force workers to either stay competes at points in my career.428 her original scribe company had 1 ‘‘office’’ • As a veterinarian I support the they were providing scribe services to in in jobs they want to leave or bear other elimination of non-compete agreements. In Salem, Oregon. My daughter had applied significant harms and costs, such as our profession they still are overwhelmingly with the local scribe company to provide leaving the workforce or their field for the normal expectation with contracts. . . . services but when examined further found a period of time; relocating out of their [C]ompanies use the fear of litigation to that her original scribe company from area; or violating the non-compete and enforce them. As veterinary medicine very Indiana was going to enforce a $5000 non- facing the risk of expensive and quickly becomes more corporate owned, compete buy-out fee on her to provide the protracted litigation. In addition, the basically they pit us as a singular employee services in Salem, Oregon that were within Commission finds non-competes exert a against large corporations that have the sphere of restriction for her ‘‘new’’ local substantial means both financially and scribe opportunity.432 powerful in terrorem effect: they trap legally. No reasonable employee wants to workers in jobs and force them to bear Many commenters explained that take on that battle or even can financially these harms and costs even where take on that battle. So regardless if the non-competes forced them to relocate workers believe the non-competes are clauses are ‘unenforceable’ they are enforced and described the toll the relocation overbroad and unenforceable, due to via intimidation. . . . When [my] job was a took on their families. Other workers’ fear that having to defend a terrible fit and my boss ultimately ended up commenters stated that their families lawsuit from their employer for any ‘not renewing my contract’ I was still left have been forced to live apart, or they length of time would devastate their with a noncompete. This basically eliminated had been separated from elderly finances or ruin their professional my ability to work within a reasonable relatives, due to a non-compete forcing distance of our home. I ended up commuting reputations. an hour and 15 minutes one way for 10 the relocation of one of the family The comment record provides strong months until my husband, myself, and my members. Many commenters described support for this finding. Many workers very young child were able to move closer to how long commutes undertaken to submitted comments supportive of the my new job. While it was likely legally avoid non-competes increased Commission’s preliminary finding that unreasonable in nature, I did not have the transportation costs and caused the non-competes coerce workers into resources financially to even consider the worker to lose precious time with their remaining in their current jobs. Many legal battle that would have had to happen families. workers reported staying in their jobs for reconsideration and I desperately needed The comment record bolsters the because they feared harm to their a d n e b i t n t c h o a m t e c o to m c e o s n w ti i n th u e b e to in p g a a y y t o h u e n s g tu d d o e c n t t o r. Commission’s finding that employers careers if they were forced out of their Furthermore I had a baby that needed my wield non-competes to coerce and exploit workers into refraining from field; feared having to relocate or endure focus as well.429 a lengthy commute due to a non- • I was fired unjustly 11/2021 for competitive activity even where non- compete; or feared their non-competes declining the Covid vaccine. My medical and competes are unenforceable. Many religious exemptions were both denied. In workers explained that they—and others would cause them to be unemployed if addition to this, I was required by my former in their industry—abided by non- they left. Several workers reported they employer contract to abide by the two-year competes, even where they believed the were unable to take a specific desired 10 mile restrictive covenant. This greatly non-compete was overbroad and likely job because of a non-compete. Many hindered my ability to find employment, and unenforceable. According to a law firm workers recounted how non-competes I was out of work for approximately three specializing in executive compensation, trapped them in jobs with poor working months. I could only find part-time work for conditions or where they were subject to a fraction of my former salary. Had I not had even workers who can afford counsel illegal conduct, including sexual the noncompete clause, I could have found may be unwilling to mount a long and a full-time job almost immediately.430 uncertain legal battle to challenge a non- harassment.427Some workers said they • Unfortunately, the average dental school compete. The firm said employers were subject to particularly broad, even graduate has nearly $300,000 in student loan almost always have deeper pockets and global, non-competes, meaning leaving debt, and most new dentists are unable to more access to counsel than individual their field was their only option if they make their practice-ownership dreams a workers, making workers more reluctant left their current job. These comments reality immediately after residency. Thus, we to litigate. Commenters further stated spanned both lower-wage workers and rely on entry-level associate dentist positions workers in high-wage industries. to gain experience, pay off debt, and become that employers may be able to deduct Illustrative examples of the comments fiscally/professionally prepared to become litigation costs as a business expense, practice owners. Much to my dismay, upon giving them the wherewithal to enforce the Commission received include the interviewing for my first associate dentist their non-competes. following:
with a 35% decrease in the likelihood on Hawaii’s ban of non-competes for that a worker would leave for a Additionally, the record is replete high-tech workers and find that the ban competitor.446While this finding is with examples of commenters who increased mobility by 12.5%.451Lipsitz based on the use of non-competes (and and Starr, in 2022, focused on Oregon’s recounted personal stories that accord is accordingly given less weight), the ban of non-competes for hourly workers with the empirical literature. The authors also survey workers, who report and find that mobility increased by Commission received comments from that the cause of their reduced mobility 17.3%.452 several thousand individual workers is their non-compete. The study finds stating that their mobility is or has been that the mechanism underlying reduced Comments Pertaining to Labor Mobility restricted by a non-compete. While mobility is not whether non-competes Evidence and Commission Responses some commenters who opposed the are legally enforceable or not, but rather, The Commission’s finding that non- proposed rule disputed that non- it is the worker’s belief about the competes suppress labor mobility is competes prevent workers from finding likelihood that their employer would principally based on the empirical other jobs in their industry, the seek to enforce a non-compete. Workers evidence described in this Part Commission finds the weight of the who did not believe that employers IV.B.3.a.i. However, the comments evidence clearly demonstrates a would enforce non-competes in court provide strong qualitative evidence that were more likely to report they would significant effect on labor mobility. bolsters this finding.
be willing to leave for a competitor.447 The Commission further notes that Many commenters agreed with the This study thus not only supports the Commission’s preliminary finding that many commenters’ submissions Commission’s finding that the use of non-competes suppress labor mobility substantiated its finding that non- non-competes impacts labor mobility, and stated that this reduction in labor competes can have an in terrorem effect but also supports the Commission’s mobility leads to less labor market on labor mobility even where they finding that non-competes can exert an competition and poorer wages and would not ultimately be enforceable in in terrorem effect on labor mobility even working conditions. court.453As many commenters where they are unenforceable.448This In response to the NPRM’s discussion explained, the high costs and supports the need to ensure that of this literature, some commenters complexities of non-compete litigation questioned the adequacy of the studies. can have a chilling effect on workers version of the study reports results slightly For example, one commenter stated that and thus reduce worker mobility differently than the 2022 version cited in the NPRM, but the analysis and results themselves do regardless of whether a court would not meaningfully change. Accordingly, the update 449See Part IV.E (describing the final rule’s notice enforce the non-compete. For this to Johnson, Lavetti, and Lipsitz does not materially requirement). reason, the very existence of a non- affect the Commission’s analysis of the study. 450Jessica S. Jeffers, The Impact of Restricting compete is likely to deter workers from 444Id. at 21. Labor Mobility on Corporate Investment and 445Evan Starr, Consider This: Training, Wages, Entrepreneurship, 37 Rev. Fin. Stud. 1 (2024). The switching jobs or starting their own and the Enforceability of Covenants Not to 2024 version of Jeffers’ paper finds a decline in the business, even if it would ultimately not Compete, 72 I.L.R. Rev. 783 (2019). The value is departure rate of 7% of the sample mean, and a be enforced. This supports the calculated as 8.2% = 0.56/6.46, where 0.56 is the decline in the within-industry departure rate of reported impact on tenure and 6.46 is mean tenure 10%. Commission’s view that not only should in the sample. 451Natarajan Balasubramanian, Jin Woo Chang, non-competes’ enforcement be 446Evan Starr, J.J. Prescott, & Norman Bishara, Mariko Sakakibara, Jagadeesh Sivadasan, & Evan prohibited, it is also important to The Behavioral Effects of (Unenforceable) Starr, Locked In? The Enforceability of Covenants provide a readily understandable, Contracts, 36 J. L., Econ., & Org. 633, 652 (2020). Not to Compete and the Careers of High-Tech 447Id. at 664. Workers, 57 J. Hum. Res. S349, S351 (2022). 448See Part IV.B.2.b.ii. 452Lipsitz & Starr, supra note 72 at 157. 453See Part IV.B.2.b.ii. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38382 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations uniform Federal approach, and notice to subject to non-competes.456Several Furthermore, a study conducted by workers of unenforceability.454 major empirical studies of how changes Evan Starr estimates that earnings fall Some commenters who generally in non-compete enforceability affect by about 4% where a State shifts its opposed the rule questioned the virtue workers’ earnings show that increased policy from non-enforcement of non- of labor mobility, arguing that when enforceability of non-competes competes to a higher level of colleagues leave, remaining workers can suppresses workers’ earnings. enforceability.461This study covers a experience increased workloads or harm A study conducted by Johnson, sample which is broadly representative to their employer. However, this Lavetti, and Lipsitz finds that non- of the entire labor force from 1996 to comment ignores the benefits that will competes limit workers’ ability to 2008. Unlike many of the other studies also accrue from those same firms leverage favorable labor markets to described in this Part IV.B.3, this study having more ready access to incoming receive greater pay.457The authors find does not use a change in enforceability potential colleagues as well. The that when non-competes are more of non-competes to analyze the impact Commission also notes that unfair enforceable, workers’ earnings are less of enforceability. Rather, it examines the conduct cannot be justified on the basis responsive to low unemployment rates, differential impact of enforceability on that it provides the firm undertaking the which workers typically leverage to workers in occupations that use non- conduct with pecuniary benefits.455 negotiate pay raises. The authors competes at a high rate versus workers Some commenters argued labor estimate that a nationwide ban on non- in occupations that use non-competes at mobility has generally been increasing competes would increase average a low rate. As described in Part IV.A.2, in the U.S. labor market. Setting aside earnings by approximately 3–14%.458Of studies comparing differential usage of whether this is true, it is not probative the studies of how non-competes affect non-competes are generally less of whether the practice of using non- earnings, this study has the broadest informative than studies examining competes reduces labor mobility or coverage. It spans the years 1991 to changes in enforceability, although in negatively affects labor market 2014, examines workers across the labor this particular study the comparison competition. force, and uses all known common law between workers in high- and low-use For these reasons, the empirical and statutory changes in non-compete occupations may effectively control for evidence that non-competes suppress enforceability to arrive at its estimates. State-level differences between labor labor mobility supports the markets, lending more credibility to the This study is very robust, as it satisfies Commission’s finding that non- estimates. More importantly, the all of the principles outlined in Part competes tend to negatively affect Commission notes that the study IV.A.2.
competitive conditions in labor markets. corroborates the estimates from other The same study also finds that non- ii. Non-Competes Suppress Workers’ competes increase racial and gender studies that rely on more credible Earnings wage gaps by disproportionately research designs, and therefore is appropriately viewed as additional Evidence of Suppressed Earnings suppressing the wages of women and evidence supporting the range of non-White workers. While the study The Commission finds that non- estimated effects on wages across the estimates that earnings of White men competes suppress workers’ earnings as labor market.
unenforceable, and explaining the importance of find that women’s earnings increased at notice to workers). 458Id. at 3. The NPRM reported an increase in average earnings of 3.3–13.9%. Those numbers a higher rate, with earnings increases 455Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant’s distribution contracts were taken from an earlier version of the Johnson, after the non-compete ban of 3.5% for at issue ‘‘may well provide Atlantic with an Lavetti, and Lipsitz paper. The updated paper finds women, versus 1.5% for men. an increase in average earnings of 3.2–14.2%. The economical method of assuring efficient product A study by Balasubramanian et al. d ‘‘C is o tr m ib m u i t s io si n o n am w o a n s g c i l t e s a d rl e y a j l u er s s ti ’’ f i a e n d d i n h o re ld fu in si g n t g h t a h t e t he c fi h n a d n in ge g s d o o r e s th n e o C t o m m at m er i i s a s l i l o y n a ’s ff a e n ct a l t y h s e i s p a o p f e th r’ e s paper. focuses on a natural experiment in participants an opportunity to offset these evils by 459Id. at 42. The 2023 version of the paper by Hawaii, which banned non-competes for a showing of economic benefit to themselves’’); FTC Johnson, Lavetti, and Lipsitz reports earnings high-tech workers in 2015. The study v. Texaco, 393 U.S. 223, 230 (1968) (following the increases of 1.3% for White men, and increases finds earnings of new hires increased by same reasoning as Atlantic Refining and finding between 1.5–3.2% for workers in other about 4% after the ban, relative to that the ‘‘anticompetitive tendencies of such a demographic groups, corresponding to a change in system [were] clear’’); L.G. Balfour Co. v. FTC, 442 non-compete enforceability equal to the difference earnings in other States without bans.463 F.2d 1, 15 (7th Cir. 1971) (‘‘While it is relevant to between the 75th and 25th percentiles. These In addition to this research, which consider the advantages of a trade practice on differences are statistically significant for Black shows that increased enforceability of individual companies in the market, this cannot men and non-White, non-Black women. excuse an otherwise illegal business practice.’’). 460Id. The 2023 version of the paper reports that Justifications that are not cognizable under other the earnings gaps would close by 1.5–3.8% given 461Starr, supra note 445 at 783. antitrust laws are also not cognizable under section a change in non-compete enforceability equal to the 462Lipsitz & Starr, supra note 72 at 143.
5. difference between the 75th and 25th percentiles. 463Balsubramanian et al., supra note 451 at S349. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38383 non-competes reduces workers’ earnings who worked in the State where the law measuring how non-competes affect across the labor market generally and for changed but lived across the border. earnings, and accordingly the specific types of workers, two empirical The second of these studies, a study Commission gives these studies studies find that increased conducted by Starr, Frake, and Agarwal, minimal weight. enforceability of non-competes analyzed workers without non-competes In one such study, Starr, Prescott, and suppresses earnings even for workers who worked in States and industries in Bishara examine survey results and find who are not subject to non-competes. which non-competes were used at a that non-compete use is associated with high rate.469The authors find that, 6.6% to 11% higher earnings.473In The Johnson, Lavetti, and Lipsitz when the rate of use of non-competes in another study, using Payscale.com data, study, in a separate analysis, isolates the an industry in a State is higher, wages Balasubramanian, Starr, and Yamaguchi impact of a State’s enforceability policy are lower for workers who do not have find that individuals with non-competes on workers not directly affected by that non-competes but who work in the same (regardless of what other post- policy to demonstrate that non- State and industry. This study also finds contractual restrictions they had) had competes affect not just the workers that this effect is stronger where non- 2.1–8.2% greater earnings than subject to non-competes, but the broader competes are more enforceable.470 individuals with no post-contractual labor market as well. The study finds The authors show that the reduction restrictions. However, this positive that increases in non-compete in earnings (and in labor mobility) is association may be due to non-competes enforceability in one State have negative due to a reduction in the rate of job often being bundled with NDAs. The impacts on workers’ earnings in offers. Individuals in State/industry authors find that, compared with bordering States, and that the effects are combinations that use non-competes at individuals subject only to NDAs, non- nearly as large as the effects in the State a high rate do not receive job offers as competes are associated with a 3.0– in which enforceability changed (but frequently as individuals in State/ 7.3% decrease in earnings, though the taper off as the distance to the bordering industry combinations in which non- authors do not disentangle this effect State increases).464The study estimates competes are not frequently used.471 from the effects of non-solicitation and that a legal change in one State has an The authors also demonstrate that non-recruitment provisions.474Another effect on the earnings of workers just decreased mobility and earnings are not study, by Lavetti, Simon, and White, across that State’s border that is 76% as due to increased job satisfaction (i.e., if finds that use of non-competes among great as for workers in the State in workers are more satisfied with their physicians is correlated with greater which the law was changed.465In other jobs, they may be less likely to change earnings (by 14%) and greater earnings words, when one State changes its law jobs, and more likely to accept lower growth.475Finally, Rothstein and Starr to be more permissive of non-competes pay).472 find that greater use of non-competes is and itself experiences a decrease in Given some methodological correlated with higher earnings.476 workers’ earnings of 4%, workers just limitations of this study, the Because these studies merely reflect across the border (i.e., workers who Commission views it as supporting the correlation and are unlikely to reflect share a labor market)466would other evidence that non-competes have causation, the Commission gives them experience decreased earnings of 3%.467 negative spillover effects on earnings for little weight. The NPRM noted that the The authors conclude that, since the workers without non-competes and Lavetti, Simon, and White physician workers across the border are not reduce labor mobility. Namely, the study partially mitigates this directly affected by the law change (i.e., research design relies on cross-sectional methodological flaw by comparing contracts that they have signed do not differences in enforceability of non- earnings effects in a high- versus a low- become more or less enforceable), this competes. Although this study also enforceability State (Illinois versus effect must be due to changes in the examines the use of non-competes, it California). However, at best, this local labor market.468The researchers does not compare individuals who are comparison is a cross-sectional based their analysis on where workers bound by non-competes to individuals comparison with a minimally small worked, rather than their residence, so who are not. Instead, it examines the number of States being compared. The the results are not tainted by workers rate of use across industries and States, study does not consider changes in non- and therefore avoids the statistical compete enforceability over time. biases inherent in studies which Therefore, it is impossible to 464The NPRM cited an earlier version of Johnson, compare individuals with and without disentangle underlying differences in Lavetti, and Lipsitz’s study that estimated that a legal change in one State would have an effect on non-competes. The authors also employ those two States from the effects of non- the earnings of workers just across that State’s tests to increase confidence in the compete enforceability. The border that was 87% as great as for workers in the causal interpretation of these results, Commission accordingly gives this State in which the law was changed. NPRM at 3488.
51. Seventy-six percent is calculated as the Several additional studies examine little weight, though the shortcoming is coefficient on the donor State NCA score (¥.137)
467The Commission notes that the estimates in the updated version of Johnson, Lavetti, and 469Evan Starr, Justin Frake, & Rajshree Agarwal, 473Starr, Prescott, & Bishara supra note 68 at 75. Lipsitz’s study are slightly different, but Mobility Constraint Externalities, 30 Org. Sci. 961 474Balasubramanian, Starr, & Yamaguchi, supra qualitatively similar to the earlier estimates noted (2019), online ahead of print at https:// note 74 at 40. The percentage range is calculated in the NPRM. The results remain statistically pubsonline.informs.org/doi/abs/10.1287/ as e¥0.030¥1 and e¥0.076¥1, respectively. significant and do not materially affect the orsc.2018.1252 at 6. 475Lavetti, Simon, & White, supra note 82 at Commission’s analysis. 470Id. at 11. 1051. The increase in earnings is calculated as 468Johnson, Lavetti, & Lipsitz, supra note 388 at 471Id. at 10. e0.131¥1.
30. 472Id. at 13. 476Rothstein & Starr, supra note 77 at 1. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38384 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations workers positioned similarly in the my current employer who has not given me In addition to receiving thousands of income distribution477and studies a pay increase in 2 years.481 comments recounting personal stories of which broadly represent the U.S. • I am a Certified Nurse Practitioner and non-competes stymieing the signed [a non-compete]. I live in Minnesota workforce478) provide compelling commenters’ ability to get a better- and would be required to travel one hour one evidence that non-competes paying job or a raise, many commenters way in order to fulfill [the] agreement. . . .
significantly suppress wages. My employer increased my responsibilities also described how, over the long term, (on-call hours added) without additional pay non-competes can lower wages and Comments Pertaining to Suppressed using vague language in my binding diminish career prospects for workers Earnings and Commission Responses agreement. I would have to hire a lawyer and forced to sit out of the market or start The Commission’s finding that non- spend thousands of dollars to file a lawsuit over in a new field. The Commission competes suppress earnings is to get the agreement releasing me. . . . My also received numerous comments employer took advantage of my binding principally based on the empirical stating that non-competes exacerbate agreement and did not increase my [Relative evidence described in this Part Value Unit] rate in 5 years for my or other wage gaps based on gender and race, IV.B.3.a.ii. However, the comments Nurse Practitioners in our organization.482 including by decreasing provide strong qualitative evidence that • I was just starting out in my career when entrepreneurship and wages to a greater bolsters this finding. I finally got a part time job in my field of extent for women and people of color The Commission received thousands geology. Unfortunately, it didn’t last long and and by giving firms more power to of comments from workers describing I was let go. But because of a non compete engage in wage discrimination.487 agreement I had to sign I couldn’t take With respect to the empirical how non-competes suppressed their another job in my field even though I had a literature, numerous commenters agreed earnings. These commenters spanned a good lead on one. Instead I had to take a job that there is a wealth of empirical wide variety of industries, hailed from as a waitress making less than minimum evidence to support the Commission’s across the U.S., and recounted a wage.483 common experience: a non-compete • I work for an IT company, low-level preliminary finding that, by inhibiting prevented them from earning more. employee just above minimum wage, and I efficient matching between workers and had to sign one of these to get the job even employers, the use of non-competes is Illustrative examples of these comments though I don’t know any knowledge above harming workers by suppressing their include the following:
outside my field where I have advanced Relative value units are a component of a degrees or not work at all. Since I am the methodology that calculates earnings for some 487See also Part IV.B.3.a.iii (summarizing primary breadwinner, this is not financially healthcare workers. comments from workers and worker advocates possible for my family, so I have to stick with 483Individual commenter, FTC–2023–0007– stating that non-competes increase illegal conduct 11973. by employers and make it harder for workers to report illegal conduct).
479Individual commenter, FTC–2023–0007–8067. 2016) at 20. 480Individual commenter, FTC–2023–0007–0616. 486Individual commenter, FTC–2023–0007–2416. 489See Part IV.A.2. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38385 while others cautioned against A commenter argued that the Johnson, workers, wages might decrease for other interpreting these relationships as Lavetti, and Lipsitz dataset is outdated categories of workers.494 causal. The Commission agrees with because it examines enforceability In response to these comments, the commenters who caution against a between 1991 and 2014. In response, the Commission finds that, while estimates causal interpretation of these studies, Commission finds that while the of the magnitude of the effect of non- which are unable to determine whether enforceability measures contained in competes on earnings vary to some non-compete use causes differences in that dataset do not perfectly reflect extent across groups of workers, the earnings, whether earnings cause current enforceability due to changes in effects are directionally and differences in non-compete use, or State law in the intervening several qualitatively similar across groups. For whether a third factor simultaneously years, the measures still reflect the example, while Balasubramanian et al. determines both, as discussed in Part impacts of non-compete enforceability do not report a table with average IV.A.2. on economic outcomes, and likely still earnings for workers in their study, workers in the high tech jobs studied Some commenters opposing the rule have strong predictive power. tend to be relatively highly paid, and stated that the most comprehensive Some commenters opposing the rule the study finds non-competes suppress study of the earnings effects of non- asserted that the overall competitiveness these workers’ earnings.495On the lower competes (the Johnson, Lavetti, and of U.S. labor markets undermines the end of the earnings spectrum, Lipsitz Lipsitz study described in this Part argument that workers suffer from non- and Starr report average earnings of IV.B.3.a.ii) examines only relatively competes. In response, the Commission $16.41 per hour for workers in their incremental changes in laws governing notes that a range of factors have study, which corresponds to annual the enforceability of non-competes (i.e., weakened competition in labor earnings of approximately $34,133 per changes other than full bans), and markets.492In any event, the level of year (assuming 2,080 hours worked per claimed that this study thus does not competitiveness of a labor market does year), and their study likewise finds that shed light on the effects of a full not justify use of a practice that tends non-competes suppress the earnings of prohibition. In response, the to negatively affect competitive these workers.496 Commission notes that the analysis in conditions. Additionally, Johnson, Lavetti, and Johnson, Lavetti, and Lipsitz finds that Lipsitz’s study of workers across the the effects of changes in non-compete Some commenters opposing the rule economy shows that, while college- enforceability are broadly linear. This pointed to academic writings, including educated workers and workers in means the effect of a change in a summary of the research by an FTC occupations and industries in which enforceability twice the size of another economist writing in his personal non-competes are used at a high rate change results in a change in workers’ capacity in 2019, stating that there was experience relatively larger adverse earnings that is approximately twice as limited evidence on the effects of such effects on their earnings from non- large. As a result, the Commission finds clauses. The Commission finds that compete enforceability, the estimated that it would be appropriate to these writings are generally outdated effect of increased enforceability on extrapolate from the effects of and disagrees with them. As the various other workers is still negative (albeit incremental changes in non-compete explanations of the empirical research statistically insignificant in this laws to the effects of prohibitions, at in Parts IV.B and IV.C illustrate, much study).497In short, while these studies least in the context of worker of the strongest evidence on the effects do not estimate the magnitude of earnings.490In other words, if of non-competes has been published in negative effects for every subset of the incremental changes in enforceability recent years. The Commission notes population, the finding of negative lead to a certain level of earnings effects, further that Evan Starr, one expert who effects on earnings is consistent across it is reasonable to presume—based on voiced concerns over the state of the dissimilar subsets of the population. the linearity of the relationship between evidence in the past, submitted a A commenter that opposed the NPRM changes in enforceability and workers’ comment that was broadly supportive of asserted that a categorical ban could earnings—larger changes will lead to the interpretation of the evidence in the decrease wages for highly paid workers, larger effects. NPRM and of the proposed rule.493 arguing that such workers could That said, in the regulatory impact Other comments opposing the rule negotiate higher wages in exchange for analysis, the Commission does not stated that the heterogeneity of the the non-compete that they would lose extrapolate from the incremental impact of a non-compete ban on with a ban. This speculative assertion is changes observed in these studies with earnings undermined the Commission’s belied by the comment record, which respect to earnings effects.491Instead, preliminary finding regarding the effects indicates that the highly paid, highly the Commission follows a conservative of non-competes on earnings. These skilled workers who are not senior approach and assumes that the commenters asked whether the prohibition in the final rule, even population-wide average effects noted 494These commenters were generally referring to though it is comprehensive, will have in certain studies apply across the higher-wage workers, but not senior executives. Comments that focused on senior executives are the same effects on earnings as the workforce or only to certain individuals addressed in Part IV.C.
incremental legal changes observed in (e.g., at certain points in the income 495Workers in the occupation Computer and these studies. Therefore, even if the distribution), certain professions, or in Information Research Scientists (SOC code 15– effects of changes in non-compete certain geographies (e.g., where local 1221) in the private sector had median earnings of enforceability are not linear, the labor markets tend to be more $156,620 in 2022, while Software Developers (SOC code 15–1252) in the private sector had median Commission’s analysis of the economic concentrated). Another commenter earnings of $127,870 in 2022. BLS, Occupational impacts of the final rule is not argued that if a ban on non-competes Employment and Wage Statistics, https:// undermined because, if anything, it drives up earnings for highly skilled www.bls.gov/oes/tables.htm. These private-sector underestimates the benefits of the rule. data are from the May 2022 National industry- specific and by ownership XLS table (see table 492See Treasury Labor Market Competition labeled ‘‘national_owner_M2022_dl’’). 490See Figure 3; Johnson, Lavetti, & Lipsitz, supra Report at i. 496Lipsitz & Starr, supra note 72 at 148. note 388 at 17. 493Comment of Evan Starr, FTC–2023–0007– 497Johnson, Lavetti, & Lipsitz, supra note 388 at 491See Part X.F.5. 20878. 57.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38386 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations executives are also unlikely to negotiate Some commenters opposing the rule The Commission finds that those non-competes.498It is also belied by asserted that Hawaii’s prohibition of concerns are not a compelling reason to empirical evidence that non-competes non-competes in the technology discard the study. The study carefully suppress earnings for highly paid industry may not have covered the examines multiple comparisons of workers.499 workers claimed (in particular, omitting workers within Oregon and across Similarly, commenters opposing the workers in the broadcast industry).503 States. The results therefore cannot be rule questioned whether earnings effects These commenters also asserted that explained by a differential response of merely result from firms hiring different Hawaii simultaneously banned non- Oregon to the Great Recession, a types of workers after changes in non- solicitation clauses. differential response of hourly workers compete enforceability (for example, The Commission finds the study of to the Great Recession, or even a workers with different levels of Hawaii’s non-compete ban to be differential response of hourly workers experience or education). In response to informative, despite these limitations. in Oregon to the Great Recession. The these comments, the Commission first First, any workers omitted from Commission also does not believe that notes that the studies find adverse coverage by the statute, but considered the study is undermined because the impacts across the labor force. as affected in the study, would lead to law did not affect existing non-competes Therefore, even if a different mix of a phenomenon known as ‘‘attenuation and included multiple carve-outs, or types of workers were hired due to non- bias,’’ which causes estimated effects to because non-competes were disfavored compete enforceability, the evidence underestimate the true impact.504 in Oregon before the law changed. shows workers’ wages are suppressed Second, the non-solicitation agreements These factors likely mitigated the across the labor force when non- banned by the Hawaii law were non- magnitude of the law’s negative effect competes are more enforceable. solicitation of coworker agreements on earnings, rather than exaggerating it. Additionally, the Commission notes that (otherwise known as non-recruitment Some commenters opposing the rule the study by Lipsitz and Starr compares agreements)—agreements under which argued that Johnson, Lavetti, and the earnings growth of individual workers are barred from recruiting Lipsitz505claim that ‘‘[t]he overall effect workers before and after the legal former coworkers, as opposed to non- of [non-compete] enforceability on change in Oregon, showing that solicitation of client agreements, under earnings is ambiguous,’’ and that this earnings growth increased after the non- which workers are barred from undermines the Commission’s compete ban. This provides some soliciting former clients. While non- preliminary findings. However, these evidence that the effects observed in the solicitation of coworker agreements may commenters take this quote out of literature are not simply due to have a marginal impact on workers’ context. The authors were referring to a substitution, since individual workers’ earnings (e.g., in situations in which theoretical model, not to the empirical earnings trajectories would not be workers only find out about job work in their paper. When economists changed if all the effects were simply opportunities via past coworkers), the do empirical research, they often begin due to firms substituting one type of Commission does not find it likely that by constructing a theoretical model and worker for another.500 they have a major effect on workers’ describing what the theory would Some commenters opposing the rule earnings. They may prevent some predict; they then describe their asserted that enforceability indices are workers from hearing about some job empirical findings, which may show a likely measured with substantial error. opportunities, but unlike non-competes, different result. The authors described These commenters argue that the they do not prevent workers from taking that it is unclear, theoretically, whether indices are based on qualitative analyses those opportunities. And unlike non- non-compete enforceability would of State laws and not data on how solicitation of client agreements, they do increase or decrease earnings. However, frequently non-competes are actually not frustrate workers’ ability to build up the empirical findings of the study were enforced or the results of these a client base after moving to a new clear: as the authors stated, ‘‘We find enforcement cases. The Commission employer. The Commission therefore that increases in [non-compete] finds the enforceability indices are finds it likely that much of the impact enforceability decrease workers’ sufficiently reliable, because they are identified in the study of the Hawaii law earnings.’’506The fact that the authors generated through careful analysis of is due to non-competes. The described the theoretical results of a State law that takes into account Commission also notes that the Hawaii hypothesized model as ambiguous does variation in legal enforceability along study is directionally consistent with not undermine the fact that their study multiple dimensions.501Moreover, a the results from other more robust had clear empirical results. 2024 study using enforcement outcome studies that use different methodologies. Some healthcare businesses and trade organizations opposing the rule argued data finds that a non-compete ban in Some commenters opposing the rule that, without non-competes, physician Washington increased earnings, argued that the impact of Oregon shortages would increase physicians’ consistent with the studies using banning non-competes for low-wage wages beyond what the commenters enforceability indices.502 workers may have been limited because view as fair. The commenters provided the law did not affect existing non- no empirical evidence to support these 498See Parts IV.B.2.b.i and IV.C.1. competes; because non-competes were assertions, and the Commission is 499See, e.g., Balasubramanian et al., supra note already disfavored in Oregon before the 451. unaware of any such evidence. Contrary law change; and because the law 500Lipsitz & Starr, supra note 72, Online to commenters’ claim that the rule included multiple carve-outs.
Appendix at 18. would increase physicians’ earnings 501Norman D. Bishara, Fifty Ways to Leave Your Commenters also argued the negative beyond a ‘‘fair’’ level, the weight of the Employer: Relative Enforcement of Covenants Not effects on earnings found in Oregon may evidence indicates that the final rule to Compete, Trends, and Implications for Employee have been confounded by the Great Mobility Policy, 13 U. Pa. J. Bus. L. 751 (2011);
Barnett & Sichelman, supra note 389. 505Matthew S. Johnson, Kurt Lavetti, & Michael 502Takuya Hiraiwa, Michael Lipsitz, & Evan Lipsitz, The Labor Market Effects of Legal Starr, Do Firms Value Court Enforceability of 503Balasubramanian et al., supra note 451. Restrictions on Worker Mobility (2021) at 11; Noncompete Agreements? A Revealed Preference 504Attenuation bias occurs when the independent https://papers.ssrn.com/sol3/papers.cfm?abstract_ Approach (2024), https://papers.ssrn.com/sol3/ variable (here, whether a worker is covered by the id=3455381. papers.cfm?abstract_id=4364674. ban) is measured with error. 506Id. at 2. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38387 will lead to fairer wages by prohibiting Johnson, Lavetti, and Lipsitz shows that in labor markets. However, the a practice that suppresses workers’ the impact of a decrease in non-compete Commission believes its finding that earnings by preventing competition; that enforceability on earnings is positive for non-competes are an unfair method of is, the final rule will simply help ensure workers in each of these groups. competition is further bolstered by this that wages are determined via fair The empirical evidence makes clear strong qualitative evidence related to competition. The Commission also that, by restricting a worker’s ability to non-competes degrading working notes that it received a large number of leave their current job to work for a conditions. comments from physicians and other competitor or to start a competing Numerous workers and worker healthcare workers stating that non- business, non-competes reduce workers’ advocacy organizations described how competes exacerbate physician earnings, supporting the Commission’s non-competes compel workers to shortages.507 finding that non-competes tend to endure jobs with poor working One commenter opposing the rule negatively affect competitive conditions conditions. Illustrative examples of criticized the analysis in the Johnson, in labor markets. these comments include the following:
Lavetti, and Lipsitz study, suggesting that data on where individuals live are iii. Non-Competes Reduce Job Quality • In March 2018, I was fired from a job in not necessarily indicative of where In the NPRM, the Commission local news for refusing to go into an unsafe individuals work, and that identified recognized that non-competes may also situation. I’d recently received a letter from spillover effects may simply be due to negatively affect working conditions, a man threatening to kidnap me. When my boss decided he would still send me out cross-border commuters. The i.e., job quality,508although this had not alone in the field, I fought him on it, lost, and Commission disagrees, because, as been studied in the empirical literature was terminated. Three weeks later, I found noted, the study considers whether the (likely because it is harder to quantify). out I was pregnant. Unable to work in my workers are subject to enforceable non- Competition in labor markets yields not field because of a noncompete enforced even competes based on their work location. only higher earnings for workers, but AFTER I was terminated, I had no choice but A commenter also argued that if the also better working conditions.509In a to apply for WIC and government assistance, absence of non-competes helped well-functioning labor market, workers and work at a retail job making half my workers, one would expect California, who are subject to poor working previous salary. I wanted to work. I wanted North Dakota, and Oklahoma to have conditions can offer their labor services money to support my child. I wanted money the highest median incomes among all to an employer with better working to move closer to home, to escape a domestic the States. The Commission believes conditions. Such workers can also start violence situation. My noncompete kept me in a horrible spot, and nearly cost me my this expectation is inapt. Given the businesses, giving them more control life.510 evidence that non-competes suppress over working conditions. Non-competes • I started my first job as a Nurse workers’ earnings, earnings in frustrate this competitive process by Practitioner in 2019. All positions I California, North Dakota, and Oklahoma restricting a worker’s ability to switch interviewed for required a non- are likely higher than they would be if jobs or start a business. Furthermore, in compete. . . . In myc ase, I work for an non-competes were enforceable, but a well-functioning labor market, employer that is hostile, discriminated there is no reason to expect they would employers compete to retain their against me during pregnancy and maternity necessarily be higher than all other workers by improving working leave and has raised his voice at me in States. conditions. Where workers are locked meetings. He told me I was lucky to even One commenter opposing the rule into a job—because their alternative have a job after becoming pregnant. I learned asserted that the Commission’s citation employment options are restricted— after starting at the practice that he has shown this pattern before with previous of one study in the NPRM was those competitive forces are diminished employees. I say this because all of these insufficient to show that non-competes and working conditions can suffer. The above-mentioned reasons are why I have the are directly tied to discriminatory Commission accordingly sought right to want to quit my job and move on. behavior by employers, or that non- comment on this topic. I desperately want to leave and start another competes worsen racial or gender wage In response, thousands of workers job but I can’t because of the non compete. gaps. The Commission does not rest its with non-competes described how, by I feel like a prisoner to my job. I feel finding in this final rule that non- frustrating these competitive processes, depressed in my work conditions and I feel competes tend to negatively affect non-competes prevent them from like I have no way out.511 competitive conditions on findings of escaping poor working conditions or • I’m a barber and violated a non-compete about 6 months ago. . . . Iw orked for my increased discriminatory behavior or demanding better working conditions. previous employer for two years in a toxic exacerbation of gender and wage gaps. Based on the large number of comments environment. I told my employer how work The Commission merely notes that there the Commission received on this issue was affecting my home life on more than one are two empirical studies—described and the wide variety of negative and occasion and she did nothing. . . . How was under ‘‘Evidence of suppressed severe impacts commenters described, I to know that I would be working in a toxic earnings’’—that find that non-competes the Commission finds that, in addition environment when I applied? So ultimately, do, in fact, exacerbate earnings gaps. to suppressing earnings, non-competes I decided in order to be happy and make a One commenter opposing the rule negatively affect working conditions for living wage, I’d have no choice but to violate stated that closing racial and gender a significant number of workers. my non-compete. She came after me in no wage gaps may harm racial minorities The Commission finds that the effects time flat. Now I’m paying legal fees and at risk of going to court and losing my job for and women if their wages were to fall of non-competes on labor mobility and 6 more months. . . . [I]f I’m working in poor in absolute terms. Another commenter workers’ earnings are sufficient, working conditions, I should be able to work argued that the proposed rule would standing alone, to support its finding where I please. For two years, my job and reduce capital investment and output, that non-competes with workers other employer affected my mental health. I chose which would decrease White male than senior executives tend to to take anti-depressants after things got bad workers’ wages. In response, the negatively affect competitive conditions at work, upped my dosage twice as work Commission notes that the study by 508NPRM at 3504. 510Individual commenter, FTC–2023–0007– 507See Part IV.B.3.b.iv for a more detailed 509Treasury Labor Market Competition Report at 12813. summary of these comments. i. 511Individual commenter, FTC–2023–0007–4989. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38388 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations became progressively worse and since I’ve in turn incentivize employers to provide stated that, because non-competes make left, I’ve stopped taking my medication.512 better work environments. it harder for these workers to find new • I am a commissioned employee in the Workers in both high-wage and low- jobs, non-competes decrease the mortgage world, and I had a non-compete wage professions, as well as worker likelihood that workers report these with my former company in Ohio. Near the advocacy groups, stated that by kinds of harms.
end of my time at this company, they merged diminishing workers’ competitive Many workers described how, by with another company and put the new company in charge of the sales staff. It was alternatives, non-competes keep limiting their ability to get out of miserable. We started having issues, even workers trapped in jobs where they harmful workplace environments, non- with having basic supplies, and it went from experience dangerous, abusive, or toxic competes contributed to stress-related just harming me to harming my ability to get conditions; discrimination; sexual physical and mental health problems. business complete, which harms the harassment; and other forms of Many commenters, particularly in the consumer. I left and I was sued for a three harassment. These commenters also healthcare profession, stated that year period. . . . Ir eally do not feel that described how non-competes trap some suicide is a major problem in their [non-competes] should be allowed. You are workers in jobs where their employer profession and described non-competes stuck at employers and they can treat you in commits wage and hour violations, such as one of the stressors, because non- any manner that they please because they know that they can make your life a living as wage theft, as employers that use competes make it harder to leave jobs hell if you leave them.513 non-competes can insulate themselves with unsustainable demands, leaving • Like many new graduates in the medical from the free and fair functioning of workers feeling trapped. field, I signed on with a company that made competitive markets and are thus more While thousands of commenters numerous empty promises. . . . What I was likely to be able to steal worker wages described, often in personal terms, how not prepared for, was the company’s strategic with impunity. Several commenters said non-competes have negatively affected increase in facilities in which I was to they were unable to receive benefits their working conditions, the perform services under this contract. In the because a non-compete rendered them Commission received few comments short span of 2 years, I did unable to switch to a job with better neurophysiological monitoring for 24 from workers or worker advocates benefits or rendered them unable to facilities . . . . When working conditions fell stating that non-competes improved leave their job when their employer took apart regardless of my requests for adequate working conditions. The few comments their benefits away. A professional sleep following 36 hours straight of working received stated that workers who remain membership network for survivors of on call at my designated stroke hospital, time with an employer can be harmed by for meals or breaks within 18+ hour work human trafficking explained that departing and competing colleagues, via days, and a reasonable travel distance within traffickers masquerading as legitimate increased workloads or harm to their the area the company demanded I relocate to, businesses use non-competes to prevent employer.
I was met with threats from HR regarding my trafficking victims from leaving. Taken together, these comments non-compete if I were to leave. . . . Working Some workers and advocacy conditions became so intense, I was placed organizations stated that non-competes provide strong qualitative evidence that on migraine medications at the increase the potential for harm from non-competes degrade working recommendations of my doctor and required conditions, which supports the retaliation. These commenters stated three separate trips in the ER for medical Commission’s finding that non- that restricting a worker’s employment conditions related to stress, inability to eat or competes tend to negatively affect opportunities makes it even harder for drink while tied within tens of hours long competition in labor markets. surgeries . . . . Again I was met with threats workers to find new jobs after from HR and now their legal team.514 experiencing retaliation. These b. Non-Competes Tend to Negatively commenters argued that this Affect Competitive Conditions in Many commenters stated that non- discourages workers from reporting Product and Service Markets competes harm working conditions for fraud, harassment, discrimination, or lower-wage workers. However, there labor violations. A labor union Based on the Commission’s expertise were many commenters in higher-wage commented that, by making it harder for and after careful review of the jobs who also stated that non-competes workers to find new jobs, non-competes rulemaking record, including the harmed their working conditions. For can deter unionization and chill empirical research and the public example, numerous physicians activities protected by the National comments, the Commission finds that explained that they were trapped in jobs Labor Relations Act, including activities non-competes tend to negatively affect with poor working conditions because to address unsafe, unfair, or competitive conditions in markets for of non-competes. Many of these unsatisfactory working conditions. products and services by inhibiting new physicians described how non-competes According to a trade organization of business formation and innovation. accelerate burnout in their profession by attorneys, whistleblower protections New businesses are formed when new making it harder for workers to escape may come too late for a fired firms are founded by entrepreneurs or bad working conditions or demand whistleblower who cannot obtain spun off from existing firms. New better working conditions. Many another job because of a non-compete. business formation increases commenters recounted how they left Several commenters provided survey or competition by reducing concentration, poor work environments but non- case evidence showing that workers bringing new ideas to market, and competes harmed them by forcing them who report sexual harassment, wage forcing incumbent firms to respond to to leave their field, move out of the area theft, or poor working conditions are new firms’ ideas instead of stagnating. where they lived, or spend time and frequently retaliated against, including New businesses disproportionately money defending themselves from legal by being fired.515These commenters create new jobs and are, as a group, action. Many commenters argued that more resilient to economic prohibiting non-competes would 515For example, the National Women’s Law increase workers’ bargaining power and Center, which operates and administers the TIME’S Women’s L. Ctr., FTC–2023–0007–20297 at 5 (citing UP Legal Defense Fund, reported that among Jasmine Tucker & Jennifer Mondino, Coming individuals who contacted the Fund to request legal Forward: Key Trends and Data from the TIME’S UP 512Individual commenter, FTC–2023–0007–3323. assistance related to sexual harassment in the Legal Defense Fund, 4 (Oct. 2020), https://nwlc.org/ 513Individual commenter, FTC–2023–0007–3955. workplace, 72% reported facing retaliation, and, wp-content/uploads/2020/10/NWLC-Intake-Report_ 514Individual commenter, FTC–2023–0007–1252. among those, 36% had been fired. Comment of Nat’l FINAL_2020-10-13.pdf). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38389 downturns.516With respect to spinoffs, This decreases knowledge flow between several changes in non-compete research shows that spinoffs within the firms, which limits the cross-pollination enforceability that are measured in a same industry are highly successful of innovative ideas. binary fashion. While this study relative to other entrepreneurial As described in Parts IV.B.3.b.i and ii, therefore does not satisfy all the ventures.517 the Commission finds that the effects of principles outlined in Part IV.A.2, it Non-competes, however, tend to non-competes on new business satisfies most of them and is accordingly negatively affect competitive conditions formation and innovation are sufficient quite robust and weighted highly. in product and service markets by to support its finding that non-competes Another study, conducted by Matt inhibiting new business formation in tend to negatively affect competitive Marx, examines the impact of several two ways. First, since many new conditions in product and service changes in non-compete enforceability businesses are formed by workers who markets. In addition, as described in between 1991 and 2014 on new leave their jobs to start firms in the same Parts IV.B.3.b.iii and iv, the Commission business formation, and likewise finds a industry, non-competes reduce the believes this finding is further bolstered negative effect of non-competes on new number of new businesses that are by evidence that non-competes increase business formation.524Marx finds that, formed in the first place.518Second, concentration and consumer prices, as when non-competes become more non-competes deter potential well as evidence that non-competes enforceable, men are less likely to found entrepreneurs from starting or spinning reduce product quality. a rival startup after leaving their off new businesses—and firms from The Commission’s findings relating to employer, that women are even less expanding their businesses—by locking new business formation and innovation likely to do so (15% less likely than up talented workers.519Non-competes are principally based on the empirical men), and that the difference is thus create substantial barriers to evidence described in Parts IV.B.3.b.i statistically significant.525This study potential new entrants into markets and and ii. However, the comments provide therefore supports both that non- also stymie competitors’ ability to grow strong qualitative evidence that bolsters competes inhibit new business by making it difficult for those entrants these findings. Furthermore, the formation and that non-competes tend to find skilled workers. Commission notes that the legal to have more negative impacts for Innovation refers to the process by standard for an unfair method of women than for men. Marx uses several which new ideas result in new products competition under section 5 requires changes in non-compete enforceability or services or improvements to existing only a tendency to negatively affect measured in a continuous fashion. The products or services. Innovation may competitive conditions; empirical study therefore satisfies the principles directly improve economic outcomes by evidence of actual harm is not necessary outlined in Part IV.A.2 and is weighted increasing product quality or decreasing to establish that conduct is an unfair highly. prices, and innovation by one firm may method of competition. In the case of In addition, Johnson, Lipsitz, and Pei also prompt other firms to compete and non-competes, however, there is analyze the extent to which non- improve their own products and extensive empirical evidence, as well as compete enforceability affects the rate of services. However, non-competes tend extensive corroborating public firm entry in high-tech industries. They to negatively affect competitive comments, that non-competes find that an average increase in non- conditions in product and service negatively affect competitive conditions compete enforceability decreases the markets by inhibiting innovation. in product and service markets. establishment entry rate by 3.2%.526 Non-competes tend to reduce Outside of examining only innovative
530Starr, Balasubramanian, & Sakakibara, supra papers.cfm?abstract_id=4277191. 536Hyo Kang & Lee Fleming, Non-Competes, note 518 at 561. 32.5% is calculated as 0.0013/ 534Samila & Sorenson find that a 1% increase in Business Dynamism, and Concentration: Evidence 0.004, where 0.0013 is the coefficient reported in venture capital funding increased the number of From a Florida Case Study, 29 J. Econ. & Mgmt. Table 2, Column 6, and 0.004 is the mean WSO new firms by 0.8% when non-competes were Strategy 663, 673 (2020). entry rate reported in Table 1 for ‘‘nonlaw’’ firms. enforceable, and by 2.3% when non-competes were 537Id. at 674. The value is calculated as 15.8% 531For reviews of the literature, see, e.g., Steven not enforceable. Sampsa Samila & Olav Sorenson, = e0.1468¥1. Klepper, Spinoffs: A Review and Synthesis, 6 Noncompete Covenants: Incentives to Innovate or 538In the NPRM, the Commission stated that the European Mgmt. Rev. 159 (2009) and April Franco, Impediments to Growth, 57 Mgmt. Sci. 425, 432 evidence relating to the effects of non-competes on Employee Entrepreneurship: Recent Research and (2011). The values are calculated as 0.8% = job creation was inconclusive. However, in the final Future Directions, in Handbook of Entrepreneurship e0.00755¥1 and 2.3% = e0.00755+0.0155¥1, rule, the Commission does not make a separate Research 81 (2005). respectively. finding that non-competes reduce job creation. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38391 While the research described previously seven years after founding, the results standards would drop so low and they would shows that non-competes inhibit the are similar: spinouts into a different raise prices so high that we lost so many rate of new business formation, this industry have average per-firm clients. . . . Weh ave all had enough of the research indicates that even where new employment that is 1.5% lower due to toxic environment and need to be free of this unfair contract.547 businesses are created, these new greater non-compete enforceability, • I am a veterinarian that has had to suffer businesses have fewer workers where while spinouts into the same industry under non-compete clauses my entire career.
non-competes are more enforceable. have per-firm employment that is 0.7% I have had to sell my home and relocate This evidence suggests that non- lower.545The Commission notes that several times including moving out of State competes not only prevent small this study compares States with due to non-compete clauses. I’m currently businesses from being formed, but they different levels of enforceability, using stuck in a [non-compete covering a] 30 mile also hinder entrepreneurship by tending law firms as a control group, instead of radius of all 4 practices of a group of to reduce the number of employees new considering changes in non-compete hospitals I work for. This basically keeps me firms are able to hire. enforceability. It is therefore given less from working in an enormous area. I had to In addition to analyzing the rate of weight than studies with stronger sign it due to circumstances out of my control and they took advantage of my firm entry in high-tech industries, methodologies.546 situation. I recently tried to start my own Johnson, Lipsitz, and Pei analyzes the number of jobs created at newly Comments Pertaining to Inhibited New business, not related to the type of practice that I have the non-compete clause with, and founded firms in innovative Business Formation and the had to abandon the idea because I couldn’t industries.539Using evidence from Commission’s Responses get funding without my current employer several State law changes, the authors The Commission’s finding that non- releasing me from the contract or by find that increases in non-compete competes inhibit new business relocating again out of the huge area of non- enforceability lead to a reduction in the formation is principally based on the compete.548 number of jobs created at newly empirical evidence described in this • We own a small family practice in urban founded firms in innovative industries Part IV.B.3.b.i. However, the comments Wisconsin. I previously was employed by a large healthcare organization and burned out.
(though not necessarily across all provide strong qualitative evidence that When I left to star[t] my own business, I was industries or all types of firms) by bolsters this finding. restricted from working close by, by a non- 7.2%.540 Hundreds of commenters agreed with compete. I spent $24,000 [in] legal fees A study by Starr, Balasubramanian, the Commission’s preliminary finding challenging this successfully. . . . Now as a and Sakakibara finds that increases in that non-competes reduce new business business owner for 5 years, we have the non-compete enforceability decreased formation. Illustrative examples of opportunity to hire some physician assistants average per-firm employment at new comments the Commission received who have been terminated without cause firms.541In the NPRM, the Commission include the following: from my prior employer. I am unable to do stated that this study found that several so because they also had to sign non- increases in non-compete enforceability • I am a hairstylist . . . and have been competes. I have seen many disgruntled were associated with a 1.4% increase in with the company for 11 years. Our work patients who have delayed care because of conditions have changed drastically over the this.549 average per-firm employment at new years and Covid has really sent us on a sharp • I am aesthetic nurse practitioner wanting firms.542However, upon further review decline. It is not the same salon I signed on to start my own business but I am tied to a of the study, the Commission interprets to work for. That being said, a few coworkers 2 year 10 mile non compete. I was basically this study as finding that increases in want to open a salon and take some of us obligated to sign the non-compete when I non-compete enforceability decreased with them to bring back the caliber of service needed to reduce my hours to finish my average per-firm employment at new we want to give our clients. Our non-compete master’s degree (that I paid for and they firms—both for spinouts within the contracts state that we can’t work within 30 wanted me to get). I feel forced to stay at a same industry and spinouts into a miles of this salon. We didn’t expect that job that is not paying me what I am worth.550 different industry.543For spinouts into • I am a licensed social worker with a non- a different industry, average per-firm relative impact on within-industry spinouts compete which is hindering my employment compared with non-within-industry spinouts options. . . . Iw ould like to start my own employment at the time of founding (¥1.1%). See Starr, Balasubramanian, & Sakakibara, business as the mental health facility I work decreases by 1.4% due to greater non- supra note 518 at 561. for is not supportive of mental health. This compete enforceability. For spinouts 545Calculated as 1.5%¥0.7%, based on the effect rule would be a great benefit for mental into the same industry, average per-firm for non-within-industry spinouts (1.5%) and the health professionals and those seeking relative impact on within-industry spinouts employment decreases by 0.3%.544At compared with non-within-industry spinouts quality mental health services.551 (¥0.8%). See id. at 563. • As a recently graduated physician, I Instead, it cites the research described herein— 546There are also two studies analyzing how non- wanted to start my own practice and become which relates solely to job creation at newly competes affect job creation or employment a small business owner. However, I also founded firms—to support its finding that non- generally. Neither study relates to new business needed a source of income to start out and competes inhibit new business formation. formation specifically. Goudou finds a decreased wanted to work part time at a local hospital 539Johnson, Lipsitz, and Pei, supra note 526 at job creation rate from an increase in non-compete for income and benefits. However, due to a 36. enforceability in Florida. Felicien Goudou, The non-compete clause in their contracts, I 540Id. While this study satisfies each of the other Employment Effects of Non-compete Contracts: Job metrics outlined in Part IV.A.2, the sample is Retention versus Job Creation (2023), https:// could not start my own business and practice restricted to firms in innovative industries, and www.jesugogoudou.me/uploads/JMP_Felicien_ in the same city if I was to work with them. therefore the outcome of interest is not reflective of G.pdf. This study considers just one change in non- This hindered my ability to work as much as the entire population. compete enforceability, and is therefore given less I wanted (ended up having to work as an 541Starr, Balasubramanian, & Sakakibara, supra weight, though the results corroborate findings in independent contractor for significantly less note 518 at 552. papers which satisfy more of the guideposts in Part 542NPRM at 3488–89. IV.A.2. Additionally, the 2023 version of Johnson, 547Individual commenter, FTC–2023–0007–3299.
me. I ended up having to hire an attorney to and describing how it would help small Other commenters raised additional defend myself and when it was all said and business owners. These commenters issues relevant to hiring. According to done, I spent close to 12,000 in fees and contend that categorically prohibiting one technology startup organization, the penalties.554 non-competes will empower small inability to assemble the right team is a • Non compete agreements are detrimental businesses by providing them with new major reason startups fail, and small to the average worker, preventing them from access to critical talent and will drive businesses lose opportunities because pursuing better paying job offers or from small business creation as they must avoid hiring workers who are starting their own business in the same entrepreneurial employees will be free subject to even unenforceable non- industry. I am directly affected by a non- compete clause I had signed as part of a job to compete against their former competes. That organization also said acceptance. I am now forming my own employers. Many small businesses also startups currently face legal and time business in the same industry as my argued that non-competes can hinder costs from navigating the patchwork and employer, and cannot do business within a small business formation and can keep complexity of State non-compete laws, 50-mile radius of my employer. That radius small businesses from growing once especially when trying to determine if a covers the hometown I live in. Even though they are formed. The extensive potential hire’s non-compete is we are in the same industry, we have very comments the Commission received enforceable; the time and expense of different target markets.555 from small businesses are also navigating this landscape will thus often As these comment excerpts reflect, addressed in Part XI.C. cause the startups to forego that hire. many potential entrepreneurs wrote to Some small businesses said they That organization said some non- the Commission to describe how they spent tens or hundreds of thousands of competes prevent experienced workers wanted to strike out on their own, but dollars defending themselves from non- from counseling, advising, or investing a non-compete preventing them from compete lawsuits. A one-person in startups, and such mentoring can doing so. These comments indicate that surveying firm said it has to regularly double a startup’s survival rate. non-competes have deprived turn down work because of the former Several self-identified entrepreneurs communities of homegrown employer’s threat to sue over a non- commented that because of their non- businesses—with respect to everything compete. A small, five-worker firm said competes, they feared not being able to ranging from tech companies, to hair it was sued by a billion-dollar company operate, build, or expand their business. salons, to physician practices, and many for violating a non-compete despite the Numerous workers reported that they more types of firms. This deprives fact that the firm waited out the non- wanted to or planned to start their own markets of competing firms that can compete period and did not use business, but their non-compete made reduce concentration—which in turn proprietary information or pursue the them too afraid to do so. A public policy has benefits for lowering prices and former employer’s customers; it fears organization referenced the Census raising the quality of products and the legal fees will force it out of Bureau’s Annual Business Survey to services, and increasing innovation in business. A legal aid organization argue that a majority of business owners bringing new ideas to market—as well relayed the story of a client, a self- and an even higher majority of Black employed beauty worker who was business owners view starting their own 552Individual commenter, FTC–2023–0007– unable to provide their service during a business as the best avenue for their 11777. non-compete lawsuit despite working ideas, and that non-competes may 553Comment of NW Workers’ Justice Project, outside the non-compete geographic prevent these potential entrepreneurs’ FTC–2023–0007–15199 (discussing a client). radius. The CEO of one small transport ideas from coming to market. 554Individual commenter, FTC–2023–0007– and logistics company said a ban would Several commenters stated that non- 12904.
of non-competes to inhibit new business Commenters also argued that non- 558Ex Parte Communication: Email from G. formation more than counteracts any competes may have different effects on Carlino to E. Wilkins (Jan. 30, 2023), https:// tendency of non-competes to promote different types of workers—for example, www.ftc.gov/system/files?file=ftc_gov/pdf/P201200 new business formation. across different industries, occupations, NonCompeteNPRMExParteCarlinoRedacted.pdf. Other commenters said non-competes 559In particular, the long time period and the or levels of pay—and that these protect firms’ value and assets for sale difference-in-difference methodology used in the differences may affect the impacts of study do not mitigate concerns that decreases in in future acquisitions, which they said non-competes on new business employment due to non-compete enforceability drives seed capital investment in start- formation. In response, the Commission could drive increases in the job creation rate. The ups. An investment industry concern is not that the findings somehow represent notes that the studies show negative organization commented that private- effects on anything other than the average job effects across a range of industries and creation rate (as noted by the author in his ex parte equity financing, particularly for early- are directionally consistent, even if they communication), but that a rate is comprised of a stage companies, often includes non- do not provide results for all subgroups. numerator and denominator, and effects on either competes and is used to support growth, may drive effects on the rate as a whole. This in turn increasing competition. In concern is shared by at least two empirical studies 556Baslandze, supra note 533 at 40. of non-competes. See Johnson, Lavetti, & Lipsitz response, the Commission notes that 557Starr, Balasubramanian, & Sakakibara, supra supra note 388 at 19 and Johnson, Lipsitz, & Pei these commenters provided no note 518. supra note 526 at 19. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38394 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations the Commission does not make a enforceability, even in one State, sectional variation in non-compete separate finding that non-competes increases innovative activity enforceability, which is measured along reduce job creation. Instead, it cites the nationally.563Johnson, Lipsitz, and Pei’s two dimensions in a binary fashion. In research described herein—which study uses several legal changes to addition, a study by Gerald Carlino relates to job creation at newly founded analyze the impact of enforceability. It examined how patenting activity in firms—to support its finding that non- also uses several metrics of quality and Michigan was affected by an increase in competes inhibit new business quantity to mitigate concerns over non-compete enforceability. The study formation. whether patenting is an accurate finds that mechanical patenting reflection of innovation, especially in increased following the change in the ii. Non-Competes Inhibit Innovation this context. The study thus satisfies all law, but that drug patenting fell, and Evidence of Inhibited Innovation the principles outlined in Part IV.A.2 that the quality of computer patents and is therefore given substantial weight fell.567However, the increase in The Commission finds that non- by the Commission. mechanical patenting appears to have competes tend to negatively affect A third study, by Rockall and primarily occurred approximately 14 competitive conditions in product and Reinmuth, finds that non-competes have years after non-compete enforceability service markets by inhibiting a significant negative impact on changed. This suggests that some other innovation. Three highly reliable innovation. They further find that this mechanism may have led to the increase empirical studies find that non- effect is not driven solely by the entry in patenting activity.568Moreover, the competes reduce innovation.
compete enforceability, using a binary described in Part IV.A.2 and is given A study by Clemens Mueller does not measure of non-compete enforceability.
policy do not simply reallocate findings are directionally consistent Coombs and Taylor examine the innovative activity across State lines, with the first three studies described impact of non-compete enforceability on which would result in no change in herein). This study also uses cross- innovation. They find that research innovation at the national level. Instead, they find that decreasing non-compete 563Id. 567Carlino, supra note 535 at 40.
Exploration or Exploitation Strategies?, 23 Indus. 574Individual commenter, FTC–2023–0007–0198. 578Individual commenter, FTC–2023–0007– And Corp. Change 262 (2014). 575Individual commenter, FTC–2023–0007–3885. 12872. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38396 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations does not want to pursue, and we are also California despite the inability of outweighed by workers who can switch precluded from pursuing these ideas due to employers to enforce non-competes, jobs to firms that make better use of the noncompete. We see new ways to reach suggesting that employers have less their talents, or to startups that thrive people and help people with our unique skill restrictive alternatives for protecting and bring innovative new products to sets, and our noncompete keeps us from trade secrets. market.
being able to reach them. The noncompete Other commenters opposing the rule Other commenters stated that non- allows our employer to own us. They argued that non-competes may promote competes promote the sharing of ideas monopolize the talent of their workforce and this deprives the community of the innovation by encouraging firms to and information within firms and innovation that may stem from the make productivity-enhancing incentivize risk-taking. The Commission unleashing of the creativity of the physician investments and by decreasing the risk is not aware of evidence that non- workforce. I see the direct impact of non- of workers leaving. These commenters competes promote the sharing of ideas compete clauses. The public has so much to stated that non-competes protect firms’ within firms specifically, but in any gain by releasing healthcare workers from investments in workers, R&D, event the Commission explains in Part their noncompete clauses. These talented intellectual capital, and innovation. The IV.D.2 that trade secrets and NDAs individuals, once released from their Commission does not believe that non- provide less restrictive means than non- noncompetes, will begin to contribute to competes are needed to protect valuable competes for protecting confidential their communities with new ideas and innovation that will serve their communities. firm investments. As described in Part information. With respect to risk-taking, Many entities have so many reasons to avoid IV.D.2, the Commission finds that firms the Commission notes that the Conti innovation and this stifles the individuals have less restrictive alternatives that study finds that firms engage in riskier who work for them and oppresses new ideas. protect these investments adequately R&D strategies when non-compete Once released from the bureaucracy and while burdening competition to a less enforceability is greater, but it is not burden of non-competes I believe you will significant degree. clear whether these riskier R&D see an abundance of community outreach, In addition, when assessing how non- strategies translate into increased device innovation and community service competes affect innovation, the innovation.
from many physicians currently subjugated Commission believes it is important to Commenters also argued that non- by their noncompete clauses.579 consider the net impact. It is possible competes may have different effects on A research organization said a ban on that the effects described by these different types of workers—for example, non-competes would increase the value commenters and the effects described by across different industries, occupations, workers realize from creativity and the Commission earlier in this Part or levels of pay—and that these inventiveness, though it also asserted IV.B.3.b.ii can be occurring at the same differences may affect the impacts of that non-competes can incentivize firms time. That is, a non-compete might in non-competes on innovation. In to create and share information. Some some instances be protecting a firm’s response, the Commission notes that the workers commented that they had investments in a manner that is most methodologically robust studies innovative ideas or research that their productivity-enhancing holding all else show negative effects across a range of employer was unwilling to pursue, but equal. But even that same non-compete industries and are directionally the worker could not leave to pursue can—and certainly non-competes in the consistent, even if they do not provide their ideas elsewhere. A commenter also aggregate do—inhibit innovation by results for all subgroups. argued that captive workforces can stifle preventing workers from starting new A research organization argued that competition for workers and for clients businesses in which they can pursue non-competes decrease the likelihood or patients that leads to innovation. innovative ideas; inhibiting efficient that innovative technologies are According to several commenters, matching between workers and firms; developed outside the U.S. and that trapping workers in jobs can also lead and reducing the movement of workers non-competes promote economic to decreased productivity and so-called between firms. What the empirical growth, competitiveness, and national ‘‘quiet quitting.’’ evidence shows is that non-competes security. The Commission is not aware Some commenters contended that reduce innovation, overall and on net, of any reliable evidence of the effects of California’s ban on non-competes indicating that the tendency of non- non-competes on whether innovative helped Silicon Valley and other competes to inhibit innovation more technologies are developed outside the industries in California thrive. For than counteracts any tendency of non- U.S. However, the weight of the example, a public policy organization competes to promote innovation. empirical evidence indicates that non- pointed to industry clusters where The Commission addresses the competes reduce the amount of studies have identified job hopping, available evidence on the relationship innovation occurring within the U.S. which may otherwise be prohibited by between non-competes and firm Some commenters noted that non-competes, as the primary investment in Part IV.D.1. innovation hubs have emerged in States mechanism of knowledge diffusion and A business commenter contended that that enforce non-competes. In response, argued that restricting non-competes for worker mobility does not necessarily the Commission notes that it does not knowledge workers would improve the improve innovation since the new firm find that it is impossible for innovation U.S.’s competitiveness. Other may be unable or unwilling to use the hubs to emerge where non-competes are commenters questioned whether non- worker’s knowledge or ideas, or the new enforceable. Instead, the Commission competes played a role in Silicon start-up may fail and leave consumers finds that, overall, non-competes inhibit Valley’s growth. In response, the with less innovative products and innovation. Commission notes that it does not services. In response, the Commission One commenter performed an attribute California’s success in the notes that it is certainly possible that empirical exercise in which he technology industry to its non-compete some workers switch jobs to firms that correlated Global Innovation Index laws. The Commission merely notes (in are unable or unwilling to use their rankings of innovation clusters with the Part IV.D) that the technology industry knowledge or ideas, or to startups that enforceability of non-competes in each is highly dependent on protecting trade may fail. However, the fact that the location. The commenter found that secrets and that it has thrived in empirical evidence shows that reduced only one of the top five clusters bans non-compete enforceability increases non-competes, and only three others in 579Individual commenter, FTC–2023–0007–2340. innovation suggests that these effects are the top 100 ban non-competes. The VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38397 commenter cited the success of Chinese observed in the He study are in Oregon was no more likely to be innovation clusters, noting that non- considerable, as the study finds that the governed by Oregon’s law than any competes are permitted in each of value of patents, relative to the assets of other State’s law—we would expect to them.580The Commission does not find the firm, increases by about 31% when observe no effects on economic this evidence persuasive. Other non-compete enforceability decreases. outcomes (such as earnings, innovation, differences across countries may explain In addition, the Commission notes that and new business formation) from these results better than policy towards the comment record provides changes in State law. Instead, the non-competes, which is one factor substantial qualitative support in line empirical research shows that changes among many that affect the level of with the empirical findings. in State law have clear impacts on innovation in an economy. Furthermore, additional research, economic outcomes in particular States. Some commenters argued that the published since the release of the This indicates that enough non- empirical research cited in the NPRM NPRM, helps confirm the Commission’s competes within a particular State are has mixed results. These commenters finding regarding the effect of non- subject to that State’s law for changes in point to the study by Xiao (2022) competes on innovation. As described that State’s law to affect economic showing that non-competes increase under ‘‘Evidence of inhibited outcomes in that State. exploitative innovation (innovation that innovation,’’ this evidence moves Third, the authors argue that there is incrementally extends firms’ existing beyond assessing the impact of non- a lack of data on the use of non- capabilities), but not explorative competes on the value of patents or the competes and that such data are needed innovation (innovation that extends the number of patents to identify the quality to completely assess the effects of non- scope of firms’ capabilities). In of new innovation, as well as the competes. Although there is not response, the Commission notes that, mechanisms underlying these effects. comprehensive data on individual within this particular study, the net Many commenters referred to a law workers’ employment agreements, the impact of non-competes on innovation review article, which was also Commission believes the studies that was unclear. But the Commission does submitted as a comment itself, that examine changes in enforceability do so not believe the evidence overall is critiques the literature on non-competes based on sufficient data to be reliable mixed, given that the three empirical and innovation.583First, the authors and are otherwise methodologically studies of the effects of non-competes argue that a measure of enforceability sound. These studies are also highly on innovation that use the most reliable used in part of the economic literature probative with respect to the effects of empirical methods all find that non- is incorrect and that a more recently the final rule because what they are competes reduce innovation. developed measure is imperfect but examining—how changes in the Some commenters claimed that two better.584The Commission agrees with enforceability of non-competes affect studies cited in the NPRM—the Xiao the authors that the more recently various outcomes—matches closely and Conti studies—had findings that developed measure of enforceability, the with what the final rule does. The were omitted or misinterpreted: first, scale based on Bishara (2011), is Commission also notes that there is the Xiao finding that non-compete stronger than other measures of considerable data regarding the enforceability increases the rate of new enforceability due to its granularity. prevalence of non-competes, which it discoveries of medical devices due to This metric is used in many studies discussed in Part I.B.2.
increases in the rate of exploitative cited in this final rule, including the innovation but not explorative Johnson, Lipsitz, and Pei study, which Fourth, the article argues that some innovation); and second, the Conti largely reinforces the conclusions in the studies of non-competes have small finding that greater non-compete He study, lending weight to the sample sizes, which may lead to enforceability leads to riskier conclusions in these studies that non- measurement error. In response to innovation, which these commenters competes suppress the overall level of concerns about small sample sizes, the assert is a positive outcome.581In innovation in the economy. Commission notes that the most recent response, the Commission notes that the Second, the authors argue that a given studies use a greater breadth of variation NPRM described both of these findings non-compete may be governed by the in the legal environment surrounding and did not omit or misinterpret laws of a State other than the State non-competes, overcoming this obstacle. them.582The Commission explains why where the worker lives, which Fifth, the article expresses concern it gives these studies little weight under undermines the reliability of studies about certain studies that are based on ‘‘Evidence of inhibited innovation.’’ analyzing the effects of non-compete legal changes in Michigan. The A commenter asserted that the He enforceability. The authors argue that Commission takes this critique into study is insufficient evidence to support cross-border enforcement of non- account throughout this final rule and a finding, and that the study examines competes may be a difficult issue to notes it when discussing the applicable the effects of non-compete properly address in empirical work and studies that examine legal changes in enforceability on the value of patents, has not been accounted for in the work Michigan, including under ‘‘Evidence of which the commenter asserts misses to date. In response, the Commission inhibited innovation.’’ other aspects of innovation. In response, notes that if the State law that applied In an ex parte communication the Commission believes that the He to a given non-compete were totally included in the public record, the study is methodologically robust and random—for example, if a non-compete author of one of the studies of that, while no single metric can capture innovation stated that studies which all aspects of innovation, the value of 583Barnett & Sichelman, supra note 389. examine multiple legal changes may be patents is a meaningful proxy. The 584The allegedly flawed measures use binary biased, since affected parties may Commission also notes that the effects indicators for enforcement versus non-enforcement, anticipate the legal change and adjust or binary indicators for several facets of enforceability (Stuart and Sorenson, supra note 529; their behavior prior to the date that the 580Comment of Mark Cohen, FTC–2023–0007– Mark J. Garmaise, Ties that Truly Bind: legal change is made. The author stated 12064, at 12–13. Noncompetition Agreements, Executive that examination of the legal change in 581Referring to Xiao, supra note 572 and Conti, Compensation, and Firm Investment, 27 J. L., Econ., supra note 571. & Org. (2011)), and the more recent measure is more Michigan was therefore preferable, since 582NPRM at 3492–93. nuanced (Bishara, supra note 501). it was ‘‘inadvertent’’ and therefore not VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38398 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations subject to anticipation effects.585The the empirical evidence on consumer decreased non-compete enforceability Commission agrees that, in general, prices relates only to healthcare markets decreases earnings, then the fall in anticipation effects can bias the findings (though the evidence on concentration prices may simply be due to pass- of empirical studies. However, spans all industries in the economy). through of labor costs. However, empirical work shows that the legal For this reason, the Commission does empirical research shows that decreased changes used in much of the literature not rest its finding that non-competes non-compete enforceability increases on non-competes are not subject to tend to negatively affect competitive earnings (as discussed in Part anticipation effects.586This may be conditions in product and service IV.B.3.a.ii). Even if that were not the because the vast majority are changes markets on a finding that non-competes case, Hausman and Lavetti show that based on judicial decisions, rather than increase concentration and consumer labor cost pass-through cannot explain statutory changes, as hypothesized by prices. However, there are several their findings.590This study satisfies all researchers.587Moreover, even if reliable studies finding that non- of the principles described in Part anticipation effects occur in studies of competes increase concentration and/or IV.A.2, and is accordingly weighted non-compete enforceability, that would consumer prices, bolstering the highly by the Commission. likely not change the measurable Commission’s finding that non- Another study, by Lipsitz and observed benefits of reducing non- competes tend to negatively affect Tremblay, examines all industries in the compete enforceability, and may indeed competitive conditions in product and economy and shows empirically that lead to underestimation of observed service markets. increased enforceability of non- benefits. Underestimation would occur The Commission finds that non- competes at the State level increases if parties were adjusting their behavior competes reduce new business concentration.591Lipsitz and Tremblay in advance of the change in formation.588By doing so, non- theorize that non-competes inhibit enforceability in the same direction as competes may increase concentration. entrepreneurial ventures that could the effects observed after the change. Non-competes may also stunt the otherwise enhance competition in goods This would occur if, for example, firms growth of existing firms that would and service markets. The authors show began to decrease use of non-competes otherwise better challenge dominant that the potential for harm is greatest in in advance of a decrease in non-compete firms, for example, by limiting potential the industries in which non-competes enforceability, knowing that those non- competitors’ access to talented are likely to be used at the highest competes would soon be less workers.589 rate.592 enforceable. This ultimately would Non-competes may also affect prices If the general causal link governing mean that the actual effects on labor in a variety of ways. By suppressing the relationship between enforceability mobility, earnings, new business workers’ earnings, non-competes of non-competes, concentration, and formation, innovation, and other decrease firms’ costs, which firms may consumer prices acts similarly to that outcomes could be even greater. theoretically pass through to consumers identified in the study by Hausman and Additionally, the legal change in in the form of lower prices. However, Lavetti, then it is plausible that Michigan is subject to other criticism, as non-competes may also have several increases in concentration identified by discussed under ‘‘Evidence of inhibited countervailing effects that would tend to Lipsitz and Tremblay would lead to innovation’’ and by commenters. increase prices. First, non-competes higher prices in a broader set of industries than healthcare. Lipsitz and may increase concentration, which iii. Non-Competes May Increase Tremblay use several changes in non- could lead to less competition between Concentration and Consumer Prices compete enforceability measured in a firms on price, and therefore higher Evidence of Increased Concentration prices for consumers. Second, by continuous fashion, but do not measure and Consumer Prices inhibiting efficient matching between the impact on consumer prices or welfare. The Commission therefore As described in Parts IV.B.3.b.i and ii, workers and firms, non-competes may finds the study’s conclusion that non- the Commission finds that non- reduce the productivity of a firm’s competes increase concentration highly competes tend to negatively affect workforce, which may lead to higher robust, but the study is not itself direct competitive conditions in product and prices. Third, by inhibiting innovation, empirical evidence of a relationship service markets by inhibiting new non-competes may hinder the between non-competes and prices.
business formation and innovation, and development of lower-cost products or Two additional studies assess the have in fact done so. The Commission more efficient manufacturing processes. effects of non-competes on finds that these effects, standing alone, One study, by Hausman and Lavetti, concentration and prices. However, the are sufficient to support its finding that focuses on physician markets. The study Commission gives these studies little non-competes tend to negatively affect finds that as the enforceability of non- weight.
competitive conditions in product and competes increases, these markets A study of physician non-competes by service markets. become more concentrated, and prices Lavetti, Simon, and White finds that However, the Commission notes that for consumers for physician services prices charged by physicians with non- there is also evidence that non-competes increase. The study finds that while competes are similar to those charged by increase industrial concentration more non-competes allow physician practices physicians without non-competes.593 broadly, which in turn tends to raise to allocate clients more efficiently consumer prices. The empirical across physicians, this comes at the cost 590Naomi Hausman & Kurt Lavetti, Physician literature on these effects is less of greater concentration and higher Practice Organization and Negotiated Prices: developed than the empirical work consumer prices. This study examines Evidence from State Law Changes, 13 Am Econ. J. documenting declines in new business several changes in non-compete Applied Econ. 278 (2021). formation and innovation; specifically, enforceability measured continuously. 591Michael Lipsitz & Mark Tremblay, Noncompete Agreements and the Welfare of The authors note that, in theory, if Consumers 6 (2021), https://papers.ssrn.com/sol3/ 585Ex Parte Communication: Email from G. papers.cfm?abstract_id=3975864. Concentration is Carlino, supra note 558. 588See Part IV.B.3.b.i. measured by an employment-based Herfindahl- 586Johnson, Lavetti & Lipsitz, supra note 388 at 589See Part IV.C.2.c.i (describing a study Hirschman Index (HHI). 12–14. addressing how non-competes force firms to make 592Id. at 3. 587Id. at 12. inefficiently high buyout payments). 593See Lavetti, Simon, & White, supra note 82. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38399 The Commission gives this study less notes that the available evidence asserting that non-competes worsen weight because it merely analyzes indicates that non-competes increase healthcare shortages.598 differences between workers based on concentration, rather than reducing it. Some commenters stated that non- the use of non-competes.594 The Commission further notes that these competes may improve access to A study by Younge, Tong, and theories are inconsistent with the robust physicians due to non-compete-led Fleming finds that non-competes empirical literature finding that non- consolidation or more efficient patient- contribute to economic concentration competes reduce new business sharing within practices, and that because non-compete enforceability formation, as well as with the hundreds Hausman and Lavetti’s study is unable increases the rate of mergers and of comments from small businesses, to quantify these benefits. In response, acquisitions.595This study uses one including physician practices, the Commission notes that there is no change in non-compete enforceability— recounting how non-competes stymied empirical literature bearing out this in Michigan—to generate its results. their ability to enter markets or grow theory, and that the commenters However, in addition to its use of a because they make it harder to hire overwhelmingly stated that non- single legal change in a single State, the talent. competes decrease patients’ access to change to non-compete enforceability the physicians of their choice, increase Several commenters claimed that was accompanied by several other healthcare shortages, and negatively prohibiting non-competes would changes to Michigan’s antitrust laws, so affect the quality of health care.599 increase worker earnings and increase it is not possible to identify the effect of the change in non-compete transaction costs related to hiring, iv. Non-Competes May Reduce Product enforceability standing alone. which firms would pass through to and Service Quality and Consumer consumers in the form of higher prices. Choice Comments Pertaining to Increased However, the only study of how non- Concentration and Consumer Prices and competes affect prices—the Hausman The negative effects of non-competes the Commission’s Responses and Lavetti study—finds that decreased on competition may also degrade product and service quality and Several commenters addressed the non-compete enforceability decreases consumer choice. Competition question of whether non-competes affect prices in the healthcare market, rather encourages firms to expand their concentration and consumer prices. than increasing them. Moreover, while product offerings and innovate in ways Some commenters asserted that the rule it is theoretically possible that higher that lead to new and better products and would lower consumer prices by labor costs could be passed on to services.600However, by inhibiting new improving matches between employers consumers in the form of higher prices, business formation, increasing and workers, increasing productivity. there are several countervailing effects concentration, and reducing innovation, Commenters also argued that locking up from prohibiting non-competes that non-competes reduce competitive talent, particularly in specialized would tend to lower prices. pressure in product and service markets, markets, prevents entrepreneurship and Additionally, empirical research shows which may reduce product quality and new business formation and can thus that labor cost pass-through cannot consumer choice. In addition, poor contribute to increased concentration. explain decreases in prices in healthcare working conditions and less optimal Some commenters opposing the markets associated with non-competes matching of workers and firms may lead NPRM claimed that banning non- becoming less enforceable.597 to reductions in the quality of products competes could increase concentration. An insurance company stated that and services. For these reasons, non- These commenters argued that larger insurance premiums would increase if competes may tend to negatively affect firms could discourage companies from the rule allows non-profit hospitals to competitive conditions in product and expanding into new and underserved dominate the hospital market and have service markets by reducing product markets by poaching, or threatening to more leverage in network negotiations. quality and consumers’ options. poach, their key employees, leading to These commenters do not provide any Such effects are less readily increased costs that could force some empirical evidence to support this quantifiable than the other negative firms out of business. These assertion. Moreover, for the reasons effects of non-competes on product and commenters also argued that non- described in Part V.D.5, the Commission service markets—i.e., the negative competes protect small businesses from disagrees that the ability to use non- effects on new business formation, dominant consolidators, as high competes will provide a material innovation, concentration, and recruitment, retention, and other costs competitive advantage to non-profit consumer prices. It is thus unsurprising may induce small businesses to sell or hospitals. Another commenter stated that there are not reliable empirical larger businesses may hire away their that if non-competes are prohibited, studies of these effects. However, the workers. A medical trade organization physicians will leave States with lower Commission received an outpouring of stated that without non-competes, market reimbursement rates for those public comments on this issue. independent practices might not be able with higher rates, increasing healthcare Hundreds of commenters, primarily to afford to hire and thus may be unable costs and shortages. Commenters did from the healthcare field, described how to grow or compete.596 not cite any empirical evidence that While these commenters theorize that supports this hypothetical assertion that prohibiting non-competes would 598These comments are summarized in greater the final rule would increase healthcare detail in Part IV.B.3.b.iv. increase concentration, the Commission costs or shortages due to physicians 599See Part IV.B.3.b.iv. leaving States with lower 600In the NPRM, the Commission noted that 594See Part IV.A.2 (describing the shortcomings reimbursement rates, and the innovation and entrepreneurship can, in turn, have of such studies). positive effects on product quality. See NPRM at Commission is aware of none. However, 595Kenneth A. Younge, Tony W. Tong, & Lee 3492. The Commission did not make specific Fleming, How Anticipated Employee Mobility the Commission notes that it received findings on the effect of non-competes on consumer Affects Acquisition Likelihood: Evidence From a many comments from doctors, nurses, choice. However, the Commission discussed the Natural Experiment, 36 Strategic Mgmt. J. 686 and other healthcare professionals closely related questions of how non-competes (2015). affect new business formation, innovation, 596See also Part XI.C.2, which addresses these concentration, and consumer prices. See id. at types of comments in greater detail. 597Hausman & Lavetti, supra note 590. 3490–93. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38400 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations non-competes reduce product and distances to see that physician, switch doctors with this change. They worry how service quality and consumer choice. physicians, or lose access entirely if no they can pay for the steep gas prices to see The large number of comments the other physicians are available. One their doctors. . . . They are truly concerned Commission received on this issue, the physician argued that taking away a for the health of their families. All the while all I can do is tell them that my non-compete wide variety of impacts commenters patient’s ability to choose their provider does not allow me, their cardiologist for the describe, and the fact that the impacts violates the Patients’ Bill of Rights.602 past decade, to give them any advice on how commenters describe are One medical society cited a 2022 to maintain their care.605 overwhelmingly negative, indicate that survey of Louisiana surgeons in which • As a Physician, I had a non compete non-competes reduce product quality 64.4% of the surgeons believed non- clause in my contract that extended two and consumer choice, further bolstering competes force patients to drive long counties wide (100 square miles). . . . the Commission’s finding that non- distances to maintain continuity of care, [W]hen I would not sign a contract competes tend to negatively affect and 76.7% believed they force surgeons amendment regarding pay that was very competitive conditions in product and to abandon their patients if they seek unfavorable and nebulous I was called in and summarily dismissed ‘no cause.’ Because of service markets.601 new employment.603This study had a that I had to work out of state and my The commenters who addressed the small sample size and thus the patients were instantly without a physician. effects of non-competes on product Commission gives it limited weight, but The community did not have enough quality and consumer choice primarily the Commission notes that it accords physicians to be able to care for the patients discussed the healthcare industry. The with the many comments the who now had no medical provider. During majority of these comments focused on Commission received describing how COVID this lack of access to healthcare for how non-competes harm patient care. patients must drive long distances to patients most certainly led to increased Hundreds of physicians and other maintain continuity of care—or are unnecessary illness and death. . . . Patients commenters in the healthcare industry unable to do so, resulting in harms to are suffering with access to healthcare, and physician shortages are being exacerbated stated that non-competes negatively their health. Illustrative comments on because every time a physician has to leave affect physicians’ ability to provide how non-competes affect the quality of because of a non compete clause they start quality care and limit patient access to patient care include the following: hiring and credentialing all over again and it care, including emergency care. Many of • As a primary care physician I truly hope can take months for them to be able to work these commenters stated that non- again.606 competes restrict physicians from to see [the rule] move forward. I recently left • Being a therapist, non-competes are my position at one company and for a year leaving practices and increase the risk of extremely scary when it comes to patient commuted an hour to be outside of my non- retaliation if physicians object to the compete radius. I recently returned to my care. Some include date ranges in which we practices’ operations, poor care or community and discovered I have more cannot communicate with our patients, some of whom have severe trauma histories or services, workload demands, or patients than I can count who simply didn’t suicidal ideations. If a clinician changes corporate interference with their clinical get care for over a year because they didn’t companies but is unable to continue meeting judgment. Other commenters from the want to find a new [primary care physician] a patient, who is at fault if there is an injury healthcare industry said that, like other but also couldn’t make the hour drive to see or death? . . . Some non-competes include me at my new location. The commute was industries, non-competes bar mileage in which a clinician cannot create annoying for me, but ultimately the only ones competitors from the market and their own company or rent out an office truly hurt were patients. Let’s stop hurting prevent providers from moving to or within a certain radius—how is this a safe our patients by restricting their ability to see starting competing firms, thus limiting their physicians.604 practice? How can clients continue to work access to care and patient choice. • My practice has operated since the 1990s on their mental health and desire to stay alive if they have to change clinicians due to Physicians and physician organizations in Danville, Kentucky. We are the only s b a u i r d n n ou on t - a c n o d m jo p b e t d es is c s o at n i t s r f i a b c u ti t o e n t , o a nd said c h a a r s d w io o l r o k g e y d p t r i a re c l t e ic s e s l t y h t a o t h se a r s v b e e t e h n is p r r u e r s a e l n t and a n • on D c u o e m to p e m te i s c t l r a e u a s tm e? e 6 n 0 t 7 and to escape community. The practice was a private workplace toxicity, one of my colleagues left burnout negatively impacts patient care. practice originally. Unfortunately, just as our practice in compliance to our non- In addition, physicians and physician most cardiac practices throughout the compete conditions, even though they caused organizations stated that, to escape non- country have had to, our practice had to great hardship. I, too, wanted to leave, but competes, physicians often leave the come under the control of these hospital could not because doing so would have area, and that this severs many systems to maintain its viability. . . . The harmed my family’s well being. What I physician/patient relationships. These CEO and the administration . . . have witnessed in the aftermath was commenters stated that non-competes squeezed us out and forced us to leave the unconscionable. There was a void in patient therefore cause patients to lose the area with the employment contract non- care and months later, there still is a void. knowledge, trust, and compatibility that compete in place. . . . Ih ave spent the last Not only was this physician required to move 6 months hugging patients, medical staff, quite a distance from the practice, he was comes with long-established nursing who are stricken by the fact that we forbidden to even inform his patients that he relationships. These commenters also are being pushed out. Patients desperately was leaving. The practice in turn, did not said that strong physician/patient ask me how they can maintain care if they inform the patients, and when asked, just relationships and continuity of care have to travel up to an hour to see their informed them that he was no longer with improve health outcomes, particularly the practice. Consequently, wait times to for complex, chronic conditions or 602See President’s Advisory Commission on treat cancers doubled and now have patients who need multiple surgeries. Consumer Protection and Quality in the Health Care tripled.608 These commenters described how Industry, Consumer Bill of Rights and • I would like to open a new clinic in my Responsibilities, Executive Summary (1997), town, but my noncompete would disallow patients who lose their physicians to https://govinfo.library.unt.edu/hcquality/cborr/ that from happening immediately. non-competes either travel long index.htm. Furthermore, I worry that my patients that 603See William F. Sherman et al., The Impact of need medical care wouldn’t be able to access 601As described in Parts IV.B.3.b.i and ii, the a Non-Compete Clause on Patient Care and it at my current clinic because the providers Commission finds that the effects of non-competes Orthopaedic Surgeons in the State of Louisiana: on new business formation and innovation, Afraid of a Little Competition?, 14 Orthopedic Revs. standing alone, are sufficient to sustain its finding (Oct. 2022), https://www.ncbi.nlm.nih.gov/pmc/ 605Individual commenter, FTC–2023–0007–4072. that non-competes tend to negatively affect articles/PMC9569414/. 606Individual commenter, FTC–2023–0007–4440. competitive conditions in product and service 604Individual commenter, FTC–2023–0007– 607Individual commenter, FTC–2023–0007–4270. markets. 19853. 608Individual commenter, FTC–2023–0007–2384. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38401 are booked out 6+ months, and if one left that to coordinate care plans and simplify shortages and prevent hospital or would make those immediately increase to logistics, and that non-competes protect facility closures by keeping physicians nearly a year, which could potentially cause the stability of those care teams to from leaving underserved areas and my patient lasting damage. If I could open patients’ benefit. Some industry reducing fluctuations in labor costs. my own clinic locally without the constraints associations and hospitals argued that Some of these commenters asserted that of the noncompete, those patients would be non-competes improve patient choice a ban on non-competes would upend able to continue care as necessary with me, and I wouldn’t feel stuck with poor and continuity of care because they stop healthcare labor markets, thereby management worsening patient care for my physicians from leaving a health exacerbating healthcare workforce patients.609 provider, benefiting patients who shortages, especially in rural and • As a veterinarian, I can personally assure cannot follow the provider due to underserved areas. A medical society the FTC that such restrictions have caused geographic or insurance limitations. argued that non-competes can allow both death and permanent disability of One physician association said groups to meet contractual obligations pets. . . . Inn early every scenario I have physicians leaving jobs can be costly to to hospitals, as physicians leaving can heard of, the veterinary business that requires patients, who must transfer records and prevent the group from ensuring safe and enforces non-compete clauses is underserving the pet-owning public. This is reevaluate insurance coverage. care. As the Commission notes, there are the current situation for veterinary medicine The Commission notes that the vast not reliable empirical studies of these on a national level. Hospitals are so majority of comments from physicians effects, and these commenters do not overwhelmed that they are not accepting new and other stakeholders in the healthcare provide any. However, the Commission patients, turning away emergency cases, and industry assert that non-competes result notes that the rule will increase labor imposing extremely long (several months or in worse patient care. The Commission mobility generally, which makes it more) waiting lists for appointments and/or further notes that the American Medical easier for firms to hire qualified scheduled procedures. If a hospital cannot Association discourages the use of non- workers. accommodate the patients who require competes because they ‘‘can disrupt Commenters in a variety of industries veterinary care, that hospital is not able to continuity of care, and may limit access beyond healthcare markets also compete with the existing demand for services. . . . Is itf air for pet owners who to care.’’613In addition, there are provided a wide range of examples of cannot get their pets in to see a veterinarian alternatives for improving patient how non-competes diminish the quality (even on emergency situations) to have the choice and quality of care, and for of goods and services, including veterinary hospitals who refuse to see their retaining physicians, that burden preventing businesses from hiring pets remove other options for care via non- competition to a much less significant experienced staff and creating worker compete clauses? These clauses are being degree than non-competes. shortages. Commenters stated that, blatantly abused by certain large veterinary A related issue frequently raised in where firms in a market use non- businesses so that these organizations can the comments is the impact non- competes, it can be difficult for other maintain a pool of potential patients (on competes have on healthcare shortages. firms to remain in the market, and waiting lists) to draw from. Unfortunately, many of these dogs and cats die while According to many commenters, non- consumers thus lose the freedom to waiting to be seen. At least in my profession, competes contribute to shortages by choose providers. Several comments the non-compete concept has reached an preventing physicians from moving to pointed favorably to the American Bar epitome of unethical conduct. In addition, areas where their skills and specialties Association’s longstanding ban on non- economic growth has been stunted due to are needed; forcing physicians out of competes for most lawyers to protect self-serving greedy people in power. Please such areas; or forcing them out of clients’ freedom to choose their lawyer, get rid of this horrible clause and lets make practice entirely due to contractual in contrast with other highly paid and sure pets and their owners get what they restrictions or burnout. Such shortages, highly skilled professions such as need, when they need it.610 according to these commenters, physicians and their patients or Some hospital associations argued decrease access to care, increase wait clients.614 that a study of physician markets611 times, lead to canceled procedures, and Commenters from outside the shows that non-competes improve decrease the quality of care. Many healthcare industry mainly focused on patient care. According to these commenters stated that these effects of how non-competes increase commenters, this research finds that non-competes are particularly acute in concentration within industries, which non-competes make in-practice referrals rural, underserved, and less affluent reduces firms’ incentive to innovate and more likely, increasing revenue and areas that already have difficulty results in consumers having fewer wages and providing patients with more attracting healthcare professionals. choices. Other commenters described integrated and better care. In response, Some commenters argued that provider how non-competes lock highly talented the Commission notes that while the shortages can, in combination with non- workers out of their fields or force them study finds that non-competes make competes, create monopolies. into jobs where they are less productive, physicians more likely to refer patients A smaller number of commenters depriving the marketplace of the to other physicians within their from the healthcare industry argued that products and services they would have practice—increasing revenue for the non-competes alleviate healthcare developed. Illustrative examples of practice—it makes no findings on the these comments include the following: impact on the quality of patient care.
The Commission further notes that 20 6 2 1 3 3 – S 0 e 0 e 0 , 7 e – .g 2 . 1 , 0 C 1 o 7 m , m at e 4 n – t 5 o ( f c A it m in . g M A e M d A . A C s o s’ d n e , o F f T C– • As a software developer who often works pecuniary benefits to a firm cannot Medical Ethics Opinion 11.2.3.1). After the under contracts containing sections justify an unfair method of comment period closed, the AMA adopted a policy stipulating non-compete agreements, I have supporting banning non-competes for physicians in observed first hand how they can harm the competition.612 clinical practice who are employed by hospitals, economy by bolstering monopolies, such as Some medical practices argued that hospital systems, or staffing companies, though not in sectors where clientele only have a single within-group referrals allow physicians those employed by private practices. This policy choice for meeting their engineering needs. change does not have legal effect. Andis Often, these clients have no other options Robeznieks, AMA Backs Effort to Ban Many 609Individual commenter, FTC–2023–0007–1206.
me. I learned to climb and saw while executive, it is an unfair method of The Commission accordingly finalizes working for Federal agencies (USDA and competition for a person to enter into or the language as proposed. NPS), and also through self-education and attempt to enter into a non-compete practice on my own. I believe that non- b. Enforcing or Attempting To Enforce compete agreements have adversely limited clause; enforce or attempt to enforce a (§910.2(a)(1)(ii)) competition in the tree service industry. This non-compete clause; or represent that Proposed §910.2(a) would have hurts employees who could do better if they the worker is subject to a non-compete provided that it is an unfair method of were free to change their place of clause.
employment, and it hurts consumers who Part IV.A sets forth the Commission’s competition for an employer to, among have fewer tree service providers to choose other things, ‘‘maintain with a worker a determination that the foregoing from.616 non-compete clause.’’ In addition, • I worked in a business supplying practices are unfair methods of proposed §910.2(b)(1) would have competition under section 5, and Parts technology and materiel considered critical provided that, to comply with this for national defense. I was labeled an expert IV.B.1 through IV.B.3 explain the prohibition on maintaining a non- in the field by my DoD customers and findings that provide the basis for this compete, an employer that entered into commended multiple times for solving determination. In this Part IV.B.4, the a non-compete with a worker prior to logistical and technical problems with Commission explains the three prongs protective equipment during the previous of §910.2(a)(1) and addresses comments the compliance date must ‘‘rescind the two wars. I lead development contracts from non-compete no later than the on proposed §910.2(a).618 the DoD to advance the state-of-the-art in compliance date.’’ warfighter protection, which set multiple a. Entering Into or Attempting To Enter As elaborated in Part IV.E, the records for figures of merit within my Into (§910.2(a)(1)(i)) Commission has decided not to finalize business, and which our program manager a rescission requirement. As a result, the volunteered was the most exciting Proposed §910.2(a) would have Commission also removes ‘‘maintain’’ technology she had ever managed. When my provided that it is an unfair method of from the text of §910.2(a), to avoid any business decided to discontinue that competition for an employer to, among technology and transfer me, my noncompete other things, ‘‘enter into or attempt to ambiguity about whether the final rule agreement prevented me from continuing to contains a rescission requirement. enter into a non-compete clause with a support the DoD. I was removed from Instead of a rescission requirement, the worker.’’ The Commission adopts this consideration at another firm in the third final rule focuses more narrowly on the round of interviews because of my same language in the final rule in future enforcement of existing non- noncompete agreement—again, for a §910.2(a)(1)(i). As a result, the final rule competes with workers other than technology my business had decided to not prohibits persons from entering into or senior executives. It provides that, with pursue and had transferred me out of. So, attempting to enter into non-competes respect to a worker other than a senior instead of having the opportunity to advance with workers other than senior my career into management in the service of executives as of the effective date. executive, it is an unfair method of protecting warfighters, I had to exit that competition for a person to enforce or (Section 910.2(a)(2)(i) separately industry and move laterally, into a different attempt to enforce a non-compete prohibits persons from entering into or industry that cannot value 20 years of my clause. An employer attempts to enforce expertise, and which will not further the attempting to enter into non-competes a non-compete where, for example, it defense of my country. If the FTC had with senior executives as of the effective takes steps toward initiating legal action nationalized a prohibition on noncompete date.)
4. Prohibitions in Section 910.2(a)(1) Commission is concerned that such non-competes that are rendered attempts to enter into non-competes still Based on the totality of the evidence, unenforceable by this provision of the have in terrorem effects that deter including its review of the empirical rule.
Several commenters argued that the Overall, courts tend to apply a default rule of Commission should allow all existing 619See Part IV.C.3. enforceability.’’) (internal citations omitted). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38404 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations has assessed the benefits and costs of believes the non-compete is potential approaches to defining the the final rule and finds that the final unenforceable—may deter the worker term.630 rule has substantial benefits that clearly from seeking or accepting work or In the final rule, the Commission does justify the costs (even in the absence of starting their own business. As not find that senior executives— full monetization).623 explained in Part IV.B.2.b.ii, many specifically, highly paid workers with commenters—including highly paid the highest levels of authority in an
c. Representing (§910.2(a)(1)(iii))
other than a senior executive is subject exclusionary conduct that tends to to a non-compete clause. The ‘‘good A commenter suggested limiting the negatively affect competitive conditions faith’’ language remains in the final rule ‘‘representation’’ prong to instances in product and service markets and but, for clarity, it has been moved to where the employer has no good-faith labor markets. Indeed, non-competes §910.3, which contains exceptions to basis to believe the non-compete is valid with senior executives may tend to the final rule.624 ‘‘under local or State law,’’ even if the negatively affect competitive conditions Under this ‘‘representation’’ prong, non-compete is invalid under the final in product and service markets to an the final rule prohibits an employer rule. The Commission does not adopt even greater degree than non-competes from, among other things, threatening to this approach because representing to with other workers, given the outsized enforce a non-compete against the workers that they are subject to a non- role senior executives play in forming worker; advising the worker that, due to compete, where the rule provides that new businesses and setting the strategic a non-compete, they should not pursue the non-compete is unenforceable, direction of firms with respect to a particular job opportunity; or telling would mislead the worker and would innovation. The Commission explains the worker that the worker is subject to tend to deter them from competing the basis for these findings in Part a non-compete. The Commission against the employer by seeking or IV.C.2. believes that this prohibition on accepting work or starting a business. Because non-competes with senior representation is important because executives are not exploitative or
not or when the non-compete is with workers other than senior In Part IV.C.4, the Commission unenforceable. Such misrepresentations executives were exploitative and explains the final rule’s definition of can have in terrorem effects on workers, coercive, the Commission stated that ‘‘senior executive’’ and the related causing them to refrain from looking for this finding did not apply to senior definitions it is adopting.631The work or taking another job, thereby executives.629The Commission Commission finds that the final rule’s furthering the adverse effects on requested comment on that preliminary definition of ‘‘senior executive’’ competition that the Commission is finding, as well as on whether non- appropriately captures the workers that concerned about.
625See Prescott & Starr, supra note 413 at 10–11. 627NPRM, proposed §910.2(a). 626See Starr, Prescott, & Bishara, supra note 68 628Id. at 3500. 630Id. at 3520. at 81. 629Id. at 3502–04. 631See §910.1.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38405 workers for whom the Commission period as long or longer than their non- comments in their personal capacity. decides to leave existing non-competes compete period, making it easier to sit While the Commission did receive some unaffected, the final rule adopts a out of the market.636However, this comments from self-identified senior definition of senior executive that uses study was limited to very-high-earning executives suggesting that their non- both an earnings test and a job duties CEOs at large public companies—the competes were exploitative and test. Specifically, the final rule defines average total compensation of the CEOs coercive, such comments were far less the term ‘‘senior executive’’ to refer to studied was $1.65 million637—so its common than for other workers. workers earning more than $151,164 findings do not necessarily capture the However, some senior executives did who are in a ‘‘policy-making position’’ experiences of other senior executives. report experiencing similar issues of as defined in the final rule.632 Many Americans work in positions with exploitation and coercion. Several Finally, in Part IV.C.5, the ‘‘senior executive’’ classifications. senior executives said that their non- Commission explains the regulatory text According to BLS, there were almost 3.4 competes were required and non- it is adopting in §910.2(a)(2), which million ‘‘top executives’’ in the U.S. in negotiable. Multiple senior executives defines unfair methods of competition 2022 at firms under private ownership, described their own non-competes as related to non-competes with senior and the median income for these ‘‘one-sided’’ in favor of the employer. executives. workers was $99,240.638 Some senior executives said they were The comment record on whether not given consideration for the non- 1. The Commission Does Not Find That senior executives experience compete, and even some who said they Non-Competes With Senior Executives exploitation and coercion in relation to received consideration still said their Are Exploitative or Coercive their non-competes is mixed. Many non-competes were exploitative and The Commission stated in the NPRM commenters asserted that, because some coercive. For example, some senior that its preliminary finding that non- senior executives negotiate their non- executives said they: (1) were required competes are exploitative and coercive competes with the assistance of expert to sign a non-compete under threat of did not apply to senior executives. The counsel, they are likely to have losing their job or their earned Commission stated that non-competes bargained for a higher wage or more compensation; (2) were forced into a with senior executives are unlikely to be generous severance package in exchange stock share buyout that included a non- exploitative or coercive at the time of for agreeing to the non-compete, and compete; or (3) could obtain long-term contracting, because senior executives thus their non-competes are not compensation only if they signed a non- are likely to negotiate the terms of their exploitative or coercive. Several compete. Two advocacy groups stated employment and may often do so with commenters stated that senior that many senior executives may lack the assistance of counsel.633The executives frequently negotiate non- power to avoid non-competes and that Commission also stated that such non- competes for valuable consideration employers still hold most of the leverage competes are unlikely to be exploitative and/or typically agree to non-competes in employment negotiations, even with or coercive at the time of the executive’s only in exchange for compensation. respect to senior executives. An potential departure, because senior Some senior executives said they were employment law firm stated that in its executives are likely to have bargained not exploited or coerced in connection experience, it had not seen higher for a higher wage or more generous with non-competes.639Several compensation for senior executives and severance package in exchange for commenters agreed with the other highly paid workers in agreeing to the non-compete.634The Commission’s preliminary finding that jurisdictions where non-competes were Commission sought comment on senior executives often obtain the allowed, and that employers rarely whether there are other categories of assistance of counsel with respect to provide compensation for non- highly paid or highly skilled workers non-competes. Some commenters stated competes. The firm said that senior (i.e., other than senior executives) who that to the extent a non-compete is not executives and other highly paid are not exploited or coerced in exploitative or coercive at the time of workers are more likely to receive connection with non-competes.635 contracting, it is also not exploitative or severance payments, but such payments Based on the totality of the record, coercive at the time of departure. One are paid only in some cases. It said that including the many comments CEO stated that non-competes should be even when paid, the severance submitted on these questions, the permissible for senior executives when payments often do not fully compensate Commission finds that senior they are entered into in exchange for for what a senior executive could have executives—specifically, highly paid severance and when the senior otherwise earned during the non- workers with the highest levels of executive leaves voluntarily. compete period.
authority in an organization—are The Commission notes that a Furthermore, several self-identified substantially less likely than other relatively small number of self- senior executives said they felt unable workers to be exploited or coerced in identified senior executives submitted to leave their company because of their connection with non-competes. For non-competes. Many of these these reasons, the Commission does not 636Stewart J. Schwab & Randall S. Thomas, An commenters said they feared being find that non-competes with senior Empirical Analysis of CEO Employment Contracts: unemployed. Some senior executives executives are exploitative or coercive. What Do Top Executives Bargain For?, 63 Wash. & There is little empirical evidence on Lee L. Rev. 231, 256–57 (2006). said they feared or could not afford the question of whether non-competes 637Id. at 244. litigation, while two senior executives 638BLS, Occupational Employment and Wage said that they could not afford to fight with senior executives are exploitative Statistics, Tables Created by BLS, https:// non-competes they believed were or coercive. A 2006 study of non- www.bls.gov/oes.tables.htm. These data are from unenforceable. Several self-identified competes with CEOs finds that many of the May 2022 National XLS table for Top these workers negotiated a severance Executives under private ownership. senior executives, having spent their 639For the sake of readability, the Commission careers in one industry, said they were refers to the commenters based on how they forced to sit out of the market for long 632Id.
likely to be losing out on increasingly to leave or forcing them to leave their scarce employment opportunities profession, move their families far away, 2. The Use of Non-Competes With relative to their younger counterparts. and/or commute long distances. And a Senior Executives is an Unfair Method Another advocacy group argued that the large share of high-wage workers argued of Competition Under Section 5 Commission did not provide sufficient that even where their non-competes evidence to support its preliminary were overbroad and likely While the Commission does not find finding that non-competes are not unenforceable, they were deterred from that non-competes with senior exploitative and coercive for senior seeking or accepting other work or executives are exploitative and coercive, executives. A few commenters starting a business by the threat of a the Commission determines that these suggested that senior executives from lawsuit from their employer, which they non-competes are nonetheless unfair historically marginalized groups may be said would be ruinous to their finances methods of competition, for the reasons paid less and have less bargaining and professional reputations.642The described herein. power than other senior executives.640 Commission accordingly finds that To determine whether conduct is an Critically, the Commission received higher-wage workers who are not senior unfair method of competition under an outpouring of comments indicating executives are often exploited and section 5, the Commission assesses two that highly paid workers who are not coerced through employers’ use of non- elements: (1) whether the conduct is a senior executives (i.e., who are not competes. method of competition, as opposed to a workers with the highest levels of In addition, the Commission believes condition of the marketplace and (2) authority in an organization) are often it is appropriate to conclude that lower- whether it is unfair, meaning that it goes coerced or exploited via non-competes. earning workers, regardless of their job beyond competition on the merits. The The Commission received many title or function in an organization, are latter inquiry has two components: (a) comments from workers in relatively more likely to be exploited or coerced whether the conduct has indicia of higher-wage fields—such as medicine, in connection with non-competes. As unfairness and (b) whether the conduct engineering, finance and insurance, and noted, many workers classified as ‘‘top tends to negatively affect competitive technology—who stated that employers executives’’ make under $100,000. conditions. These two components are exploited and coerced them through the Commenters did not self-report their weighed according to a sliding scale.644 use of non-competes.641The vast income, so the Commission cannot Non-competes with senior executives definitively determine that the self- satisfy all the elements of the section 5 640One of those commenters cited two USA identified senior executives who inquiry. As described in Part IV.C.2.a, Today articles that examined Federal workforce reported exploitation and coercion are records for 88 companies in the S&P 100 to assess lower-wage senior executives. Because these non-competes are methods of the number of Asian and Latina women in competition. As described in Part of their incomes, however, lower-wage executive positions. The articles did not include the IV.C.2.b, these non-competes are facially underlying data used for the evaluation. See Jessica senior executives are likely subject to unfair conduct because they are Guynn & Jayme Fraser, Asian Women Are Shut Out many of the same exploitative and of Leadership at America’s Top Companies. Our coercive factors that affect other restrictive and exclusionary. And as Data Shows Why, USA Today (Apr. 25, 2022), described in Part IV.C.2.c, these non- workers, such as the inability to afford h w t o tp m s e :/ n / - w e w xe w c . u u t s iv a e to s- d d a i y s . c / r / i m m o in n a e t y i / o 2 n 0 - 2 u 2 s / -c 0 o 4 m /2 p 5 a /a n s i i e a s n / - a non-compete lawsuit, forgo work for a competes tend to negatively affect 7308310001/?gnt-cfr=1; Jessica Guynn & Jayme lengthy period, leave the field, or competitive conditions in product and Fraser, Only Two Latinas Have Been CEOs at a relocate.643Comments from some senior service markets and in labor markets. Fortune 500 Company: Why So Few Hispanics executives confirmed that they did not Because the Commission finds that non- M ht a tp k s e : / I / t w to w t w h . e u s T a o t p o , d U ay S . A co T m o / d st a o y r y (A /m u o g. n 2 e , y / 2 2 0 0 2 2 2 2 ), / 08/ have sufficient bargaining power to competes with senior executives are 02/hispanic-latina-business-demographics- negotiate the non-compete or unfair methods of competition, the executive//?gnt-cfr=1. These news reports find a consideration for it, suffered serious Commission declines to exclude them disparity in the number of Asian and Latina women financial harm from non-competes, and from the final rule. However, as i m n a s k e e n n io o r s e p x e e c c i u fi t c iv f e in r d o i l n es g s a t o t n h b e a se rg c a o in m i p n a g n p i o e w s b e u r. t could not afford to litigate their non- described in Part IV.C.3, the final rule While lack of representation and other factors may competes. Accordingly, the Commission allows existing non-competes with impact bargaining power, the Commission believes finds that a mere job title alone is senior executives to remain in effect, that these two articles (with no underlying data insufficient to confer bargaining power due to the considerations described provided) are insufficient evidence at this time to therein. find exploitation and coercion with respect to this subset of senior executives. 642See Part IV.B.2.b.ii.
a. The Commission Finds That Non- Here, non-competes with senior preliminarily concluded that, as a Competes With Senior Executives are a executives are not unfair methods of result, prohibiting non-competes for Method of Competition, Not a Condition competition under section 5 because senior executives may have relatively of the Marketplace they are unfair to the individual greater benefits for consumers than executive, but because they tend to prohibiting non-competes for other With respect to the first element— negatively impact competitive workers.651 whether conduct is a method of conditions—i.e., harm competition in Based on the Commission’s expertise competition—the Commission finds that product and service markets, as well as and after careful review of the non-competes with senior executives in labor markets—by imposing serious rulemaking record, including the are a method of competition for the negative externalities on other workers, empirical research and the public same reasons as non-competes with rivals, and consumers.647 comments, the Commission finds that other workers.645 non-competes with senior executives
b. Non-Competes With Senior tend to negatively affect competitive Executives Tend To Negatively Affect Executives are Facially Unfair Conduct conditions in markets for products and Competitive Conditions Because They are Restrictive and services, inhibiting new business Exclusionary The Commission finds non-competes formation and innovation. with senior executives tend to In Part IV.B.2.a, the Commission finds Non-Competes With Senior Executives negatively affect competitive conditions that non-competes with workers other Inhibit New Business Formation and in product and service markets and in than senior executives are facially unfair Innovation labor markets. As explained in Part II.F, conduct because they are restrictive and the legal standard for an unfair method In Part IV.B.3.b, the Commission exclusionary. The Commission finds of competition under section 5 requires described the extensive empirical that non-competes with senior only a tendency to negatively affect evidence indicating that non-competes executives are facially unfair conduct competitive conditions. The inquiry inhibit new business formation and for the same reasons.
job. And like non-competes for all other non-competes with senior executives do much as non-competes with other workers, non-competes with senior in fact negatively affect competitive workers and likely to a greater extent, executives are exclusionary because conditions. given the outsized role of senior they impair the opportunities of rivals.
market are subject to non-competes, the In the NPRM, the Commission stated Specifically, non-competes with ability of firms to expand into that that non-competes with senior senior executives tend to negatively market, or entrepreneurs to start new executives may harm competition in affect competitive conditions in product businesses in that market, is impaired.
Because senior executives are often executives may also block potential Senior executives are particularly compensated in return for their promise entrants, or raise their costs, to a high well-positioned to form new businesses not to compete, some commenters argue degree, because such workers are likely because of their strategic expertise and that non-competes with senior to be in high demand by potential business acumen; knowledge of executives are not unfair methods of entrants.650The Commission multiple facets of their industries; competition. However, agreements can experience making policy decisions for present concerns under the antitrust 647See Part IV.C.2.i–ii (describing the negative businesses; and ability to secure laws even when both parties benefit. effects of non-competes with senior executives on financing. Senior executives are also markets for products and services and labor often crucial to the formation of 645See Part IV.B.1. markets).
646See Part I.B.2 (noting studies estimating that 648NPRM at 3502. startups, because startups often begin by about two-thirds of senior executives work under 649Id. at 3513. non-competes). 650Id. 651Id.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38408 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations forming a leadership team, which is markets function by matching workers increase the rate of innovation.660 often comprised of experienced and and employers. The same is true for Finally, when senior executives are knowledgeable executives from senior executives. Executives compete hired by new companies, they bring elsewhere in the industry.652Empirical for roles at firms, and firms compete to their experience and understanding of research shows that when startups hire attract (often highly sought-after) the industry, which may cross-pollinate top management teams from other firms, executives; executives choose the role with the capabilities of the new they are more likely to grow beyond that best meets their objectives, and company, cultivating new research their initial stages653and that top firms choose the executive who best which would not otherwise be managers’ experience in an industry meets theirs. Non-competes impede this achieved.661By inhibiting efficient allows startups to grow more quickly.654 competitive process by blocking matching between executives and firms, Additionally, empirical research finds executives from pursuing new non-competes impede the ability of that startups that hire top management opportunities (i.e., positions that are firms to develop innovative products teams with experience are more likely to within the scope of their non-compete) and services that benefit consumers. become successful businesses.655 and by preventing firms from competing Furthermore, empirical research Empirical research also finds that, in to attract their talent. Thus, because shows that better matching among addition to experience, top management non-competes are prevalent, the quality executives and firms drives productivity teams that have worked together in the of the matches between executives and as well as innovation. When firms and past are more successful than those that firms suffers. executives have a higher quality match, have not.656For these reasons, non- By inhibiting efficient matching the firm as a whole is more competes with senior executives not between firms and executives, non- productive.662By inhibiting efficient only inhibit new business formation by competes frustrate the ability of firms to matching between firms and executives, blocking the executives from forming hire executives who can best maximize non-competes tend to reduce the new businesses; they also prevent other the firm’s capacity for innovation. productivity of firms. potential founders from forming new Senior executives play an important role In theory, firms that seek to hire an businesses, because potential founders in advancing innovation at firms.657 executive could just pay the executive’s are less likely to start new businesses Senior executives are often a employer (or former employer) to escape when they are unable to assemble the fundamental part of the innovative the non-compete. However, research by executive team they need because so process, guiding the strategic direction Liyan Shi describes how non-competes many executives in the industry are tied of the firm in terms of topics of new with senior executives force firms to up by non-competes. By inhibiting new research and the depth of new research; make inefficiently high buyout business formation, these non-competes determining the allocation of R&D payments. Shi ultimately concludes that deprive product and service markets of ‘‘imposing a complete ban on funding; and making the decision to beneficial competition from new noncompete clauses would be close to develop (and supervising the entrants—competition that in turn tends implementing the social optimum.’’663 development of) new products and to benefit consumers through lower Shi explains that firms and executives services.658 prices or better product quality. jointly create market power by entering Research shows that labor mobility Second, non-competes with senior into non-competes and excluding rivals among senior executives may tend to executives inhibit innovation. In Part from hiring experienced labor in a foster innovation. Empirical research IV.B.3.b.ii, the Commission finds that competitive labor market. The existence finds that executives with shorter job non-competes with workers other than of a non-compete forces rivals to make tenures tend to engage in more senior executives inhibit innovation. an inefficiently high buyout payment, innovation than those who are longer The Commission finds that non- where the inefficiency arises due to the tenured at firms.659In addition, competes with senior executives inhibit market power of the incumbent firm empirical research shows that the innovation at least as much as non- created by the non-compete. Rival firms strength of executives’ external competes with other workers and likely must either make these payments, networks—which are likely stronger to a greater extent, because senior which therefore lead to deadweight among executives hired externally— executives play a crucial role in setting economic loss, or forgo the payment— the strategic direction of firms with and, consequently, the ability to hire a respect to innovation. 657See, e.g., Jean-Philippe Deschamps, Innovation talented executive (and perhaps the Leaders: How Senior Executives Stimulate, Steer Non-competes with senior executives ability to enter the market at all, for and Sustain Innovation (John Wiley & Sons, 2009);
inhibit innovation by impeding efficient Jean-Philippe Deschamps & Beebe Nelson, potential new firms).664New and small matching between workers and firms. Innovation Governance: How Top Management businesses in particular might be unable As described in Part IV.B.3.a, labor Organizes and Mobilizes For Innovation (John to afford these buyouts. By calibrating Wiley & Sons, 2014).
on non-competes is close to optimal, support a per se ban. In response, the In addition, when assessing how non- relies not on use at the individual level, Commission notes that it is determining competes with senior executives affect but on prevalence of non-competes that non-competes are an unfair method competition in product and service across a labor market. The latter of competition under section 5, not a markets, the Commission believes it is approach does not rely, therefore, on per se violation of the Sherman Act. For important to consider the net impact. It comparing individuals with and the reasons described in this Part IV.C.2, is possible that the effects described by without non-competes, and is therefore the Commission finds that non- these commenters and the effects not subject to the estimation bias that competes are restrictive and described by the Commission earlier in leads the Commission to give less exclusionary and that, based on the this Part IV.C.2.c.i can be occurring at weight to evidence based on the use of totality of the evidence, they tend to the same time. That is, a non-compete non-competes. negatively affect competitive conditions with a senior executive might in some at least as much as non-competes with Relevant Comments and Commission instances be protecting a firm’s Responses investments in a manner that is other workers, and likely even more so, given the outsize role of senior Many commenters stated that non- productivity-enhancing, holding all else executives in new business formation competes with senior executives reduce equal. At the same time, however, that and innovation. For these reasons, the new business formation and innovation, same non-compete may restrict the Commission finds that these non- confirming the Commission’s findings. executive’s ability to start a new competes are an unfair method of Several senior executives recounted business after leaving the firm. And competition under section 5.
personal experiences in which a non- even that same non-compete can—and Another commenter stated that the compete prevented them from starting a certainly non-competes in the aggregate NPRM did not satisfy the standard for business. A tech executive stated that do—prevent the most efficient match finding a tendency to negatively affect they knew many tech executives who between senior executives and the firms competitive conditions for senior would have left their roles to start that can make the highest and best use executives as set forth in the within-industry spinoffs if not for their of their talents, and decrease knowledge Commission’s section 5 Policy non-competes. A senior executive stated flow between firms, which limits the Statement.667The commenter stated that they had planned to start a small cross-pollination of innovative ideas. that a per se ban on non-competes business that would not have harmed What the empirical evidence shows is considers neither the size, power, or the former employer but had signed a that overall, i.e., in net effect, non- purpose of the firm nor how non- non-compete that prevented them from competes reduce new business competes interact with individual doing so. A former executive stated that formation and innovation,665indicating markets. The commenter argued that the they were sued after starting a new that the tendency of non-competes to evidence cannot justify an economy- business despite confirming with the inhibit new business formation and wide ban.
CEO of their former employer that doing innovation more than counteracts any The Commission finds that non- so would not violate the non-compete. effect of non-competes on promoting competes for senior executives are an Another senior executive said their non- new business formation and innovation unfair method of competition under compete prevented them from taking a by protecting a firm’s investments. section 5 for all the reasons described in job at a smaller, more innovative A commenter—referencing the Shi this Part IV.C.2. The Commission states company in their industry. Some study—argued that banning buyout the applicable legal standard under commenters warned that permitting clauses in non-competes would enhance section 5 in Part II.F, which is non-competes for senior executives economic efficiency relative to banning consistent with the standard set forth in would reinforce dominant positions for non-competes altogether. Other the Policy Statement. As noted in Part industry incumbents who can foreclose commenters, including Shi, the author new entrants from access to critical of the study, disagreed with this 666Comment of Liyan Shi, FTC–2023–0007– talent and expertise. An advocate for 19810.
startups stated that small businesses 665See Part IV.B.3.b.i–ii. 667See FTC Policy Statement, supra note 286. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38410 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations II.F, the Commission need not make a subgroups of workers that have been increase in earnings is attributable to an separate showing of market power or studied, including inventors, high-tech increase in earnings growth (as opposed market definition. Nor must the workers, low-wage workers, and to earnings at the start of the Commission show that the conduct workers across the labor force. The employment relationship), Garmaise directly caused actual harm in the impact of non-competes on labor hypothesizes that earnings increase specific instance at issue. Instead, the mobility is direct, since non-competes because CEOs are more likely to invest inquiry under section 5 focuses on the directly prohibit certain types of in their own human capital when they nature and tendency of the conduct. mobility. Therefore, the Commission have no non-compete.672However, Moreover, as noted in Part II.F, the finds the non-competes restrict the labor Garmaise also notes that while non- Commission may consider the aggregate mobility of senior executives as well. competes may offer benefits to firms effect of conduct as well. The language This finding is supported by Mark which use them, there may be negative in the Policy Statement stating that the Garmaise’s study of the relationship impacts across the labor markets in size, power, and purpose of the between non-compete enforceability which they are used.673This is the only respondent may be relevant is not and the labor mobility and earnings of study of executive earnings that does limiting, but instead provides guidance executives.668Garmaise finds that not examine the use of non-competes: it regarding factors the Commission may stricter non-compete enforceability examines multiple legal changes in non- consider in evaluating potentially unfair reduces within-industry executive compete enforceability, measured along methods of competition. This guidance mobility by 47% and across-industry multiple dimensions (though in a binary may be especially relevant in individual executive mobility by 25%. The study, fashion). cases and less so in section 5 which is limited to senior executives, As noted in Part IV.C.1, many senior rulemakings. Finally, as described in uses multiple legal changes in non- executives negotiate valuable Part II.F, a finding that conduct is an compete enforceability, measured along consideration for non-competes. unfair method of competition does not multiple dimensions in a binary However, the evidence suggests that require definition of a market or fashion. The Shi study qualitatively non-competes still have a net negative consideration of individual markets. confirms these results—that executives effect on senior executives’ earnings, Moreover, as described in Part V.D, the experience greater labor mobility in the because the suppression of earnings Commission considered and finds no absence of non-competes.669However, through reduced labor market basis for excluding particular industries that study examines use, and not just competition more than cancels out the or workers. enforceability, of non-competes, so the compensation that some of these ii. Non-Competes With Senior Commission gives it less weight. executives individually receive for their Executives Tend to Negatively Affect Furthermore, by inhibiting efficient non-competes. A second study, by Kini, Williams, Competitive Conditions in Labor matching between executives and and Yin,674simultaneously estimates Markets firms—through a similar mechanism as the impact of non-compete for all other workers670—non-competes The effects of non-competes with enforceability and non-compete use on reduce executives’ earnings. Like non- senior executives on product and earnings and finds a positive competes for other workers, non- service markets are the primary reason correlation. The Commission gives this competes block senior executives from why the Commission finds that non- study less weight because it analyzes switching to a job in which they would competes with senior executives are an the use of non-competes. As described be better paid. And by doing so, non- unfair method of competition. However, in Part IV.A.2, such studies cannot competes decrease opportunities (and non-competes also tend to negatively easily differentiate between correlation earnings) for senior executives who are affect competitive conditions in labor and causation. Kini, Williams, and Yin not subject to non-competes—as well as markets. use an enforceability measure to for workers who are not senior generate their estimates, but do not Non-Competes With Senior Executives executives, but who would otherwise estimate models that omit use of non- Suppress Labor Mobility and Earnings move into one of those roles. competes, meaning that the Commission In Part IV.B.3.a, the Commission As described in Part IV.B.3.a.ii, the does not interpret the findings as describes extensive empirical evidence empirical research indicates that non- representing a causal relationship.
that non-competes reduce labor mobility competes suppress wages for a wide and worker earnings. The Commission’s range of subgroups of workers across the Relevant Comments and Commission finding in Part IV.B.3.a that non- spectrum of income and job function, Responses competes suppress labor mobility and including workers who are not subject Many commenters addressed negative earnings does not examine non- to non-competes. Importantly, an effects of non-competes with senior competes with senior executives empirical study that does focus on executives on competition in labor specifically. However, the evidence senior executives finds that non- markets. Non-competes, these cited by the Commission is also competes suppress earnings of senior commenters stated, can negatively affect probative with respect to non-competes executives. The Garmaise study finds a senior executive’s career when they with senior executives. that decreased enforceability of non- leave their field or sit out of the Non-competes reduce labor mobility competes increases executives’ earnings workforce for a period, causing their for senior executives for the same by 12.7%.671Garmaise also finds that skills and knowledge (particularly in reasons they reduce labor mobility for decreased enforceability of non- fast-paced fields) to stagnate and other workers—they directly restrict competes increases earnings growth for affecting their reputations. Like other workers from seeking or accepting other CEOs by 8.2%. Since much of the workers, some senior executives said work or starting a business after they their non-compete limited their options leave their job. In Part IV.B.3.a.i, the 668Garmaise, supra note 584. and earnings in their specialized field. Commission cites empirical evidence 669Shi, supra note 84. 670See Part IV.B.3.a.
that non-competes reduce labor 671Garmaise, supra note 584 at 403. The 672Id. at 402.
mobility. This evidence shows that non- reduction in earnings is calculated as e¥1.3575*0.1 673Id. at 379. competes reduce labor mobility for all ¥1, where ¥1.3575 is taken from Table 4. 674Kini, Williams, & Yin, supra note 83. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38411 Other commenters argued the of the workforce, causing them to lose competitive conditions.677However, the Commission should exclude senior valuable knowledge and skills. In Commission has decided to allow executives from the rule because they general, senior executives are more existing non-competes for senior earn more compensation, including likely to be effective when they can executives to remain in effect, based on higher wages, for non-competes than remain in the industry in which they two practical considerations that are far they would gain under the final rule. have experience and expertise, rather more likely to be present for senior Many of these commenters argued that than starting over in a new industry executives than other workers. First, as because senior executives have because of a non-compete. described in Part IV.C.1, senior bargaining power, any findings on An industry trade organization stated executives are substantially less likely decreased wages would not apply to that the Commission’s assertion that than other workers to be exploited or them. Some employers stated they wages are reduced across the labor coerced in connection with non- compensated their senior executives for market is inconsistent with the NPRM’s competes. As a result, this subset of non-competes. Some industry preliminary finding that non-competes workers is substantially less likely to be organizations stated that some are not coercive or exploitative for subject to the kind of acute, ongoing additional compensation and bonuses senior executives, because when more harms currently being suffered by other might not be offered if non-competes are issues are left for negotiation, the job workers with existing non-competes banned. One business stated the market is increasingly competitive, as (even if senior executive’s existing non- compensation it pays executives takes workers can differentiate themselves competes are still harming competitive their non-competes into account. through their terms and tailor their conditions in the economy overall). Another business stated it provides terms to each employer. The Second, commenters raised credible severance benefits in exchange for non- Commission does not believe these concerns about the practical impacts of competes that fully compensate the findings are in tension. Agreements do extinguishing existing non-competes for executive for the duration of the non- not need to be exploitative or coercive senior executives, as described in this compete. to inhibit efficient matching between Part IV.C.3.678 In response to these comments, the workers and firms or to negatively affect Numerous businesses and trade Commission notes the Garmaise study competitive conditions. Furthermore, associations argued that, if the final rule indicates that non-competes have a net the Commission believes that executives were to invalidate existing non- negative effect on earnings for senior have many other ways to differentiate competes for senior executives, that executives in the aggregate because they themselves other than based on non- would present practical challenges for suppress competition, even if individual compete terms. employers, because many such non- senior executives receive some amount One commenter argued that the competes were exchanged for of compensation for their personal non- findings in the Kini, Williams, and Yin substantial consideration. According to compete. Garmaise’s analysis accounts study should not be interpreted as commenters, consideration exchanged for any compensation the executive representing a causal relationship. Upon for non-competes includes long-term receives for the non-compete. further consideration, the Commission incentive plans, bonuses, stock awards, An industry trade organization stated agrees with this comment and does not options, or severance payments, among that non-competes create job interpret this study causally, as other arrangements.
opportunities for executives and other described in this Part IV.C.2.c.ii. Some commenters were concerned highly skilled workers, rather than For these reasons, the Commission about a potential windfall for workers.
restricting them, because, without non- finds that non-competes with senior They argued that if the non-compete competes to protect confidential executives are an unfair method of portion of the contract were rescinded information, employers will often be competition. As a result, the or otherwise invalidated, the worker reluctant to expand their executive Commission declines to exclude senior may be left with any benefits already teams. The Commission notes this executives from the final rule altogether. received in exchange for the non- assertion is unsupported by empirical
690See Part IV.C.1. to choose between higher wages or total annual compensation in the year 691See Part IX.C. being free from a non-compete. preceding their departure. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38415 To clarify the definition’s Commission should look to the FLSA, The Commission analyzed compensation threshold, the final rule and some specifically recommended the occupational wage data to identify a includes definitions of ‘‘total annual FLSA regulations’ threshold for highly threshold that would capture more compensation’’ and ‘‘preceding year.’’ compensated employees.693DOL sets highly paid senior executives, who are To clarify the job duties test, the final the compensation threshold for highly likely to have bespoke, negotiated non- rule includes definitions of ‘‘policy- compensated employees in its overtime competes. BLS’s most recent wage data making position’’ as well as two regulations under the FLSA based on indicates that workers in the ‘‘chief additional terms that are in the earnings of full-time salaried workers. executive’’ category have a median wage definition of ‘‘policy-making position’’: Since January 2020, based on a of $209,810.698Thus, most ‘‘chief ‘‘officer’’ and ‘‘policy-making regulation adopted in 2019, that executives,’’ most if not all of whom authority.’’ These definitions are threshold is $107,432 and reflects the would meet the duties component of the described in Parts IV.C.4.b and IV.C.4.c. 80th percentile of full-time salaried two-part test in this final rule, earn well workers nationally using combined above the $151,164 compensation
b. Defining the Compensation Threshold 2018 and 2019 data.694In September threshold, ensuring that the threshold is Pursuant to §910.1, the senior 2023, DOL proposed raising that likely not underinclusive. The executive exception applies only to threshold to the 85th percentile of full- Commission notes that some very high- workers who received total annual time salaried workers nationally and, wage occupations have a median wage compensation of at least $151,164 from inter alia, updating the amount to reflect above $151,164, including: physicians; a person for employment in a policy- more current earnings data. For 2023, surgeons; computer and information making position in the most relevant the 85th percentile of full-time salaried systems managers; and dentists.699To preceding year. Section 910.1 further workers nationally is $151,164.695The qualify for the exemptions, these defines ‘‘total annual compensation’’ Commission recognizes DOL’s expertise workers would have to also meet the job and ‘‘preceding year,’’ respectively. This in determining who qualifies as a highly duties portion of the senior executive threshold is based on the 85th compensated worker and employers’ test, which is appropriate because the percentile of earnings of full-time likely familiarity with DOL regulations. Commission finds that workers in these salaried workers nationally.692 Given this familiarity, the Commission professions are often subject to coercion The Commission draws this line borrows from DOL’s definition of and exploitation and rarely have between more highly paid and less compensation to minimize compliance bespoke, negotiated non-competes. highly paid workers based on its burdens on employers. The Commission also considered a assessment of which workers are more Another Federal regulatory threshold lower wage threshold of approximately likely to experience exploitation and for high wage workers noted by $100,000, which would be closer in coercion and less likely to have engaged commenters also aligns with the 85th range to the DOL highly compensated in bargaining in connection with non- percentile of full-time salaried workers employee threshold of $107,432 that competes and the need to implement a nationally in 2023 or approximately DOL adopted in 2019. According to two-part test. As commenters noted, $150,000. In the retirement context, the 2022 BLS data, the median wage for there is no single compensation IRS sets a threshold for highly ‘‘top executives’’ in the U.S. is threshold above which zero workers compensated employees at $150,000 for $99,240.700Workers in the ‘‘top will have been coerced and exploited 2023 and $155,000 for 2024.696 executive’’ category include ‘‘chief and below which zero workers will have Additionally, the District of Columbia executives,’’ but also include officials bans non-competes for workers making been uncompensated for the non- with less authority like ‘‘general and less than $150,000.697 compete that binds them. Based on the operations managers.’’ The latter have Commission’s expertise and after careful an annual median wage of $97,030 with review of the rulemaking record, 693However, at the time of commenting the their earnings at the 75th percentile highly compensated employee threshold was including relevant data, the empirical being $154,440.701The Commission $107,432 and the Department had not proposed a research, and the public comments, the new threshold. believes that a significant number of Commission concludes $151,164 in total 69429 CFR 541.601; see also Defining and general and operations managers (some annual compensation reflects a Delimiting the Exemptions for Executive, of whom may be in a policy-making Administrative, Professional, Outside Sales, and compensation threshold under which position) likely do not have bespoke, Computer Employees, NPRM, 88 FR 62152, 62157 workers are likely to experience such (Sept. 8, 2023) (hereinafter ‘‘2023 FLSA NPRM’’). negotiated non-competes. For example, exploitation and coercion and are less 695See Bur. Of Labor Stats., Research Series on a vice president of operations of a local likely to have bargained for their non- Percentiles of Usual Weekly Earnings of Nonhourly retail chain with only a few locations Full-Time Workers, at https://www.bls.gov/cps/ competes, while providing employers a would likely be in this category. The research/nonhourly/earnings-nonhourly- readily administrable line. With this workers.htm (based on the table ‘‘Annual average same vice president—unlike the vice line, market participants can easily 2023’’); 2023 FLSA NPRM at 62153. The DOL president of a multinational know that workers below the line proposed a threshold at $143,998, the 85th percentile of full-time salaried workers at the time cannot be subject to non-competes, employee is a medical specialist, employers may the 2023 FLSA NPRM was proposed. When the minimizing both in terrorem effects and highly compensated employee test was originally not require or request that the employee sign an eliminating the administrative burden of created in 2004, its $100,000 threshold exceeded agreement or comply with a workplace policy that conducting a job duties test for those the annual earnings of 93.7% of salaried workers. includes a non-compete).
The $107,432 threshold was adopted different areas. Geographic disparities based on earnings in 2018 and 2019. are difficult to resolve, as disparities i. Definition of ‘‘Total Annual Adjusting for inflation, $107,432 in June often exist not just between States, but, Compensation’’ 2019 is the equivalent of $130,158 in for example, between urban and rural February 2024. Moreover, as noted areas within a State. The Commission Section 910.1 provides that ‘‘total previously, BLS data reflect that chief considered this factor in selecting the annual compensation’’ is based on the executives generally earn significantly $151,164 threshold compared to other worker’s earnings over the preceding more than $130,158. In contrast, options. Tailoring a compensation year. It is based on DOL’s regulation occupations with a median wage below threshold to every locality or even State defining ‘‘total annual compensation’’ $151,164 but above $107,432 include: or region would be burdensome and for highly compensated employees in 29 advertising, marketing, promotions, generate significant confusion for CFR 541.601(b)(1) and matches DOL’s public relations, purchasing, and sales workers and employers. The determination of what types of managers; financial managers; software Commission finds that the importance compensation can count towards total developers; physician assistants; of a uniform threshold to avoid annual compensation for highly optometrists; nurse practitioners; and confusion and for administrability compensated employees. pharmacists.702These are occupations outweighs the drawbacks of any Section 910.1, like DOL’s definition, that the comment record reflects often geographic disparities, particularly in states that total annual compensation experience coercion and exploitation light of comments from employers may include salary, commissions, with respect to non-competes and rarely stating that the existing patchwork of nondiscretionary bonuses and other have negotiated or compensated non- State laws is burdensome to navigate. nondiscretionary compensation earned competes. A civic organization The Commission notes that neither DOL during that 52-week period. commenter also argued that the DOL nor IRS have adopted thresholds for Nondiscretionary bonuses and regulations’ ‘‘highly compensated highly compensated individuals that compensation includes compensation employee’’ definition’s $107,432 vary geographically. Given the rise in paid pursuant to any prior contract, threshold was close to the median wage remote work, applying geographic agreement, or promise, including in some industries and areas and cited variation to employers and workers performance bonuses the terms of which several cases that it said demonstrate would also prove burdensome. the worker knows and can expect.706 that adopting this threshold would Moreover, total annual compensation The definition further states that total exclude workers who are vulnerable to under §910.1 includes traditional annual compensation does not include exploitation and coercion. bonuses or compensation a senior board, lodging and other facilities as Accordingly, the Commission adopts executive might receive, such as a bonus defined in 29 CFR 541.606, and does not a threshold of $151,164. This threshold, tied to performance that is paid include payments for medical combined with the duties test, reflects pursuant to any prior contract, insurance, payments for life insurance, highly compensated individuals who agreement, or promise. The rule also are most likely to have the bespoke, contributions to retirement plans and allows for the entire amount of such complex non-competes that the the cost of other similar fringe benefits. bonuses to be credited to total annual Commission elects to leave undisturbed, Section 541.606 is part of DOL’s compensation, thus, increasing the and who the Commission finds are less regulations concerning salary likelihood of capturing highly likely to experience coercion and requirements for employees employed compensated policy-making individuals exploitation. This threshold also has in a bona fide executive, administrative, across the nation.
significant administrability benefits, as The Commission estimates that or professional capacity, and applies to it is calculated in accord with approximately 92% of workers will fall definitions used in FLSA compliance, below this compensation threshold, Stephanie Richards, Renae Rodgers, & Megan with which employers are generally ensuring that existing non-competes Schouweiler. IPUMS USA: Version 15.0 [dataset]. Minneapolis, MN: IPUMS, 2024. https://doi.org/ familiar. This alignment will yield will be unenforceable for the vast 10.18128/D010.V15.0 (American Community efficiency benefits that reduce majority of workers most likely to Survey 2022 data, adjusted to 2023 dollars and compliance burdens on employers. experience exploitation and coercion in excluding government and non-profit workers). After careful review, the Commission 705See Part X.F.11. connection with non-competes.704The decided not to choose a threshold 70629 CFR 778.211(c); see also U.S. DOL, Fact Sheet #56C: Bonuses under the Fair Labor higher or lower in part because as the 703See also 2023 FLSA NPRM at 62176. Standards Act (FLSA) (Dec. 2019), https:// 704See Steven Ruggles, Sarah Flood, Matthew www.dol.gov/agencies/whd/fact-sheets/56c- 702Id. Sobek, Daniel Backman, Annie Chen, Grace Cooper, bonuses. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38417 highly compensated employees.707That person’s choice among the following between, for example, urban and rural regulation cross-references DOL’s time periods: the most recent 52-week areas within a State and could generate regulations on wage payments under the year, the most recent calendar year, the confusion where the threshold varies FLSA in 29 CFR part 531, including the most recent fiscal year, or the most between States, in addition to increasing term ‘‘other facilities’’ defined in 29 recent anniversary of hire year. The compliance burdens by requiring CFR 531.32. term ‘‘preceding year’’ is drawn from employers to assess which State This regulatory text makes one DOL’s FLSA regulations in 29 CFR adjustment applies—a particularly modification to the DOL approach to 541.601(b)(4), which states that ‘‘[t]he challenging task in increasingly cross- correspond to the final rule’s purposes employer may utilize any 52-week border and remote work environments. and the non-compete context. Based on period as the year, such as a calendar Using the local median wage would comments received, the Commission year, a fiscal year, or an anniversary of generate too much unpredictability for decided not to adopt DOL’s base salary hire year. If the employer does not employers and workers and would face requirement for highly compensated identify some other year period in the same administrability and confusion employees in its definition of advance, the calendar year will apply.’’ challenges to an even higher degree. In compensation, which serves a different Here, the Commission similarly gives contrast, a uniform national purpose than the definition adopted employers flexibility to minimize compensation threshold as part of the here. The 2019 DOL regulation requires compliance costs, as many employers test provides clarity that reduces the that a portion of the worker’s total may have compensation more readily risks of in terrorem effects and increases annual compensation must be paid on a available based on the last calendar ease of compliance. Finally, the salary or fee basis in order to qualify as year, their fiscal year, or the anniversary $330,000 threshold is an annual a highly compensated employee, to of a worker’s hire as part of tax and compensation limit, while the IRS has a ensure that the worker receives at least other reporting requirements. different test to identify highly a base salary and to guard against iii. Other Proposed Compensation compensated employees. A $330,000 potential abuses.708In contrast, the Thresholds threshold would be too high for exception in §910.2(a)(2) applies only employers in areas with lower average In seeking to exempt senior to senior executives. The Commission incomes and costs of living and would executives and highly paid workers understands that compensation for likely exclude from the definition many from the rule altogether, commenters senior executives can be structured in senior executives who bargained for suggested several possible wage-related many different ways. A law firm their non-compete in exchange for thresholds, including specific dollar commented that senior executive consideration.
in the final rule is designed to allow for defining highly compensated employee retirement contributions.709 different forms of nondiscretionary as the highest paid 1% or 250 As explained in Part V.D, the compensation without requiring Commission declines to exempt workers employees in the corporation. A employers to pay a particular amount as from the rule altogether based on their percentage threshold, however, has salary. earnings. With respect to defining the significant practical issues including ii. Definition of ‘‘Preceding Year’’ workers whose existing non-competes workers entering and exiting, earnings the Commission exempts, the changes, and factoring in independent The definitions of ‘‘senior executive’’ Commission also declines to use these contractors, workers at subsidiaries, or and ‘‘total annual compensation’’ in thresholds or standards. For the reasons workers at parent companies. It would §910.1 use the term ‘‘preceding year.’’ described in this Part IV.C.4.b, the also lead to disparities between large To provide clarity and facilitate Commission believes the compensation and small firms, as large firms could use compliance, the Commission defines the threshold it is adopting—in non-competes for far more workers than term ‘‘preceding year’’ in §910.1 as a combination with the job duties test it could small firms. is adopting—most effectively isolates Other commenters pointed to State 70729 CFR 541.601(a)(1) (‘‘[A]n employee with the workers (namely, senior executives) laws setting a compensation threshold total annual compensation of at least $107,432 is deemed exempt under section 13(a)(1) of the Act if who are likely to bargain with to support excluding highly paid the employee customarily and regularly performs employers and receive compensation for workers from the final rule or suggested any one or more of the exempt duties or their non-competes and who are the Commission look to those States as responsibilities of an executive, administrative or unlikely to be exploited or coerced in an example. A public policy professional employee as identified in subparts B, C or D of this part.’’). connection with non-competes. While organization that supported a 70829 CFR 541.601(b)(1); Defining and Delimiting thresholds based on State lines or categorical ban said any threshold the Exemptions for Executive, Administrative, metrics would reflect differences in should be at least higher than $100,000, Professional, Outside Sales and Computer wages and costs of living among States, citing research on Washington’s non- Employees, 69 FR 22122, 22175 (Apr. 23, 2004)
they would not reflect differences compete reforms that indicated (‘‘This change will ensure that highly compensated employees will receive at least the same base salary employers did not value non-competes throughout the year as required for exempt 709IRS, COLA Increases for Dollar Limitations on up to that threshold.710The employees under the standard tests, while still Benefits and Contributions, (updated Nov. 7, 2023), compensation threshold the allowing highly compensated employees to receive https://www.irs.gov/retirement-plans/cola- additional income in the form of commissions and increases-for-dollar-limitations-on-benefits-and- nondiscretionary bonuses.’’). contributions; Treas. Reg. sec. 1.401(a)(17)–1. 710Hiraiwa, Lipsitz & Starr, supra note 502. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38418 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations Commission is adopting is higher than entity that is part of the common executives (i.e., employers do not need this amount. enterprise. to consider the further element of Section 910.1 also defines terms used ‘‘policy-making authority’’). The term c. Defining the Job Duties Component in the definition of ‘‘policy-making ‘‘chief executive officer or the i. Definitions of ‘‘Officer,’’ ‘‘Policy- position.’’ Section 910.1 defines equivalent’’ was added to the definition Making Authority,’’ and ‘‘Policy-Making ‘‘officer’’ as a president, vice president, of ‘‘policy-making position’’ to increase Position’’ secretary, treasurer or principal clarity on who was included and to financial officer, comptroller or reflect the wider range of businesses In NPRM, the Commission suggested principal accounting officer, and any with various structures that are subject that the final rule’s definition of senior natural person routinely performing to the final rule (as compared to SEC executive could be based on SEC Rule corresponding functions with respect to Rule 3b–7). The definition of ‘‘policy- 3b–7.711The Commission did not any business entity whether making position’’ includes workers with receive comments specifically incorporated or unincorporated. To equivalent authority because job titles addressing this option, but the account for differences in the way and specific duties may vary between Commission carefully considered business entities may use and define job companies. This ensures that the term arguments for and against job duties or titles, the definition includes workers in ‘‘senior executive’’ is broad enough to job title distinctions as well as equivalent roles. By incorporating this cover more than just a president or chief numerous comments on potential job definition of ‘‘officer,’’ ‘‘senior executive officer, especially for larger duties tests, alone or in combination executive’’ applies to workers at the companies, as others may have final with compensation thresholds, before highest levels of a business entity. policy-making authority over significant determining that a modified version of This definition is nearly verbatim of aspects of a business entity. SEC Rule 3b–7’s job duties requirements the SEC definition of ‘‘officer’’ in 17 For example, many executives in would best meet the exception’s goals.
a policy-making position even if the 17 CFR 240.3b–2 (‘‘The term officer means a non-competes. For example, this aspect person has policy-making authority over president, vice president, secretary, treasury or of the definition can be too easily a subsidiary or affiliate of a business principal financial officer, comptroller or principal applied to managers of small accounting officer, and any person routinely departments, who the Commission finds performing corresponding functions with respect to 71117 CFR 240.3b–7; NPRM at 3520. any organization whether incorporated or 712See Part IV.C.4.c.ii. unincorporated.’’). 71417 CFR 240.3b–7. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38419 are unlikely to have bargained for their the U.S. District Court for DC business (which would likely be non-competes. At the same time, a considered a defendant who was a decisions that impact the business manager who does in fact have policy- member of a corporate body that outside the marketing division), that making authority would meet the discussed important policy decisions worker would not be considered a definition of ‘‘officer’’ in §910.1 and and made recommendations to the CEO, senior executive. Similarly, in the thus be included in the definition of and supervised and had ‘‘substantial medical context, neither the head of a senior executives (if the manager also influence’’ over a major aspect of the hospital’s surgery practice nor a meets the compensation threshold). company’s business. However, the court physician who runs an internal medical Similarly, depending on the held that only the CEO, and not the practice that is part of a hospital system organization, a vice president may have defendant, had authority to make would be senior executives, assuming final policy-making authority over company policy and ultimate decisions they are decision-makers only for their significant aspects of a business entity. on significant issues.717The court particular division. The definition is The adapted definition is based on conducted a fact-intensive analysis of limited to the workers with sufficient functional job duties rather than formal the defendant’s duties and held that the pay and authority such that they are job titles. defendant did not have the authority to more likely to have meaningful Second, SEC Rule 3b–7 uses the term make policy. The court also held that bargaining power and actually ‘‘policy making function’’ as part of its the term did not include individuals negotiated their non-competes. definition of the types of job duties that solely ‘‘involved in discussing company For the same reason, the Commission could classify a person as an ‘‘executive strategy and policy.’’718 added language to the definitions of officer.’’715While the term ‘‘policy The Commission finds this case law ‘‘policy-making authority’’ and ‘‘policy- making function’’ is undefined in SEC instructive and thus defines ‘‘policy- making position’’ to exclude from the Rule 3b–7 and other SEC regulations, making authority’’ in the final rule as definition of ‘‘senior executives’’ the Commission believes that defining ‘‘final authority to make policy workers with policy-making authority the term ‘‘policy-making authority’’ in decisions that control significant aspects over only a subsidiary or affiliate of a §910.1 would provide greater clarity of a business entity and does not common enterprise who do not have and facilitate compliance with the final include authority limited to advising or policy-making authority over the rule. The final rule applies to a wider exerting influence over such policy common enterprise. One commenter range of business entities than SEC decisions.’’ Adding this definition argued that the proposed definition of rules, and the Commission seeks to provides stakeholders with additional ‘‘business entity’’ would allow firms to minimize the need to consult with clarity as to what type of authority divide themselves into separate entities counsel about the meaning of this term. meets the definition of ‘‘senior to evade the final rule. In addition to The Commission is also concerned that executive’’ and prevents overbroad sharing this concern, the Commission is if the term is left undefined, employers application of the definition. It concerned that executives of could, inadvertently or otherwise, label expressly does not include workers who subsidiaries or affiliates of a common too many workers who have any merely advise on or influence policy, as enterprise719could rely on their final involvement in the employer’s policy a wide range of workers in an authority to make policy decisions for making as senior executives, especially organization can advise on or influence only that subsidiary or affiliate to workers without bargaining power. policy without being a senior executive. classify the head of each office as a In order to ensure that lower-level In defining this term, the Commission senior executive even though that workers, whom the Commission finds seeks to broadly align with the SEC’s individual only has authority over one likely experience exploitation and definition of ‘‘executive officer’’ while component of a coordinated common coercion, are not included in the focusing on senior executives in a wider enterprise. Rather, the worker must have definition of senior executive, policy- variety of entities, who are less likely to policy-making authority with respect to making authority is assessed based on experience exploitation and coercion. the common enterprise as a whole, not the business as a whole, not a particular As explained in Part IV.C.4.b with just a segment of it, to be a senior office, department, or other sublevel. It respect to the compensation threshold, executive. Workers who head a considers the authority a worker has to there is no job duties test that will subsidiary or affiliate of a common make policy decisions that control a exclude every worker who experiences enterprise are similar to department significant aspect of a business entity exploitation and coercion with respect heads; the senior executives controlling without needing a higher-level worker’s to non-competes while including every the entire common enterprise control approval. For example, if the head of a worker who does not. Building on the those individual subsidiaries and marketing division in a manufacturing SEC definition provides firms and affiliates. As the Commission has firm only makes policy decisions for the workers with a more administrable explained, the Commission finds that marketing division, and those decisions definition that isolates workers at the department heads and other highly paid do not control significant aspects of the most senior level of an organization. non-senior executives do not have To ensure that the final rule’s job sufficient bargaining power to avoid similar to the duties of an officer or director of the duties test for senior executives broadly exploitation and coercion and are company that his involvement, along with his aligns with the SEC definition, the history of criminal and regulatory violations, ought unlikely to have bargained in Commission looked to case law to have been disclosed’’ where the consultant connection with non-competes. The job interpreting that SEC definition. Few controlled the company, including hiring the CEO, duties test identifies the workers with arranging loans from companies controlled by the courts have interpreted SEC Rule 3b–7’s consultant, negotiating acquisitions, and putting his the highest levels of authority in an ‘‘policy making function’’ language, daughter on the board in his place); In re Weeks, organization, i.e., the workers most though some courts view it as an officer SEC Release No. 8313 at *9 (Oct. 23, 2003) (finding likely to have bargaining power and a a consultant was de facto in charge of the company test.716In the most in-depth discussion, bespoke, negotiated agreement, and a while the officers and directors were figureheads who lacked authority and influence over the 715Id. company). 719FTC v. WV Universal Mgmt., LLC, 877 F.3d 716See, e.g., SEC v. Enters. Solutions, 142 F. 717SEC v. Prince, 942 F. Supp. 2d 108, 133–36 1234, 1240 (11th Cir. 2017) (‘‘[C]ourts have justly Supp. 2d 561, 570, 574 (S.D.N.Y. 2001) (finding that (D.D.C. 2013). imposed joint and several liability where a common a so-called consultant’s role was ‘‘sufficiently 718Id. at 136. enterprise exists’’). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38420 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations common enterprise is effectively a provisions are consistent with the are often delayed and outdated, often single organization. Such workers may approach taken elsewhere in this final falling below the poverty threshold, and have a senior executive job title, but rule to focus on real-world implications the duties test serves as a loophole for they are unlikely to meet the job duties and authority rather than formal titles, wage and hour protections. test. labels, or designations. This exclusion Commenters offered several reasons To be considered a ‘‘common from the definitions of ‘‘policy-making for adopting the FLSA exemptions: enterprise’’ for the purposes of defining authority’’ and ‘‘policy-making these categories are already well- policy-making authority and policy- position’’ applies only to common established in Federal law; nonexempt making position, the Commission looks enterprises; for subsidiaries or affiliates workers under the FLSA tend not to beyond legal corporate entities to that are not part of a common have access to trade secrets or be able whether there is a common enterprise of enterprise, a worker could qualify as a to take an employer’s goodwill and are ‘‘integrated business entities.’’720This senior executive if they have policy- thus less likely to harm the employer; means that the various components of making authority over that subsidiary or the exemptions would capture both the common enterprise have, for affiliate and meet all of the wage and job duties tests; some States example, one or more of the following requirements. use a similar standard to the FLSA in characteristics: maintain officers, The Commission has also substituted their non-compete statutes; and the directors, and workers in common; ‘‘business entity’’ in the definitions of exemptions would ban non-competes operate under common control; share ‘‘officer’’ and ‘‘policy-making position’’ for low-skilled workers for whom there offices; commingle funds; and share where SEC Rule 3b–7 uses the word are insufficient justifications for non- advertising and marketing.721Therefore, ‘‘registrant’’ and 17 CFR 240.3b–2 uses competes. An employment attorney also the definitions of policy-making ‘‘organization,’’ because ‘‘registrant’’ has pushed back on the NPRM’s concerns authority and policy-making position a specific meaning in the SEC context that the FLSA exemptions could enable include provisions whose purpose is to that is inapplicable to the wider array of misclassification,725asserting that exclude those executives of a subsidiary business entities covered by this final misclassification under the FLSA is or affiliate of a common enterprise from rule and because ‘‘business entity’’ is unlawful and penalized, and thus being considered senior executives. For defined in §910.1 and is used usually inadvertent. example, if a business operates in throughout this final rule. The The Commission does not adopt the several States and its operations in each Commission substituted ‘‘natural FLSA exemptions for purposes of this State are organized as their own person’’ where SEC Rule 3b–7 and 17 final rule because it would exempt corporation, assuming these businesses CFR 240.3b–2 use ‘‘person’’ because millions of non-competes that harm and the parent company meet the ‘‘person’’ is separately defined for competition and workers. For example, criteria for a common enterprise, the purposes of this final rule in §910.1. the FLSA exempts most highly paid and head of each State corporation would highly skilled workers,726who the
F. Supp. 2d 1247, 1271 (M.D. Fla. 2012)). In assessing a common enterprise, ‘‘no one factor is 722See 29 CFR 541.100(a). 725See NPRM at 3511. controlling,’’ and ‘‘federal courts routinely consider 723See DOL, Fact Sheet #17A: Exemption for 726See 2023 FLSA NPRM at 62190 (estimating a variety of factors.’’ FTC v. Wyndham Worldwide Executive, Administrative, Professional, Computer that 36.4 million salaried, white-collar employees Corp., No. CIV.A. 13–1887 ES, 2014 WL 2812049, & Outside Sales Employees Under the Fair Labor currently qualify as FLSA-exempt executive, at *7 (D.N.J. Jun. 23, 2014); see also Del. Watch Co. Standards Act (FLSA) (revised Sept. 2019), https:// administrative, or professional employees).
v. FTC, 332 F.2d 745, 746 (2d Cir. 1964) (‘‘[T]he www.dol.gov/agencies/whd/fact-sheets/17a- 727See Part IV.C.1. pattern and frame-work of the whole enterprise overtime. 728See Part IX.C. must be taken into consideration.’’) 724Id. 729See Part IV.C.4.b. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38421 others did not mention compensation executives and their immediate entered into after the effective date; or thresholds. One business suggested a subordinates, partners and equity (iii) to represent that the senior bright-line rule for the types of holders, managers, workers involved in executive is subject to a non-compete confidential business information that strategic decision-making, and more. clause, where the non-compete clause can be protected by a non-compete The Commission carefully considered was entered into after the effective date. based on existing State statutes, to each proposed definition and how it Part IV.A.1 sets forth the Commission’s increase certainty about what is would operate in practice before determination that the foregoing allowed. Commenters suggested selecting the two-part test. Elements of practices are unfair methods of exceptions based on a variety of job some of these proposals, such as competition under section 5, and Part types they viewed as more likely to be strategy development or decision- IV.C.2 explains the findings that provide exposed to trade secrets and making, are also similar to the job duties the basis for this determination.
confidential information, including all test the Commission is finalizing. The highly skilled workers; key scientific, Commission believes that definitions Section 910.2(a)(2) uses similar technical, R&D, or sales workers; or based on job titles alone would be language as §910.2(a)(1); however, there workers with highly detailed knowledge inadequate because, as one industry are two key differences. First, the of business and marketing plans. The association commented, employers prohibition in §910.2(a)(2)(ii) on Commission explains why it is not define job titles differently, and a title enforcing or attempting to enforce a adopting exceptions based on access to might not accurately reflect a worker’s non-compete applies only to non- trade secrets or other intellectual job duties. The other definitions competes entered into after the effective property in Parts V.D.1 and V.D.2. proposed by commenters, such as the date. Second, the prohibition in provision on golden parachute Additional Proposed Job Duties and Job §910.2(a)(2)(iii) on representing that a payments, would generally require a Title Tests senior executive is subject to a non- more fact-intensive analysis than the job compete applies only where the non- The Commission carefully considered duties test the Commission is adopting. compete was entered into after the several other proposed tests. The NPRM Market participants would need to effective date. Sections 910.2(a)(2)(ii)
stated that the Commission could base conduct the analysis for more workers, and (iii) include this language because, the definition of senior executive on including workers who are exploited for the reasons described in Part IV.C.3, SEC Regulation S–K’s definition of and coerced by non-competes. A more senior executives.730Commenters did fact-intensive analysis would require the Commission has determined not to not discuss this potential option. The more resources for litigation and is thus prohibit existing non-competes with Commission is not adopting this likely to have in terrorem effects for senior executives—i.e., non-competes approach because it bears little relation lower-wage workers.734Moreover, many entered into before the effective date— to the likelihood that a senior executive of these proposals would exempt more from remaining in effect. bargained for a non-compete, and workers than the Commission’s Otherwise, the explanation of the because it would designate roughly definition, such as managers, even three prongs of §910.2(a)(1) in Part seven individuals per company as though workers in such roles and IV.B.4—relating to issues such as, for ‘‘senior executives’’ regardless of their occupations are often coerced and example, what ‘‘attempt to enter into’’ compensation level or the size of the exploited by non-competes. and ‘‘attempt to enforce’’ mean, and company, meaning it would not apply As explained in this Part, the what conduct the ‘‘representation’’ equally among employers or workers.731 Commission pairs a relatively easy-to- prong applies to—is applicable to the For example, a ten-person company apply job duties test with a corresponding language in §910.2(a)(2).
could potentially use non-competes for compensation threshold to maximize The good-faith exception in §910.3 is most of its workforce irrespective of administrability and clarity while also applicable to the relevant whether they are senior executives, identifying those senior executives most prohibitions with respect to senior whereas a company with ten thousand likely to have bargained for non- executives and is explained in Part V.C.
employees would be limited to the same competes. In addition, proposals to number.732 except partners, shareholders, and D. Claimed Justifications for Non- One commenter proposed adopting a similar groups are likely covered by the Competes Do Not Alter the definition similar to the tax code sale of business exception if they sell Commission’s Finding That Non- provision on ‘‘golden parachute their share of the business upon leaving. Competes Are an Unfair Method of payments.’’733Several commenters
733This provision determines who is an ‘‘officer’’ competition for a person: (i) to enter As noted in Part II.F, some courts ‘‘on the basis of all the facts and circumstances in into or attempt to enter into a non- have declined to consider justifications the particular case (such as the source of the compete clause; (ii) to enforce or altogether and the Commission and individual’s authority, the term for which the attempt to enforce a non-compete clause courts have consistently held that individual is elected or appointed, and the nature pecuniary benefit to the party and extent of the individual’s duties) . . . .’’ Treas.
Reg. sec. 1.280G–1, Q/A–18. 734See Part IX.C. responsible for the conduct in question VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38422 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations is not cognizable as a justification.735 employers’ incentives to make competition to a lesser degree,742and, However, where defendants raise productive investments, such as in any event, these claimed benefits do justifications as an affirmative defense, investments in worker human capital not justify the harms from non- they must be legally cognizable,736and (worker training), client and customer competes.743 non-pretextual,737and any restriction attraction and retention, or in creating As explained in the NPRM, a study by used to bring about the benefit must be or sharing trade secrets or other Evan Starr finds that moving from mean narrowly tailored to limit any adverse confidential information with workers. non-compete enforceability to no non- impact on competitive conditions.738 According to these asserted compete enforceability would decrease In the NPRM, the Commission justifications, without non-competes, the number of workers receiving considered the commonly cited employment relationships are subject to training by 14.7% in occupations that business justifications for non-competes an investment hold-up problem. use non-competes at a high rate (relative and preliminarily found they did not Investment hold-up would occur where to a control group of occupations that alter the Commission’s determination an employer—faced with the possibility use non-competes at a low rate).744The that non-competes are an unfair method that a worker may depart after receiving study further finds that changes in of competition.739The Commission has some sort of valuable investment or training are primarily due to changes in reviewed and considered the comments obtaining valuable information—opts firm-sponsored, rather than employee- on its analysis of the justifications for not to make that investment in the first sponsored, training.745 non-competes. For two reasons, the place, thereby decreasing the firm’s Firm-sponsored training is the type of claimed justifications for non-competes productivity and overall social welfare. investment in human capital that non- do not alter the Commission’s For example, according to this claimed competes are often theorized to protect, determination that non-competes are an justification, an employer may be more as the firm may be unwilling to make an unfair method of competition. First, reticent to make capital investments or unprotected investment. However, the employers have more narrowly tailored invest in workers’ human capital by study does not distinguish between core alternatives to non-competes for training its workers if it knows the training, i.e., training required to protecting valuable investments that perform job duties, and advanced worker may depart for or may establish tend to negatively affect competitive training, i.e., training with potential to a competing firm. Similarly, conditions to a lesser degree. Second, increase productivity beyond the commenters argued that employers may the asserted benefits from the claimed baseline requirements for job decrease investments or experience business justifications from non- performance. When non-competes are harm if a worker takes a trade secret or competes do not justify the considerable more enforceable, workers may receive other confidential information to a harm from non-competes. additional core training rather than competitor.
1. Claimed Business Justifications for Courts have cited these justifications reflect a reduction in efficiency. When Non-Competes and Empirical Evidence when upholding non-competes under non-competes are more enforceable, State common law and in cases Claimed business justifications for labor mobility decreases and workers challenging non-competes under the non-competes relate to increasing may also move to new industries to Sherman Act.740However, courts have avoid potentially triggering non- not considered non-competes’ aggregate 735Atl. Refin. Co., 381 U.S. at 371 (considering compete clause violations (as discussed that defendant’s distribution contracts at issue harms, and neither legislatures nor in Part IV.B.2.b.ii), both of which make ‘‘may well provide Atlantic with an economical courts have had occasion to consider method of assuring efficient product distribution these justifications in the context of experienced workers less often available among its dealers’’ and holding that the for hire. Firms therefore may need to ‘‘Commission was clearly justified in refusing the section 5. The Commission has train workers at a greater rate because participants an opportunity to offset these evils by considered them and found them they will hire inexperienced workers a showing of economic benefit to themselves’’); FTC unavailing in cases in which it has v. Texaco, 393 U.S. 223, 230 (1968) (following the who require more core training. On the successfully obtained consent decrees same reasoning as Atlantic Refining and finding other hand, advanced training can be that the ‘‘anticompetitive tendencies of such system against non-competes alleged to be an associated with productivity gains, and [were] clear’’); L.G. Balfour Co. v. FTC, 442 F.2d 1, unfair method of competition in 15 (7th Cir. 1971) (‘‘While it is relevant to consider violation of section 5.741 firms using non-competes may increase the advantages of a trade practice on individual rates of advanced training for companies in the market, this cannot excuse an There is some empirical evidence that experienced workers because non- otherwise illegal business practice.’’). For non-competes increase investment in competes increase the likelihood that provisions of the antitrust laws where courts have human capital of workers, capital not accepted justifications as part of the legal firms receive a return on the training investment, and R&D investment.
analysis, the Commission will similarly not accept investment. The study does not justifications when these claims are pursued However, the Commission also finds distinguish between these types of through section 5. that there are alternatives that burden training, and thus leaves unclear 736See, e.g., FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 463 (1986); Fashion Originators’ Guild of whether the observed increases in Am. v. FTC, 312 U.S. 457, 467–68 (1941); FTC v. 740See, e.g., United States v. Addyston Pipe & training reflect productivity gains or Superior Ct. Trial Lawyers Ass’n, 493 U.S. 411, Steel Co., 85 F. 271, 281 (6th Cir. 1898); Polk Bros., losses (or neither in net).
423–24 (1990). Inc. v. Forest City Enters., 776 F.2d 185, 189 (7th 737See, e.g., Ind. Fed’n of Dentists, 476 U.S. at Cir. 1985). Additionally, the Starr study uses 464. See also United States v. Microsoft Corp., 253 741See FTC, In the Matter of O–I Glass, Inc and data on the use of non-competes, F.3d 35, 62–64, 74 (D.C. Cir. 2001); Eastman Kodak In the Matter of Ardagh Group S.A., Ardagh Glass comparing high- and low-use Co. v. Image Tech. Svcs., 504 U.S. 451, 484–85 Inc., and Ardagh Glass Packaging Inc., Analysis of occupations, rather than changes in (1992); Aspen Skiing Co. v. Aspen Highlands Skiing Agreements Containing Consent Order to Aid enforceability; however, the study does Corp., 472 U.S. 585, 608–10 (1985). Public Comment, FTC File No. 2110182 (Jan. 4, 738NCAA v. Alston, 594 U.S. 69, 99–104 (2021); 2023) at 6–7; FTC, In the Matter of Prudential not examine differences between Polygram Holding, Inc. v. FTC, 416 F.3d 29, 38 Security, Inc., et al., Analysis of Agreement individuals who are bound by non- (D.C. Cir. 2005); 2000 Collaboration Guidelines, sec. Containing Consent Order to Aid Public Comment, 3.36b. See also Union Circulation Co. v. FTC, 241 FTC File No. 2210026 (Jan. 4, 2023) at 7; FTC, In F.2d 652, 658 (2d Cir. 1957) (‘‘The agreements here the Matter of Anchor Glass Container Corp. et al., 742See Part IV.D.2. went beyond what was necessary to curtail and FTC File No. 2210182 Analysis of Agreement 743See Part IV.D.3. eliminate fraudulent practices.’’). Containing Consent Order to Aid Public Comment 744Starr, supra note 445 at 796–97. 739NPRM at 3504–08. (Mar. 15, 2023) at 6. 745Id. at 797. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38423 competes and individuals who are not. may not necessarily reflect increased association with either training or the This study is the only study that economic efficiency. Jeffers uses sharing of trade secrets (after inclusion attempts to identify the causal link multiple changes in non-compete of control variables) but do not examine between non-competes and worker enforceability, measured in a binary other investment outcomes.751The human capital investment, and the fashion, and the Commission therefore second study, by Johnson and Lipsitz, Commission gives it some weight, gives this study substantial weight, but examines investment in the hair salon though not as much weight as it would less weight than studies which industry. That study finds that firms receive if it examined changes in non- additionally measure enforceability in a that use non-competes train their compete enforceability. The non-binary fashion. employees at a higher rate and invest in Commission also weights it less highly Two studies published after the customer attraction through the use of because it does not distinguish between release of the NPRM also assess the digital coupons (on so-called ‘‘deal core and advanced training. effects of non-competes on firm sites’’) to attract customers at a higher The second study, by Jessica Jeffers, investments. A study by Johnson, rate, both by 11 percentage points.752 finds knowledge-intensive firms invest Lipsitz, and Pei revisits the form of the As the Commission stated in the substantially less in capital equipment regressions used by Jeffers. The authors NPRM, it gives these two studies (the following decreases in the enforceability find that greater non-compete 2021 Starr, Prescott, and Bishara studies of non-competes, though the effect is enforceability increases R&D and the 2021 Johnson and Lipsitz much more muted (and statistically expenditure.748This is consistent with studies) minimal weight, because they insignificant) when considering all the NPRM’s preliminary finding, and do not necessarily represent causal industries.746While firms may invest in the finding of the Jeffers study, that relationships, a point recognized by the capital equipment for many different there is evidence that non-competes authors of both of these studies.753 reasons, Jeffers examines this outcome increase employee human capital Similar to other studies of non-compete (as opposed to labor-focused outcomes) investment and other forms of use—as opposed to changes in non- to avoid looking at R&D expenditure as investment. The Commission gives this compete enforceability—these studies a whole, which is in large part study substantial weight because it are less reliable because the use of non- composed of labor expenses. This examines multiple changes in non- competes and the decision to invest may allows the study to isolate the effects of compete enforceability measured in a be jointly determined by other non-compete enforceability on non-binary fashion.
of decreased competition—is correct, methodology the Commission gives less 754See Part IV.A.2 (describing the analytical then this increased capital investment weight to.750The first is a study by framework the Commission is applying to weigh the Starr, Prescott, and Bishara using their empirical studies, including why it assigns greater 746Jeffers, supra note 450 at 28. Jeffers reports 2014 survey of non-compete use. They weight to studies assessing changes in non-compete 34%–39% increases in capital investment due to find no statistically significant enforceability than to studies of non-compete use). increases in non-compete enforceability at 755Kenneth A. Younge & Matt Marx, The Value knowledge-intensive firms in the 2024 version of of Employee Retention: Evidence from a Natural the study, and the Commission calculates increases 748Johnson, Lipsitz, and Pei, supra note 526. Experiment, 25 J. Econ. & Mgmt. Strategy 652 of 7.9% across all sectors (see Part X.F.9.a.i). 749Shi, supra note 84. (2016). 747Id. at 29. 750See Part IV.A.2. 756Id. at 674.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38424 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations does not address the effects of non- or use information designated as Employers also have alternative competes on firm investments confidential.762The Commission further mechanisms to protect their investments specifically. stated that, if an employer wants to in worker human capital, including As the Commission stated in the prevent a worker from leaving right after fixed duration contracts, and competing NPRM, it is unaware of any evidence of receiving valuable investment in their on the merits to retain workers by a relationship between the human capital, the employer can sign providing better pay and working enforceability of non-competes and the the worker to an employment contract conditions. rate at which companies invest in with a fixed duration.763In addition, the The experiences of certain States in creating or sharing trade secrets.757 Commission stated that employers that banning non-competes bolster this Similarly, the Commission is unaware wish to retain their workers can also pay conclusion. Non-competes have been of any evidence non-competes reduce their workers more, offer them better void in California, North Dakota, and trade secret misappropriation or the loss hours or better working conditions, or Oklahoma since the 1800s.767In these of other types of confidential otherwise improve the conditions of three States, employers generally cannot information, difficult areas for their employment—i.e., compete to enforce non-competes, so they must researchers to study given the lack of retain their labor services.764 protect their investments using one or reliable data on firms’ trade secrets and The Commission also noted that in more less restrictive alternatives. There confidential information.758As three States—California, North Dakota, is no evidence that employers in these explained in Part IV.D.2, even assuming and Oklahoma—employers generally States have been unable to protect their non-competes do reduce cannot enforce non-competes, so they investments (whether in human capital, misappropriation or information loss, must protect their investments using physical capital, intangible assets, or the Commission finds that there are one or more of these less restrictive otherwise) or have been disincentivized alternatives to protect these investments alternatives.765The Commission stated from making them to any discernible that burden competition to a lesser that the economic success in these three degree. Rather, in each of these States, degree. States of industries that are highly industries that depend on highly trained dependent on trade secrets and other workers and trade secrets and other 2. Employers Have Alternatives to Non- confidential information illustrates that confidential information have Competes for Protecting Valuable companies have viable alternatives to flourished. California, for example, is Investments non-competes for protecting valuable home to four of the world’s ten largest a. The Proposed Rule investments.766 companies by market capitalization, and it also maintains a vibrant startup In the NPRM, the Commission b. The Commission’s Final Findings culture.768Technology firms are highly preliminarily found that employers have Based on the totality of the evidence, dependent on highly-trained and skilled alternatives to non-competes for including its review of the empirical workers as well as protecting trade protecting valuable investments.759The literature, its review of the full comment secrets and other confidential Commission stated that these record, and its expertise in identifying information—and, since the 1980s, alternatives may not be as protective as practices that harm competition, the California has become the epicenter of employers would like, but they Commission in this final rule finds that the global technology sector, even reasonably accomplish the same the asserted business justifications for though employers cannot enforce non- purposes as non-competes while non-competes do not alter the competes.769Indeed, researchers have burdening competition to a less Commission’s determination that non- posited that high-tech clusters in significant degree.760 competes are an unfair method of California may have been aided by The Commission stated that trade competition. Employers have increased labor mobility due to the secret law—a form of intellectual alternatives to non-competes for unenforceability of non-competes.770In property law that protects confidential protecting valuable investments that business information—already provides burden competition to a less significant 767Non-competes have been void in California significant legal protections for an degree. Rather than restraining a broad since 1872, in North Dakota since 1865, and in employer’s trade secrets.761The scope of beneficial competitive Oklahoma since 1890. See Ronald J. Gilson, The Commission also stated that employers activity—by barring workers altogether Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Non- that seek to protect valuable from leaving work with the employer or Compete Clauses, 74 N.Y.U. L. Rev. 575, 616 (1999) investments are able to enter into NDAs starting a business and by barring (California); Werlinger v. Mut. Serv. Casualty Ins. with their workers. NDAs, which are competing employers and businesses Co., 496 NW2d 26, 30 (N.D. 1993) (North Dakota); also commonly known as from hiring those workers—these B an ra d n A do cq n u K is e i m tio p n , s N , o 8 n 8 c O om kl p a. e B te a s r i J n . 1 O 2 k 8 l a ( h 20 o 1 m 7 a ) Mergers confidentiality agreements, are contracts alternatives are much more narrowly (Oklahoma). Minnesota also recently prohibited in which a party agrees not to disclose tailored to limit impacts on competitive non-competes, through a law that took effect in July 2023. See Minn. Stat. sec. 181.988. However, conditions.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38425 North Dakota and Oklahoma, the energy enjoyed by owners of other forms of viability of trade secret law as a means industry has thrived, and firms in the intellectual property, including for redressing trade secret theft is energy industry depend on highly- copyrights, patents, and trademarks.’’776 illustrated by the fact that firms trained workers as well as the ability to Similar to State laws modeled on the regularly bring claims under trade secret protect trade secrets and other UTSA, the DTSA authorizes civil law. A recent analysis by the legal confidential information. remedies for trade secret analytics firm Lex Machina finds that The Commission finds that the misappropriation, including injunctive 1,156 trade secret lawsuits were filed in economic success in these three States relief, damages (including punitive Federal court in 2022.784In addition, an of industries that are highly dependent damages), and attorney’s fees.777The analysis by the law firm Morrison on highly trained workers, trade secrets, DTSA also authorizes a court, in Foerster finds that 1,103 trade secret and other confidential information ‘‘extraordinary circumstances,’’ to issue cases were filed in State courts in illustrates that non-competes are not civil ex parte orders for the ‘‘seizure of 2019.785The number of cases filed in necessary to protect employers’ property necessary to prevent the State court has held steady since 2015, legitimate interests in trained workers or propagation or dissemination of the when 1,161 cases were filed.786The fact securing their intellectual property and trade secret that is the subject of the that a considerable number of trade confidential information. These action.’’778There is thus a clear Federal secret lawsuits are filed in Federal and alternatives are available to employers statutory protection that specifically State courts—over 2,200 cases per and viable both with respect to senior governs protection of trade secrets. year—and the fact that this number has executives and to workers other than Trade secret theft is also a Federal held relatively steady for several years senior executives. The Commission crime. The Economic Espionage Act of suggests that many employers addresses these alternatives in this Part 1996 (‘‘EEA’’) makes it a Federal crime themselves view trade secret law as a IV.D.2.b and summarizes and responds to steal a trade secret for either (1) the viable means of obtaining redress for to the comments on these alternatives in benefit of a foreign entity (‘‘economic trade secret theft. Part IV.D.2.c. espionage’’) or (2) the economic benefit The use of trade secret law burdens competition to a lesser degree than the i. Trade Secret Law of anyone other than the owner (‘‘theft use of non-competes. Trade secret law of trade secrets’’).779The EEA The Commission finds that trade provides firms with a viable means of authorizes substantial criminal fines secret law provides employers with a redressing trade secret and penalties for these crimes.780The viable, well-established means of misappropriation—and deterring trade EEA further authorizes criminal or civil protecting investments in trade secrets, secret misappropriation by workers— forfeiture, including of ‘‘any property without the need to resort to the use of without blocking beneficial competitive constituting or derived from any non-competes with their attendant activity, such as workers switching to proceeds obtained directly or indirectly harms to competition. Trade secret law jobs in which they can be more as a result of’’ an EEA offense.781The is a form of intellectual property law productive or starting their own EEA also requires offenders to pay that is specifically focused on providing businesses.
416 U.S. 470, 476 (1974). As the high court of one such as information about discrimination, 772See Levine & Seaman, supra note 758 at 113.
State noted in applying a State statute based on the harassment, sexual assault, corporate wrongdoing, The three States that have not adopted the UTSA UTSA, ‘‘business information may . . . fall within or information that may disparage the company or offer protection to trade secrets under a different the definition of a trade secret, including such its executives or employees. These types of NDAs statute or under common law. Yeh, supra note 771 matters as maintenance of data on customer lists have been widely criticized for, among other things, at 6 n.37.
iii. Other Means of Protecting Valuable receiving valuable training, the meaningful enforcement advantages to Investments employer can sign the worker to an employers compared with non- employment contract with a fixed competes. A few commenters stated The Commission finds that employers duration. An employer can establish a that, unlike non-competes, trade secret have additional well-established means term that is long enough for the law and NDAs are broadly enforceable of protecting valuable investments in employer to recoup its human capital in all fifty States. A few commenters addition to trade secret law and NDAs.
Cos. v. FMC Corporation/Agricultural Prods. Group, The Commission believes that what LeJeune v. Coin Acceptors, Inc., 849 A.2d 451, 470– 107 F. Supp. 2d 684, 692 (D. Md. 2000) (‘‘There is 71 (Md. 2004). Other States have required no question that a customer list can constitute a some commenters describe as the employers to meet high evidentiary burdens related trade secret.’’); Liebert Corp. v. Mazur, 827 NE2d ‘‘prophylactic’’ benefits of non- to inevitability, irreparable harm, and bad faith 909, 922 (2005) (‘‘[W]hether customer lists are trade competes—that an employer can block a before issuing an injunction pursuant to the secrets depends on the facts of each case.’’). worker from taking another job, without doctrine. See generally Eleanore R. Godfrey, 800See, e.g., Tendeka, Inc. v. Glover, No. CIV.A. Inevitable Disclosure of Trade Secrets: Employee respect to any alleged misconduct—is H–13–1764, 2015 WL 2212601 at *14 (S.D. Tex. Mobility v. Employer Rights, 3. J. High Tech. L. 161 May 11, 2015). also the source of their overbreadth (2004). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38428 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations difficult than for non-competes, and that record is replete with examples of interests being asserted; employers enforcement is accordingly more workers bound by non-competes who consistently bring cases under this body expensive, because it is more difficult to lacked knowledge of trade secrets or of law; and a preference among firms for detect and obtain evidence of the whose employment with a competitor a blunter instrument for protecting trade disclosure or use of confidential never threatened their previous secrets and confidential information information than it is to determine that employer’s investments. To the extent cannot justify an unfair method of a former worker has moved to a trade secret law and NDAs require competition that imposes significant competitor. Some commenters asserted higher evidentiary showings, that makes negative externalities on workers, other that trade secret litigation is expensive these alternatives more tailored tools for firms, consumers, and the economy.806 because the cases are fact-intensive and protecting employers’ valuable An industry trade organization involve litigating multiple challenging investments without unduly restricting commenter stated that neither fixed- issues. Some commenters argued that as a worker from engaging in competitive duration employment contracts nor a result, the proposed rule conflicted activity. improved pay, benefits, or working with Congressional intent underlying Some commenters argued that, conditions specifically protect against the DTSA. A few commenters similarly without non-competes, employers the disclosure of confidential argued that breaches of non-solicitation would limit access to valuable trade information. In response, the agreements are difficult to detect and secrets within the workplace because Commission notes that firms can protect can be enforced only after the trade secret law requires employers to against the disclosure of confidential solicitation has occurred. While the show reasonable efforts to maintain the information using trade secret law and Commission recognizes that trade secrecy of an alleged trade secret to NDAs, and, where applicable, patent secrets litigation and NDA and non- prove a violation, and that reduced rates law and invention assignment solicitation enforcement may be more of intrafirm trade secrets sharing will agreements. And in response to these costly than non-compete enforcement in ultimately harm innovation as well as commenters, the Commission notes that some instances, the Commission is not workers. In response, the Commission companies in California, North Dakota, persuaded that higher costs associated notes that the empirical evidence and Oklahoma have been able to protect with alternative tools make those tools indicates otherwise: when non- their trade secrets and other confidential inadequate. The comments do not competes are more enforceable, the information adequately using tools other establish that pursuing remedies overall level of innovation decreases.804 than non-competes since the late through trade secrets litigation or NDA Furthermore, these comments seem to nineteenth century. Industries that are enforcement are prohibitively overstate the burden of reasonable highly dependent on trade secrets and expensive. In any event, the efforts to keep information secret. Under other confidential information have Commission and courts have the DTSA, courts have found that flourished in those States even though consistently held that pecuniary benefit employers meet this requirement by non-competes have been unenforceable. to the party responsible for the conduct sharing information at issue only among A few commenters disputed the in question is not cognizable as a workers bound by NDAs or maintaining NPRM’s contention that the rate at justification.802While employers may such information in password-protected which employers pursue trade secrets find that protecting trade secrets and digital spaces.805Accordingly, litigation is evidence of the viability of confidential information or customer assertions that employers will need to trade secret law as a means for relationships by using non-competes to take extraordinary precautions to redressing trade secret theft or restrict worker mobility, regardless of maintain secrecy over trade secrets and protecting confidential information, in whether that worker would confidential information are part because those employers were not misappropriate confidential information inconsistent with standards courts necessarily relying exclusively on trade or solicit customers, is easier for them, typically recognize for determining secret law. The Commission does not the Commission finds that same whether reasonable efforts were taken to assert that these data, alone, overbreadth of non-competes imposes keep such information confidential. The conclusively establish trade secret law significant negative externalities on Commission is not persuaded that is a perfect vehicle for redressing trade workers, consumers, businesses, and requirements in trade secret law to show secret theft. Rather, the data show trade competition as a whole.803This reasonable efforts to maintain secrecy secret litigation is more than a mere overbreadth that employers benefit from will deter intrafirm information sharing, theoretical possibility—it is an avenue wielding is what causes the harms from or otherwise make alternative tools many companies choose to redress trade non-competes relative to more inadequate. secret theft and indeed it is the body of narrowly-tailored alternatives. Several commenters argued that the law designed and developed for this Some commenters contended that Commission should not find that very purpose. Accordingly, the higher burdens for establishing employers have adequate alternatives to Commission believes that the fact that violations of trade secret and IP laws protecting their valuable investments many companies bring claims under the will harm employer incentives to share because there is a lack of empirical well-established body of State and trade secrets with workers and to invest evidence specifically showing that trade Federal law on trade secrets is relevant in valuable skills training. The secret law and NDAs are effective for evidence that trade secret law provides Commission is not persuaded that the purpose of protecting trade secrets a viable means for redressing trade higher evidentiary burdens render trade and confidential information. In secret theft. secret law and NDAs inadequate for response, the Commission notes that Some commenters suggested a higher protecting employers’ valuable trade secret law is a body of law that is volume of trade secrets litigation in investments. Heightened standards are a specifically designed to protect the California may reflect a higher rate of valuable mechanism to filter out trade secret disclosure due to the State’s overbroad restrictions on beneficial 804See Part IV.B.3.b.ii. policy against enforcing non-competes. competitive activity. The comment 805See e.g., In re Adegoke, 632 B.R. 154, 167 However, these commenters did not (Bankr. N.D. Ill. 2021); Houser v. Feldman, 569 F.
v. Biosense Webster, Inc., 102 Cal. Rptr. 3d 1, 11 competes, employers risk the worker (Cal. Ct. App. 2nd 2009); Arthur J. Gallagher & Co.
v. Lang, 2014 WL 2195062 (N.D. Cal. May 23, 2014) 811Starr, Prescott & Bishara, supra note 68 at 81. taking that investment to a competitor. at *4 n.3. 812Id. at 68. Some commenters state that this risk is VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38430 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations greatest in underserved areas and when non-competes are a secondary method Relatedly, some commenters argued there are worker shortages. Several of protecting that asset.813 prohibiting non-competes and broadly commenters said that employment Commenters also stated that non- enabling workers to take general trade restrictions such as non-competes competes protect investments other than knowledge and skills to competitors incentivize businesses to pay for in human capital, capital expenditures, will mean that their new employers will credentials, training, and advanced and R&D, including recruiting and free ride off investments the former education that low-wage and other hiring, providing client and customer employers made in their human capital, workers would be unable to afford on service, facilities, marketing, and which will discourage future investment their own, facilitating upward mobility. technology, among others. The in human capital. The Commission does For highly educated workers, such as Commission is unaware of any not believe preventing workers from physicians, some employers said they empirical evidence showing that non- using their general trade knowledge and need non-competes to protect payments competes increase these types of skills, including their gains in trade for continuing education as well as investments, and commenters did not knowledge and skills through mentorships and on the job training. provide any. In general, however, firms experience with a particular employer, Businesses and their advocates asserted can protect investments in trade secrets is a legally cognizable or legitimate that in some industries, many new and confidential information, and justification for non-competes. Under employees are unprofitable for a investments in workers, through the less State common law, preventing a worker significant period, requiring up-front restrictive alternatives described in Part from using their general knowledge and investment and training from employers IV.D.2.b. skills with another employer is not a who want to recoup that investment. Two trade organizations stated that legitimate interest that can justify a non- In response, the Commission notes prohibiting non-competes could cause compete.815Indeed, there is a general that, as described in Part IV.D.2.b.iii, businesses to lose staff, and that losing principle in the law of restrictive firms have less restrictive alternatives staff could cause them to reduce employment agreements—and trade for protecting human capital investments that may be based on secret law as well—that these tools investments, including fixed-duration staffing assumptions. These commenters cannot be used to prevent workers from contracts and competing on the merits did not provide empirical evidence to using their general trade knowledge and for the worker’s labor services through support these arguments. The skills.816The Commission does not better pay, benefits, or working Commission also notes that firms would view the inability to prevent disclosure conditions. Through these means, not necessarily lose workers because of or use of general skills and knowledge employers can retain workers without the final rule. As described previously, as a shortcoming of trade secret law and restricting who they can work for, or some firms may lose workers because it NDAs; instead, it considers the use of their ability to start a business, after will be easier for workers to leave for general skills and knowledge as their employment ends. The better opportunities, while some firms beneficial competitive activity. Commission also notes that these may gain workers by attracting workers Moreover, the Commission notes that commenters often inaccurately describe from other firms. Additionally, firms sectoral job training strategies can be a the increased labor mobility afforded by can retain workers by competing on the tool for employers and workers to access the final rule as a one-way street. While merits for their labor services—i.e., by worker training that is transferrable it will be easier under the final rule for offering better jobs than their across employers.817 workers to switch jobs and work for a competitors. One commenter asserted trade secret competitor, it will also be easier for Commenters asserted that Starr, law and NDAs are inadequate to protect firms to hire talented workers, since Prescott, and Bishara814found that employers’ goodwill, while another those workers are not subject to non- notice of non-competes alongside a job commenter asserted these tools are competes. In general, firms will benefit offer is positively correlated with inadequate to protect investments in from access to a wider pool of labor, training compared to later notice. In relationships with clients. Regarding because the rule eliminates the friction response, the Commission notes that the whether trade secret law and NDAs are non-competes impose on the free evidence is a correlation between early adequate to protect employers’ client functioning of competition in labor notice and training, not a causal finding, relationships, the Commission markets. Whether this will be a net so the Commission gives it minimal interprets this to refer to employers’ benefit to a particular firm, or not, will weight. In addition, regardless of concern that a client will follow a depend on the firm’s ability to compete whether there is an increase in training worker to a competitor. The for workers on the merits to attract and where notice of non-competes is Commission believes that employers retain talent. provided along with the job offer have alternatives for protecting these A group of healthcare policy instead of later on, this data is not investments, including fixed-duration researchers stated that the investment salient on the question of whether contracts (in the case of goodwill), justifications offered by corporate employers have less restrictive NDAs (in the case of client lists), and owners of physician practices are alternatives to protecting training competing on the merits to retain misleading since the true value of the investments. workers and/or clients. Firms can seek investment in the practice is the book of A few commenters stated non- to protect client relationships by business and referrals. These competes protect against the offering superior service and value— researchers suggested that non-competes ‘‘disclosure’’ of general trade knowledge through the free and fair functioning of are used to circumvent laws that and skills, while the less restrictive competition. These more narrowly prohibit payment for physician referrals. alternatives cited in the NPRM do not. The Commission notes that this 815See NPRM at 3495 n.162.
comment aligns with a statement by 813Kurt Lavetti, Economic Welfare Aspects of 816See Montville, supra note 788 at 1161. researcher Kurt Lavetti at the Non-Compete Agreements, Remarks at the FTC 817See, e.g., Mayu Takeuchi & Joseph Parilla, Commission’s 2020 forum on non- Workshop on Non-Competes in the Workplace, at Federal Investments in Sector-Based Training Can competes. Lavetti stated that patient 1 _e 4 v 5 e – n 4 t 6 s / ( 1 Ja 5 n 5 . 6 9 2 , 5 2 6 0 /n 2 o 0 n ), - a c t o m ht p tp e s te :/ - / w w o w rk w s . h ft o c p .g - o v//files// B (D o e o c s . t 7 W , 2 o 0 rk 2 e 3 r ) s , ’ h U tt p p w s: a // r w d w M w o . b b i r l o it o y k , i B n r g o s o .e k d in u g / s a r I t n ic s l t e . s/ referrals are a valuable asset, but buying transcript-full.pdf. federal-investments-in-sector-based-training-can- or selling those referrals is illegal, so 814Starr, Prescott & Bishara, supra note 68 at 53. boost-workers-upward-mobility/. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38431 tailored alternatives reasonably protect living, and the Commission is aware of outweighed by the negative effects of the applicable interest while burdening no such evidence. The Commission thus non-competes on innovation.818 competition to a lesser degree because does not believe that there is a basis to According to some commenters, an they do not restrict the worker’s ability conclude the final rule would increase executive moving to a competitor could to seek or accept work or start a the cost of living nationwide. unfairly advantage the competitor and business after their employment ends. irreparably harm the former employer. Therefore, while trade secret law and iii. Comments Regarding Alternatives to In response, the Commission notes that NDAs may not protect goodwill or client Non-Competes for Senior Executives there is nothing inherently unfair about relationships, the Commission finds that Commenters offered the same an executive moving to a competitor, employers have adequate alternative justifications for non-competes with particularly if this results from tools to protect these interests. competition on the merits (such as the senior executives: that they increase Furthermore, the Commission notes the competitor paying more or otherwise employers’ incentive to make final rule does not restrict employers making a more attractive offer). If productive investments. However, many from using trade secret law and NDAs companies seek to retain their commenters argued senior executives in tandem—along with other executives, they have other means for are more likely than other workers to alternatives—to protect their doing so—such as increasing the have knowledge of trade secrets and investments, and comments maintaining executives’ compensation or entering that employers lack adequate other competitively sensitive fixed-duration contracts—that do not alternatives to non-competes because information or to have customer impose significant negative externalities the commenter views just one of these relationships and thus non-competes for on other workers and on consumers, as mechanisms as inadequate are senior executives are necessary, and non-competes do.819 unpersuasive. other tools such as trade secret law and Some commenters also said senior A commenter argued the final rule NDAs are not viable alternatives. executives may have more client, may implicate the ability of Federal In response, the Commission finds business partner, and customer contractors to provide letters of that these tools—trade secret law, relationships than other employees and commitment, which are often required NDAs, patents, and invention may contribute substantially to a firm’s by government agencies and require assignment agreements—provide viable goodwill. The Commission believes that contractors to identify key personnel means of protecting valuable employers have alternatives for who will work on an awarded contract, investments against disclosure by senior protecting goodwill and client/customer sometimes for years in the future. In executives, just as they do for all other relationships. For example, if a firm response, the Commission notes that workers. Commenters do not identify wants to keep a worker from departing contractors have alternatives to non- any reasons why senior executives are and taking goodwill or clients or competes to retain key personnel, uniquely situated with respect to these customers with them, it can enter a including by using fixed-term less restrictive alternatives—i.e., why fixed-duration contract with the worker, employment contracts or providing the trade secret law or NDAs may not otherwise seek to retain the worker key personnel a better job than adequately protect firm investments through competition on the merits, or competitors.
3. The Asserted Benefits From These estimates the final rule will increase explained in Parts IV.B.3.a.ii and Justifications Do Not Justify the Harms workers’ total earnings by an estimated IV.C.2.c.ii, the empirical evidence From Non-Competes $400 billion to $488 billion over ten indicates that, on net, greater a. The Commission’s Final Findings years, at the ten-year present discounted enforceability of non-competes reduces Based on the totality of the evidence, value.830 workers’ earnings. Likewise, in theory, The available evidence also indicates if increased human capital investment including its review of the empirical non-competes negatively affect increased innovation that redounds to literature, its review of the full comment competition in product and service the benefit of the economy and society record, and its expertise in identifying markets. The weight of the evidence as a whole, one would expect to see practices that harm competition, the indicates non-competes have a negative legal enforceability of non-competes Commission in this final rule finds that impact on new business formation and yield such benefits, but as elaborated in the claimed business justifications for non-competes do not justify the harms innovation.831There is evidence that Part IV, the empirical evidence on from non-competes—for either senior non-competes increase consumer prices innovation effects indicates the executives or for workers other than and concentration in the health care opposite. senior executives, whether considered sector.832There is also evidence non- Moreover, the Commission is also not aware of any evidence that these together or separately—because the competes foreclose the ability of potential benefits of non-competes lead evidence indicates that increasing competitors to access talent.833While to reduced prices. Indeed, the only enforceability of non-competes has a net available data do not allow for precise empirical study of the effects of non- negative impact along a variety of quantification of some of these effects, competes on consumer prices—in the measures. Whether the benefits from a they are nonetheless substantial: the health care sector—finds increased practice outweigh the harms is not Commission estimates that the rule will prices as the enforceability of non- necessarily an element of section 5,826 reduce spending on physician services competes increases.837That study, over ten years by $74–194 billion in but, in any event, the benefits from the which finds that non-compete present discounted value, will result in justifications cited in Part IV.D.1 clearly enforceability increased physician pay, thousands to tens of thousands of do not justify the harms from non- also finds that labor cost pass-through is additional patents per year, and will competes. not driving price decreases.838 increase in the rate of new firm Not all the harms from non-competes Furthermore, there is no evidence are readily susceptible to formation by 2.7%.834 that, in the three States in which non- monetization.827However, even the In the Commission’s view, the competes are generally void, the asserted benefits from non-competes do quantifiable harms from non-competes inability to enforce non-competes has not justify their harms. Even if the are substantial and clearly not justified materially harmed employers, businesses using non-competes benefit, by the purported benefits. Non- consumers, innovation (or economic pecuniary benefits to the party competes cause considerable harm to conditions more generally), or workers. undertaking the unfair method of competition in labor markets and As a result, the Commission finds that competition are not a sufficient product and service markets. Non- the asserted benefits from non-competes competes obstruct competition in labor justification under section 5.835As do not justify the harms they cause.
markets because they inhibit optimal described in Part IV.D.1, the most The Commission finds that the harms matches from being made between commonly cited justifications for non- from non-competes are clearly not employers and workers across the labor competes are that they increase justified by the purported benefits, force through the process of competition employers’ incentive to make regardless of whether one considers on the merits for labor services. The productive investments in, for example, senior executives or workers other than available evidence indicates that trade secrets, customer lists, and human senior executives together or separately. increased enforceability of non- and physical capital investment. There In this Part IV.D.3, the Commission competes substantially suppresses is some evidence that non-competes explains why, for workers overall, the workers’ earnings, on average, across the increase human and physical capital asserted benefits from non-competes do labor force generally and for specific investment, as noted previously.836 not justify the harms they cause. This is types of workers.828 However, the empirical literature does at least as true for senior executives as not show the extent to which human In addition to the evidence showing for other workers. As described in Part capital investment and other investment that non-competes reduce earnings for IV.C.2.c.i, non-competes with senior benefits from non-competes accrue to workers across the labor force, there is executives tend to negatively affect any party besides the employer, and to also evidence that non-competes reduce competitive conditions in product and earnings specifically for workers who service markets at least as much as non- 829See Part IV.B.3.a.ii.
826See Part II.F (stating that the inquiry as to likely to a greater extent—given the whether conduct tends to negatively affect 831See Part IV.B.3.b.i-ii; Part IV.C.2.c.i.
outsized role of senior executives in competitive conditions focuses on the nature and 832See Part IV.B.3.b.iii. tendency of the conduct and does not require a 833See Part IV.C.2.c.i. forming new businesses, serving on new detailed economic analysis). 834See Part X.F.6.
b. Responses to Comments requirement by, for example, posting a the worker by the effective date that the Commenters focused on the question notice at the employer’s workplace.840 worker’s non-compete clause is no of whether employers have adequate Proposed §910.2(b)(2)(i) also stated that longer in effect and will not be, and alternatives to non-competes and the the employer must provide the notice in cannot legally be, enforced against the analysis of costs and benefits of the writing on paper or in a digital format worker. These provisions are sufficient proposed rule in the preliminary such as an email or text message within to achieve the purposes of the proposed regulatory impact analysis, rather than 45 days of rescinding the non-compete. rescission requirement without the balancing analysis discussed in this Proposed §910.2(b)(2)(ii) stated that requiring any affirmative conduct Part IV.D.3 specifically. These the employer must provide the notice to beyond the notice requirement. comments are addressed in Part IV.D.2 both current workers and former The Commission has also eliminated and in Part X, respectively. workers when the employer has the the proposed rescission requirement in former worker’s contact information response to comments expressing E. Section 910.2(b): Notice Requirement readily available. To ease the burden of confusion about the requirement and for Existing Non-Competes compliance, proposed §910.2(b)(2)(iii) concern about its practical implications. The Commission proposed to require provided model language that would Some comments interpreted the employers to rescind (i.e., legally satisfy the notice requirement. Proposed proposed rescission requirement to modify) existing non-competes and §910.2(b)(2)(iii) and §910.2(b)(3) mean that the worker and employer provide notice to inform workers that provided a safe harbor for employers must be returned to their original they are no longer bound by existing using the model language, while also positions (i.e., on the day they entered non-competes.839Based on comments, permitting an employer to use different into the non-compete) and presumed to the Commission is not adopting a language, provided that the language not have entered into it or that it rescission requirement in the final rule. communicates to the worker that the mandated wholly new contracts to Rather than require employers to legally worker’s non-compete is no longer in replace any existing agreements that modify existing non-competes, the final effect and may not be enforced.841 contained non-competes. Some rule prohibits employers from enforcing In the NPRM, the Commission stated commenters objected to what they existing non-competes with workers that the purpose of the proposed notice considered the high compliance costs of other than senior executives after the requirement was to ensure that workers rescinding and revising every compliance date. are informed that their existing non- employment contract with a non- The final rule adopts the notice competes are no longer in effect. The compete. Some businesses said their requirement—for workers who are not Commission cited evidence indicating contracts with senior executives and senior executives—with minor revisions that many workers are not aware of the potentially other workers would be to facilitate compliance and to improve applicable law governing non-competes unwound by a rescission requirement. the likelihood of workers being or their rights under those laws, and Other commenters said that if the meaningfully informed. The revisions stated that it was therefore concerned Commission promulgated the proposed include an option for employers to make that, absent a notice requirement, rescission requirement, it would be the notice more accessible to workers workers may not know that their non- disregarding the role non-competes who speak a language other than competes are no longer enforceable as of played in the overall value of the English. The final rule also simplifies the effective date.842 exchange for an employment contract. compliance and ensures that workers An industry association said rescission
1. The Proposed Rule employers rescind (i.e., legally modify) omitted the rescission requirement Proposed §910.2(b)(1) would have existing non-competes. The Commission proposed in the NPRM. The required employers to rescind existing believes the proposed rescission Commission also adopts §910.3(b), non-competes with all workers. requirement would have imposed which provides an exception for causes Proposed §910.2(b)(2) would have unnecessary burdens on employers, as of action that accrued before the required employers that rescinded non- other aspects of the final rule provide effective date, to be clear that the final competes to provide notice to the rule does not render any existing non- affected workers that their non-compete 840Id. at 3513. competes unenforceable or invalid from 841Id. at 3514. the date of their origin. Instead, it is an 839See NPRM, proposed §910.2(b). 842Id. at 3513. unfair method of competition to enforce VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38435 certain non-competes beginning on the Several commenters emphasized the former workers at the worker’s last effective date. Actions taken before the importance of notice, especially for known home address, email address, or effective date—for example, enforcing former workers who may be actively cell phone number. Commenters also an existing non-compete or making refraining from competitive activity (in contended that the meaning of representations related to an existing compliance with a non-compete), and ‘‘individualized communication’’ was non-compete—are not unfair methods of who may continue to do so if they are not clear or that compliance with it competition under the final rule. As not informed that their non-compete is would be too difficult or burdensome. noted elsewhere, the Commission also no longer in effect. One commenter The Commission finalizes the exempts from the rule future highlighted the importance of notice, proposed rule’s notice requirement enforcement of existing non-competes because a non-compete may be coercive largely as proposed, with minor with senior executives. regardless of its enforceability. Many revisions to facilitate compliance, Commenters also argued that a commenters emphasized the need for reduce burdens on employers, and rescission requirement would be clear and concise language in the improve accessibility for non-English impermissibly retroactive, present due notices, including in languages other speakers.846The final rule also requires process concerns, and/or constitute an than English. One commenter asked the impermissible taking under the Fifth Commission to use concrete, lay- covered businesses to provide notice by Amendment. The Commission responds friendly terms to help reduce workers’ the effective date, rather than 45 days to these comments in Part V.B. fears of being sued. A commenter that thereafter, to simplify the final rule and recommended notice in languages other to secure its benefits for competition in Numerous commenters opposed the than English suggested that such a labor markets and product and service proposed rescission requirement based requirement apply to medium and large markets as soon as practicable. on perceived challenges presented by proposed §910.1(b)(2), which addressed businesses with a threshold percentage The Commission finalizes a notice de facto non-competes, and its of workers (such as 10%) who primarily requirement because the available purported ambiguity with respect to speak a language other than English. evidence indicates that many workers which contractual terms employers Commenters also suggested changes are not aware of the applicable law would be required to rescind. The in notice procedures to improve the governing non-competes or their rights Commission has removed the rescission chances of workers receiving and under those laws, or are unable to requirement for the reasons described in understanding the notice. One enforce their rights—and are chilled this Part IV.E.2.a and has also revised commenter stated that text messages from engaging in competitive activity as the proposed rule’s language concerning should not qualify as a primary means a result. The evidence shows that even de facto non-competes to clarify the of individual notice because they are too when employers impose non-competes scope of the definition. casual, may be automatically deleted, that are unenforceable under State law, and the sender may not be identifiable.
b. The Final Rule’s Notice Requirement However, in this commenter’s view, text them (or are otherwise unable to enforce messages could be a secondary form of While the final rule does not require their rights to be free of non- notice. Some commenters suggested that rescission (i.e., legal modification) of competes).847As a result, the in addition to individual notice, the existing non-competes, the final rule Commission finds that even after the final rule should require an employer to does prohibit enforcement of existing final rule is in effect, absent a clear post a copy of the notice in the non-competes after the effective date notice requirement, many workers may workplace and/or online.
and requires the person who entered be unaware that, because of the final A number of commenters asserted into the non-compete with the worker to rule, their employer cannot enforce a that the requirement for employers to provide clear and conspicuous notice to non-compete and that the Commission provide notice to former workers when the worker, by the effective date, that has the authority to take action against ‘‘the employer has the worker’s contact the worker’s non-compete will not be, employers who violate the final rule. information readily available’’ was and cannot legally be, enforced against Accordingly, absent notice, these confusing or burdensome. A commenter the worker.843The notice must identify workers may continue to be chilled from stated that employers do not update the person who entered into the non- switching jobs or starting their own former employees’ contact information, compete with the worker and must be business. This would tend to negatively so such information is likely incomplete on paper delivered by hand to the affect competitive conditions in the and might be inaccurate. One worker, or by mail at the worker’s last commenter asserted that a requirement known personal street address, or by to provide notice within 45 days of the 846The Commission notes that this required email at an email address belonging to notice is a routine disclosure of valuable, factual effective date is too difficult for small the worker, including the worker’s information to workers that does not implicate the businesses. Another commenter First Amendment. See Milavetz, Gallop & Milavetz, current work email address or last suggested that the final rule should P.A. v. United States, 559 U.S. 229, 249–53 (2010) known personal email address, or by require contacting only former workers (citing Zauderer v. Off. of Disciplinary Counsel, 471 text message at a mobile telephone U.S. 626, 651 (1985)). As described in this Part IV.E, who left the firm two years or less number belonging to the worker.844 the Commission adopts this notice requirement to before the effective date, unless the non- ensure workers do not wrongly believe they remain compete has elapsed.845Some bound by unenforceable non-competes after the rule 843§910.2(b)(1). commenters expressed concern that goes into effect. The Commission’s conclusion that 844This language mirrors language in other such notice is necessary to achieve the full benefits former workers might not be notified Federal regulations. See, e.g., 17 CFR 9.11 (notice of the final rule is based on its expertise and on of disciplinary action must be made personally by under the ‘‘readily available’’ standard. empirical evidence supporting the Commission’s mail at the person’s last known address or last A commenter stated that, to avoid finding of an in terrorem effect related to non- known email address); 29 CFR 38.79 (written notice confusion and evasion, employers competes. must be sent to a ‘‘complainant’s last known 847See Prescott & Starr, supra note 413; see also should be required to send notice to address, email address (or another known method Part IV.B.2.b.ii (describing the Commission’s of contacting the complainant in writing)’’); 16 CFR finding that non-competes are exploitative and 318.5 (providing for written notification at an 845Under the final rule, notice is only required coercive where they trap workers in jobs or force individual’s last known address, or email if the for existing non-competes, i.e., those that have not them to bear significant harms or costs, even where individual chooses that option). elapsed. workers believe the non-compete is unenforceable). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38436 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations same manner as if non-competes were provide workers notice, the Commission In response to comments contending in full force and effect. believes that providing notice should that notice to former workers is too A notice requirement helps address not be time-consuming, even for small burdensome or difficult, the this concern by informing individual businesses, particularly given that the Commission believes that providing workers, to the extent possible, that after final rule provides model language, notice to former workers is critical the effective date the employer will not allows use of the worker’s last known because former workers may be enforce any non-compete against the contact information for notice, allows refraining from competitive activity worker. The Commission believes that digital notice, and (unlike in the because they believe they are subject to prompt and clear notice to workers proposed rule) categorically exempts an a non-compete. The Commission other than senior executives that non- employer who has no such information disagrees that providing notice to former competes are no longer enforceable is from the notice requirement. Moreover, workers will be burdensome. The essential to furthering the purposes of as described in Part IV.B.2.b.ii, non- Commission believes that most the final rule—to allow workers to seek competes trap workers in jobs or force employers have contact information for or accept another job or to leave to start them to bear other significant harms or former workers who may be subject to and run a business, and to allow other costs—even where workers believe the non-competes.854And under the final employers to compete freely for non-compete is unenforceable. Given rule, in those rare cases in which an workers. Indeed, the Commission has the limited burdens associated with employer has no record of a street refined the model language to make it providing notice only to workers whose address, email address, mobile shorter and clearer than the proposed last known contact information is on file telephone number, or other method of model language. and employers’ option to simply copy contacting the worker or former worker, While the proposed rule would have and paste the safe harbor model notice, §910.2(b)(3) exempts the employer from required employers to provide the as well as the known and currently the final rule’s notice requirement with notice no later than 45 days after the ongoing acute harms of non-competes respect to the worker. Furthermore, by compliance date, the final rule requires (including their in terrorem effects) and specifying the circumstances under notice no later than the effective date the importance of workers knowing as which notice may not be provided, this (i.e., no later than 120 days after the soon as possible that their non-compete exemption also addresses concerns final rule is published in the Federal is unenforceable, the Commission expressed by some commenters that Register). The Commission believes that declines to extend the time to provide ambiguity in the proposed rule’s it is practicable and reasonable for notice.853The Commission finds that ‘‘readily available’’ standard for employers to provide the notice by the 120 days is more than adequate for notifying former workers would lead to effective date. The Commission has employers to complete this task. fewer former workers being notified. designed the notice requirement to In response to comments contending In response to comments expressing make compliance as easy as possible for that notice to former workers is too concern that the NPRM’s employers. The final rule provides safe burdensome or difficult, the harbor model language that satisfies the ‘‘individualized communication’’ Commission believes that providing notice requirement;848gives employers requirement was unclear or notice to former workers is critical several options for providing the burdensome, the Commission has because former workers may be notice—on paper, by mail, by email, or removed that language. Instead, the final refraining from competitive activity by text;849and exempts employers from rule ensures each worker will receive because they believe they are subject to the notice requirement where the notice while specifying several a non-compete. In light of the comments employer has no record of a street permissible methods for providing the about the proposed ‘‘readily available’’ address, email address, or mobile notice, which furthers compliance contact information standard, the telephone number for the worker.850 certainty while giving employers a range Commission in this final rule does not In addition, while the model language of options and an efficient means of adopt that language and instead requires in the proposed rule used the phrase complying. By allowing a number of that the notice must be on paper ‘‘the non-compete clause in your formats for such communications, delivered by hand to the worker, or by contract is no longer in effect,’’851the including digital formats, employers are mail at the worker’s last known personal model language in the final rule uses the more likely to be able to contact workers street address, or by email at an email phrase ‘‘[EMPLOYER NAME] will not rapidly, individually, and have address belonging to the worker, enforce any non-compete clause against flexibility to do so at low cost. including the worker’s current work you.’’852Because this language does not Accordingly, §910.2(b)(2) of the final email address or last known personal identify the recipient as having a non- rule allows for notice by text message, email address, or by text message at a compete, the employer does not need to by email, as well as paper notice by mobile telephone number belonging to determine which of its workers have hand or by mail to the worker’s last the worker. The Commission agrees non-competes; instead, it can simply known street address. The final rule with commenters that stated that most send a mass communication such as a gives employers flexibility to choose employers have such contact mass email to current and former among these methods. In responses to information for both present and former workers. the concerns expressed by the workers. For those rare cases in which commenter about text messages, the Furthermore, requiring notice by the effective date simplifies the final rule Commission believes that text messages 854Employers have many record-keeping should be a permissible method for requirements under State and Federal laws under and allows its benefits to begin sooner.
V. Section 910.3: Exceptions researchers to assess this type of non- income the portion of the sales price A. Section 910.3(a): Exception for compete’s effect on competition.860 made in exchange for non-competes. Persons Selling a Business Entity 2. Comments Received Others argued that the 25% threshold would disincentivize equity-based In the NPRM, the Commission A few commenters suggested consideration. To avoid these harms, proposed an exception for certain non- eliminating the proposed exception. these commenters suggested a variety of competes between the seller and the These commenters contended that non- other thresholds, including the 5% buyer of a business that applied only to competes between the seller and the ownership threshold used in SEC a substantial owner, member, or partner, buyer of a business may still be regulations.861Some commenters defined as an owner, member, or partner exploitative and coercive, particularly contended that the Commission failed to with at least 25% ownership interest in in the case of small business owners in provide evidence justifying the the business entity being sold. Based on transactions with larger, better- proposed 25% ownership threshold. comments, the Commission adopts an resourced corporations. However, most Others questioned the effectiveness of exception for the bona fide sale of a commenters who addressed the issue ownership as a proxy for goodwill or the business without requiring that the supported an exception that would likelihood of exploitation and coercion. seller have at least a 25% ownership allow certain non-competes between the As examples, these commenters pointed interest. seller and the buyer of a business. These to passive investors who may have 1. The Proposed Rule commenters agreed with the NPRM that significant ownership stakes in a State common law generally applies business but none of its goodwill, and Proposed §910.3 allowed non- less-intensive scrutiny to non-competes owners whose interests may be competes where the restricted party is ancillary to the sale of a business and purchased for less than fair market ‘‘a person who is selling a business that every State statute banning non- value or who are excluded from sales entity or otherwise disposing of all of competes has an exception which negotiations.
the person’s ownership interest in the allows some or all non-competes A few commenters argued that the business entity, or . . . selling all or between the seller and the buyer of a proposed 25% threshold would preempt substantially all of a business entity’s business. Most of the commenters who the laws of California and other States operating assets,’’ and is also ‘‘a supported some form of exception for which ban non-competes except in the substantial owner of, or substantial non-competes between the seller and sale of a business, none of which require member or substantial partner in, the the buyer of a business contended that that the seller have a substantial business entity at the time the person they are necessary to protect the value ownership stake. They pointed to cases enters into the non-compete.’’856The of the sale by ensuring the effective in which California courts applied the Commission proposed to define transfer of the business’s goodwill. exception and allowed enforcement of ‘‘substantial owner, substantial member, According to these commenters, a buyer non-competes against shareholders and substantial partner’’ as ‘‘an owner, will be less willing to pay for a business holding as little as a 3% ownership member, or partner holding at least a 25 if they cannot obtain assurance that they interest. In light of these statutes, some will be protected from future of these commenters urged the 855See Sandy Dietrich & Erik Hernandez, Census Commission to adopt an exception for Bureau, Nearly 68 Million People Spoke a Language Other Than English at Home in 2019 (Dec. 6, 2022) 857Id., proposed §910.1(e). at Table 1, https://www.census.gov/library/stories/ 858Id. at 3515. 861See, e.g., 17 CFR 240.13d–1 (requiring 2022/12/languages-we-speak-in-united-states.html. 859Id. at 3514–15. reporting by beneficial owners holding more than 856NPRM, proposed §910.3. 860Id. 5% interest in an equity security). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38438 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations agreements that involve the sale of a 3. The Final Rule was too high because it failed to reflect business or equity in a company the relatively low ownership interest The Commission adopts a sale of without a threshold ownership held by many owners, members, and business exception for substantially the requirement. partners with significant goodwill in same reasons articulated in the NPRM.
acquisition is 6.1 years, arguing that it exploitative and coercive. Indeed, the Furthermore, non-competes allowed is unlikely for venture-capital backed Commission acknowledges that some under the exception will continue to be businesses to operate and grow for that non-competes between the seller and governed by State law, which generally period of time without accepting buyer of a business may be exploitative requires a showing that a non-compete funding that dilutes founders’ and key and coercive due to an imbalance in is necessary to protect the value of the employees’ equity stake in the business. bargaining power and/or may tend to business being sold, as well as Federal Other commenters supporting a lower harm competitive conditions. However, antitrust law.863 threshold provided anecdotal evidence commenters did not present empirical Finally, the Commission agrees with that businesses cede large shares to research on the prevalence of non- commenters’ concerns about the risks financial backers, resulting in many competes between the seller and the that firms may abuse the exception owner-operators holding significantly buyer of a business or on the aggregate through sham transactions with wholly less than a 25% share in their business. economic effects of applying additional owned subsidiaries, ‘‘springing’’ non- Finally, some commenters focused on legal restrictions to non-competes competes, repurchase rights, mandatory eliminating potential loopholes to the between the seller and buyer of a stock redemption programs, or similar proposed exception. Some commenters business. The Commission’s decision to evasion schemes. The Commission adds expressed concern that employers may adopt §910.3(a) reflects the view of the the term ‘‘bona fide’’ and makes changes set up sham transactions with wholly Commission and most commenters that, clarifying that any excepted non- owned subsidiaries in order to impose compared to non-competes arising compete must be made ‘‘pursuant to a non-competes that would otherwise be solely out of an employment bona fide sale’’ to ensure that such prohibited under the rule, urging the relationship, non-competes between the schemes are prohibited under the rule. Commission to clarify that the exception sellers and buyers of businesses may A bona fide sale is one made in good applies only to bona fide transfers to an implicate unique interests and have faith as opposed to, for example, a independent third party. Some unique effects that this rulemaking transaction whose sole purpose is to commenters contended that firms may record does not address.862 evade the final rule.864In general, the use ‘‘springing’’ non-competes (in The proposed requirement that an Commission considers a bona fide sale which a worker must agree at the time excepted non-compete bind only a to be one that is made between two of hiring to a non-compete in the event ‘‘substantial’’ owner, member or partner of some future sale) and repurchase of the business entity being sold was 863See, e.g., U.S. v. Addyston Pipe & Steel Co., rights, mandatory stock redemption designed to allow those non-competes 85 F. 271, 281 (6th Cir. 1898) (‘‘For the reasons programs, or similar stock-transfer between the seller and the buyer of a given, then, covenants in partial restraint of trade are generally upheld as valid when they are schemes (pursuant to which a worker business which are critical to effectively agreements [inter alia] by the seller of property or may be required to sell their shares if a transfer goodwill while prohibiting business not to compete with the buyer in such a certain event occurs) to impose non- those which are more likely to be way as to derogate from the value of the property competes on their workers which would exploitative and coercive due to an or business sold . . . . Before such agreements are upheld, however, the court must find that the otherwise be prohibited. They urged the imbalance of bargaining power between restraints attempted thereby are reasonably Commission to address those instances the seller and the buyer. However, necessary . . . to the enjoyment by the buyer of the specifically, including by defining the commenters persuasively argued that property, good will, or interest in the partnership bought. . . .’’).
exception by the percentage of total the proposed 25% ownership threshold 864Black’s Law Dictionary defines bona fide as equity value received in liquid proceeds ‘‘[m]ade in good faith; without fraud or deceit,’’ and at the time of the relevant transaction. 862See NPRM at 3514–15. ‘‘[s]incere; genuine.’’ (11th ed. 2019). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38439 independent parties at arm’s length, and includes, for example, where an attaching any new disabilities for past in which the seller has a reasonable employer alleges that a worker accepted conduct.872And to minimize concerns opportunity to negotiate the terms of the employment in breach of a non-compete about retroactivity, the Commission sale. So-called ‘‘springing’’ non- if the alleged breach occurred prior to adopts §910.3(b), which states that the competes and non-competes arising out the effective date. This provision final rule does not apply where a cause of repurchase rights or mandatory stock responds to concerns that the final rule of action related to a non-compete redemption programs are not entered would apply retroactively by accrues before the effective date. The into pursuant to a bona fide sale extinguishing or impairing vested rights notice requirement in §910.2(b) because, in each case, the worker has no acquired under existing law prior to the likewise does not render the final rule good will that they are exchanging for effective date.867In this Part V.B, the impermissibly retroactive because that the non-compete or knowledge of or Commission addresses commenters’ requirement merely requires notice that ability to negotiate the terms or arguments regarding retroactivity, due non-competes that exist after the conditions of the sale at the time of process, and impermissible taking under effective date will not be enforced in the contracting. Similarly, sham the Fifth Amendment. future with respect to workers other transactions between wholly owned than senior executives. No penalties
B. Section 910.3(b): Exception for disability in respect to transactions or or otherwise sanctionable for parties to Existing Causes of Action considerations already passed.’’869‘‘A have entered into non-competes before rule that ‘alter[s]’ the past legal the effective date; it merely provides Proposed §910.2(a) would have consequences of ‘past action’ is that persons cannot enforce or attempt prohibited employers from maintaining retroactive,’’ while a rule that ‘‘‘alter[s] to enforce such agreements with an existing non-compete with a worker.
required of existing non-competes retroactive because it does not impose In National Cable, the court also would be impermissibly retroactive, any legal consequences on conduct considered whether the agency had present due process concerns, and/or predating the effective date. The ‘‘balance[d] the harmful ‘secondary constitute an impermissible taking Commission is not creating any new retroactivity’ of upsetting prior under the Fifth Amendment.
Cal. App. 3d 284, 291 (Cal. Ct. App. 1984) (refusing Cir. 2009). disability’’ when a Department of Interior rule made to enforce non-compete imposed on physician 868Landgraf v. USI Film Prods., 511 U.S. 244, 269 mine operators ineligible for a surface mining under agreement requiring physician to purchase (1994). permit based on ‘‘pre-rule violations.’’ Nat’l Min. 9% of stock at hiring and resell to corporation upon 869Burwell, 155 F. Supp. 3d at 44 (alteration in Ass’n v. U.S. DOI, 177 F.3d 1, 8 (D.C. Cir. 1999). termination because agreement ‘‘was devised to original) (quoting Nat’l Min. Ass’n, 292 F.3d at 859). Here, the final rule imposes no penalties or other permit plaintiffs to accomplish that which the law 870Id. (alterations in original) (quoting Ne. Hosp. disabilities on persons who entered into non- otherwise prohibited: an agreement to prevent Corp. v. Sebelius, 657 F.3d 1, 14 (D.C. Cir. 2011)). competes before the effective date. defendant from leaving plaintiff medical group and 871Nat’l Cable, 567 F.3d at 670 (internal 873Nat’l Cable, 567 F.3d at 661. opening a competitive practice’’). quotation omitted) (quoting Mobile Relay Assocs. v. 874Id. at 670. 866See proposed §910.2(b)(1). FCC, 457 F.3d 1, 11 (D.C. Cir. 2006)). 875Id. at 670. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38440 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations to existing contracts.’’876This rule is purely prospective. The final rule exchange for them. And research has consideration led the Commission to does not render any existing non- confirmed that for many such adopt the various exceptions described competes unenforceable or invalid from agreements, employers do not value the in the final rule, including the decision the date of their origin. Instead, under ability to enforce the agreements.886The not to apply the final rule to non- the final rule, it is an unfair method of final rule also includes provisions that competes entered into with senior competition to enforce certain non- allow employers and workers to executives before the effective date. As competes beginning on the effective ‘‘moderate and mitigate the economic explained in Part IV.B, however, the date. Action taken before the effective impact’’ of the final rule.887The Commission has determined that, for date to enforce an existing non-compete Commission has made clear that workers other than senior executives, or representations made before the employers may continue to use there are substantial benefits to applying effective date related to an existing non- reasonable NDAs and trade secrets law the rule to prohibit the future compete are not an unfair method of to protect their interests, including enforcement of non-competes entered competition under the final rule. The customer goodwill.888In fact, one study into before the effective date. These final rule does not effectuate a taking. finds that 97.5% of workers with non- benefits include the anticipated increase The Takings Clause provides that competes are also subject to a non- in worker earnings, new business ‘‘private property’’ shall not ‘‘be taken solicitation agreement, NDA, or a non- formation, and innovation.877 for public use, without just recruitment agreement, and 74.7% of Additionally, the Commission finds compensation.’’880When, as here, ‘‘the workers with non-competes are subject such agreements are generally coercive government, rather than appropriating to all three provisions.889And in cases and exploitative, so prohibiting their private property for itself or a third where non-competes with workers other future enforcement is also a benefit.878 party, imposes regulations that restrict than senior executives were tied to In the Commission’s view, these an owner’s ability to use his own benefits like cash or equity, the significant benefits justify any burdens property,’’ courts consider whether the Commission has provided time for those of applying the final rule to the future regulation ‘‘goes too far’’ and constitutes agreements to be renegotiated if enforcement of pre-existing agreements a ‘‘regulatory taking.’’881Consistent necessary.890For senior executives, the with workers other than senior with the Supreme Court’s decision in Commission allows existing agreements executives. Having balanced the Penn Central Transportation Co. v. City to continue to be enforced. burdens and benefits of so applying the of New York (‘‘Penn Central’’), this is The character of the governmental final rule, the Commission has satisfied necessarily an ‘‘ad hoc, factual action here also counsels against its obligation to consider the secondary inquir[y]’’ and focuses on three factors: viewing the final rule as a taking. ‘‘A retroactivity effects of the final rule. ‘‘the economic impact of the regulation ‘taking’ may more readily be found Moreover, the Commission notes that on the claimant’’; ‘‘the extent to which when the interference with property can non-competes were already subject to the regulation has interfered with be characterized as a physical invasion case-by-case adjudication under section distinct investment-backed 5.879Employers were thus already expectations’’; and ‘‘the character of the by government . . . than when responsible, even before the final rule, governmental action.’’882‘‘[T]he Penn interference arises from some public for ensuring their non-competes are not Central inquiry turns in large part, albeit program adjusting the benefits and unfair methods of competition. not exclusively, upon the magnitude of burdens of economic life to promote the a regulation’s economic impact and the common good.’’891There is no physical 2. Takings degree to which it interferes with invasion here, and the final rule is The Commission also disagrees with legitimate property interests.’’883As a promulgated under the Commission’s commenters who contended that general matter, ‘‘the fact that legislation authority to identify and prohibit unfair applying the final rule to non-competes disregards or destroys existing methods of competition.892Among entered into before the effective date contractual rights does not always other economic benefits described in would violate the Fifth Amendment by transform the regulation into an illegal Part IV.B, the Commission finds effecting a taking without due taking.’’884 economy-wide benefits, including compensation. Some comments Under the Penn Central test, the final increases in new business formation and interpreted the proposed rescission rule does not effect a taking as a matter innovation. The Commission also finds requirement to mean that the worker of law. First, the economic impact of the that the final rule will increase earnings and employer must be returned to their regulation on employers with existing for workers by preventing enforcement original positions (i.e., on the day they non-competes with workers who are not of agreements that suppress their entered into the non-compete) and senior executives is insufficient to earnings. Moreover, non-competes have presumed to not have entered the constitute a taking.885The Commission long been subject to government agreement, or that the rule would has found that such agreements are regulation, including not only section 5 mandate wholly new contracts to rarely the product of bargaining, and of the FTC Act, but also State common replace any existing agreements that that little to nothing is offered in contained non-competes. The 886See Hiraiwa, Lipsitz, & Starr (2023) (showing Commission does not intend the final 880U.S. Const. amend. V. that firms do not value the ability to enforce non- rule to have such effect and has omitted 881Cedar Point Nursery v. Hassid, 594 U.S. 139, competes for workers earning up to $100,000 per 148 (2021). year and potentially more).
the rescission requirement proposed in 882Penn Cent. Transp. Co. v. City of N.Y., 438 887Connolly, 475 U.S. at 225–26. the NPRM. The Commission also adopts U.S. 104 (1978). 888See Part IV.D.2. §910.3(b), which provides an exception 883Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 889Balasubramanian, Starr, & Yamaguchi, supra for causes of action that accrued before 540 (2005). note 74 at 35. the effective date, to clarify that the final 884Connolly v. Pension Ben. Guar. Corp., 475 U.S. 890See §910.6. 211, 224 (1986); see also Nat’l Min. Ass’n v. Babbitt, 891Penn Cent. Transp. Co. v. City of N.Y., 438 172 F.3d 906, 917 (D.C. Cir. 1999) (applying U.S. 104, 124 (1978) (internal citation omitted). 876Id. at 671. Connolly to a Takings challenge to an 892See 15 U.S.C. 45(a); see also Parts IV.B and C 877See Part IV.B. administrative rule). (the Commission’s findings outlining the public 878See Part IV.B.2.b. 885Murr v. Wis., 582 U.S. 383, 405 (2017); see also benefits of the final rule and the public harm from 879Part I.B.1. Connolly, 475 U.S. at 225. the use of non-competes). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38441 law, State enactments, and other Federal property.897By issuing the NPRM and is protected by the First Amendment, antitrust laws. engaging in notice-and-comment the final rule does not run afoul of it. Finally, the final rule does not upset rulemaking, the Commission has As explained in Parts IV.B.4 and investment-backed expectations to the provided sufficient due process. And on IV.C.5, the Commission adopts a extent necessary to constitute a taking. top of the notice-and-comment process, prohibition on ‘‘representing’’ that a Even in States that prohibit some or all there will be further process in an worker is subject to a non-compete in non-competes, employers make many administrative adjudication or in court §§910.2(a)(1)(iii) and 910.2(a)(2)(iii). In investments in workers that they would before any person is found to have §910.3(c), the Commission incorporates continue to make regardless of their violated the rule. a ‘‘good-faith’’ exception that applies to the prohibition on ‘‘representing’’ the ability to use non-competes, such as
IV.D) employers have reasonable in §910.2(a). The exception states: ‘‘It is The Supreme Court has held ‘‘there alternatives to protecting the not an unfair method of competition to can be no constitutional objection to the investments they make. The enforce or attempt to enforce a non- suppression of commercial messages Commission has also lessened the compete clause or to make that do not accurately inform the public economic burden of the final rule by representations about a non-compete about lawful activity.’’901Accordingly, creating an exception for situations clause where a person has a good-faith ‘‘[t]he government may ban forms of where a cause of action accrued before basis to believe that this part 910 is communication more likely to deceive the effective date.893Furthermore, inapplicable.’’ A similar ‘‘good-faith the public than to inform it, . . . or States and the Federal government have basis’’ clause was in proposed commercial speech related to illegal regulated and considered further §910.2(a). activity.’’902The final rule does not regulating non-competes for years, and the Commission issued the NPRM more As described in Parts IV.B.4 and cover protected speech because it than 18 months before the effective IV.C.5, the final rule includes a prohibits only misrepresentations about whether a non-compete covered by the date—and began exploring whether to prohibition on enforcing or attempting rule is enforceable. The good-faith regulate non-compete agreements more to enforce non-competes in both exception in §910.3(b) ensures, than five years ago.894There has thus §910.2(a)(1) and (2). Under the Noerr- however, that the final rule does not run been ample notice that non-competes Pennington doctrine, filing a lawsuit— afoul of the First Amendment if a may become unenforceable by rule,895 even if the suit may tend to restrict circumstance arises under which an and prior to this rule non-competes competition and is ultimately employer’s representation that a worker were already subject to case-by-case unsuccessful—is typically protected is subject to a non-compete is protected adjudication under section 5. For all under the First Amendment right to by that Amendment.
these reasons, the Commission does not petition and immune from antitrust In the NPRM, the Commission stated believe the final rule constitutes a scrutiny.899However, courts have that an employer would have no good taking. recognized that where a lawsuit is a faith basis to believe that a worker is ‘‘sham,’’ i.e., objectively baseless and 3. Due Process subject to an enforceable non-compete subjectively designed solely to prevent ‘‘where the validity of the rule . . . has Similarly, the Commission disagrees competition, it is not protected.900For been adjudicated and upheld.’’ Some with commenters who argued that a non-compete covered by the final rule, commenters stated that legal challenges applying the final rule to existing non- enforcing or attempting to enforce the to the final rule will create uncertainty competes would present due process non-compete would likely be and unpredictability related to concerns. Assuming that these due considered a ‘‘sham’’ lawsuit. compliance. The Commission believes process concerns are independent of Accordingly, such a lawsuit would not the foregoing statement in the NPRM other constitutional concerns like the enjoy protection under the First would contribute to this confusion and alleged retroactive application of the Amendment. Section 910.3(b) ensures, does not adopt it in this final rule. The final rule,896which are addressed in however, that if a circumstance arises Commission clarifies that the absence of Parts V.B.1 and V.B.2, the Commission under which an employer’s enforcement a judicial ruling on the validity of the disagrees that there is any due process of or attempt to enforce a non-compete final rule does not create a good-faith infirmity. Due process requires the basis for non-compliance. If the rule is government, at a minimum, to provide 897See, e.g., N. Am. Butterfly Ass’n v. Wolf, 977 in effect, employers must comply. notice and an opportunity to be heard F.3d 1244, 1265 (D.C. Cir. 2020) (citing Mathews v. before depriving any person of Eldridge, 424 U.S. 319, 333–34 (1976)). D. Requests To Expand Final Rule 898The Commission adopts §910.3(b)(3) out of an Coverage or To Provide an Exception abundance of caution and does not believe that any From Coverage Under the Final Rule 893See §910.3(b). of the requirements in the final rule run afoul of the 894See Part I.B. First Amendment because the Commission finds In the NPRM, the Commission 895Connolly v. Pension Ben. Guar. Corp., 475 U.S. that the use of certain existing non-competes is an preliminarily concluded that applying 211, 226 (1986). unlawful unfair method of competition. the rule uniformly to all employers and 896Commenters invoking a due process concern 899See E.R.R. Presidents’ Conference v. Noerr workers would advance the proposed outside the retroactivity context provided little Motor Freight, Inc., 365 U.S. 127 (1961); United contextual detail on the precise substance of the Mine Workers of Am. v. Pennington, 381 U.S. 657 concern, nor did they explain what further process (1965). 901Cent. Hudson Gas & Elec. v. Pub. Serv. would be due before the Commission could 900Pro. Real Est. Invs., Inc. v. Columbia Pictures Comm’n of N.Y., 447 U.S. 557, 563 (1980). promulgate the rule. Indus., Inc., 508 U.S. 49, 60 (1993). 902Id. at 563–64. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38442 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations rule’s objectives to a greater degree than invalidating existing non-competes for remedy the tendency of non-competes differentiating among workers on the certain senior executives, however, the to negatively affect competitive basis of industry or occupation, final rule differentiates between senior conditions in the excepted industries or earnings, another factor, or some executives and other workers by for excepted types of workers and combination of factors, and that it allowing existing non-competes for would likely have in terrorem effects. would better ensure workers are aware senior executives to remain in force.
Other commenters argued the commenters proposed using a Overall, the Commission is committed Commission should differentiate among compensation threshold to differentiate to stopping unlawful conduct related to workers and employers along different highly paid workers and senior the use of certain non-competes to the parameters. They stated that workers executives, discussed in IV.C.4.b. Other full extent of its authority and with higher earnings, higher skills, commenters suggested an exception jurisdiction. The Commission finds specific job titles, or access to specific based on the FLSA exemptions or the every use of a non-compete covered by types of information should be worker’s level of access to confidential the final rule to be an unfair method of excluded. Some stated that particular information, discussed in Parts IV.C.4. competition under section 5 of the FTC industries should be excluded and V.D.2.
2. Differentiation by Worker Access to painted a picture consistent with the Information 3. Differentiation by Industry Other Commission’s findings in Part IV.B Than Healthcare Some commenters suggested regarding indicia of unfairness, excluding workers with access to trade Some businesses and organizations including facial unfairness, and the secrets, confidential business argued that specific industries should be tendency of non-competes to negatively information, or other intellectual exempt from the final rule. The affect competitive conditions in the capital. Commenters contended these Commission carefully considered these labor and product and service markets. workers are uniquely situated because comments and declines to adopt any A worker from the real estate industry of their access to valuable employer industry-based exceptions. The stated that non-competes are standard in information. Many commenters Commission notes that while some the industry for all workers, regardless responded to these arguments and commenters characterized purported of their position in a company. disagreed with them. Some commenters justifications for an exclusion from the Commenters stated that they were asked stated that employers overstate the final rule as unique to a particular to sign after starting their job, with one proportion of workers who have access industry, the purported justifications worker stating that they faced the option to such information. Commenters also were in fact the same as the those of either signing the non-compete or stated that employers exaggerate the addressed in Part IV.D, namely, the leaving and losing future commissions amount or quality of information that need to protect investments in labor, for work they had done. Workers noted trade secrets, confidential business that they were terminated without cause should be appropriately considered a information, or other intellectual and still required to comply with a non- trade secret, confidential business capital. The Commission addresses compete, and that they had no information, or other intellectual those arguments in full in Part IV.D, but bargaining power for promotion or wage capital, and therefore exaggerate the in this Part V.C.3 further discusses increases. The following examples are purported cost to the firm of not being examples of comments seeking illustrative of the comments the able to use non-competes. Commenters industry-based exceptions. Commission received:
also stated that employers have alternatives to non-competes that a. Client- and Sales-Based Industries • As an aspiring entrepreneur in the real generate less harm to competition, to estate space, I am in a relatively small market workers, to the economy, and to rival Some commenters in client- or sales- where one company dominates. I recently based industries, including real estate ended my employment with them. They use firms, including NDAs and fixed-term and insurance, argued they are unique non-competes to restrict competition and employment contracts.
relationships with their customers, and The Commission disagrees with In response to commenters arguing customers lose the ability to choose the commenters arguing that a worker that information and techniques related same agent if the agent is bound by a leaving a sales position is akin to the to sales, including strategy on non-compete. Commenters also noted sale of a business. Unlike the seller of developing business, is confidential or that standard employment agreements a business, a worker is in an unequal proprietary and that workers’ ability to in the insurance industry require bargaining position and does not receive move to another job or start a business workers to pay their own costs to defend compensation when leaving the firm. would thus harm them, the Commission against noncompete litigation even if The fact that a worker generates notes that any specific information or the worker is successful in the challenge goodwill for an employer is not a truly proprietary techniques can be such that even if a worker does not cognizable justification for non- protected by much less restrictive violate the terms of a noncompete, or competes. First, it not clear that the alternatives, such as trade secret law the noncompete is not enforceable, employer would lose goodwill and NDAs. For example, proprietary workers who change jobs or start a new associated with their business if a targets and strategies for timeshares or agency are often faced with significant particular worker leaves. Moreover, unique compensation structures or legal bills. Commenters noted that commenters do not specify the extent to company analyses cited by IMOs can be although independent licensing agents which their legitimate investment in the otherwise protected. Moreover, are meant to be able to contract with worker—separate from employing the companies can compete on the merits to multiple insurance companies, they are retain their customers by offering better heavily restricted by non-competes, 919See Nat’l Soc’y of Prof. Engrs. v. United States, creating regional monopolies. The 435 U.S. 679 (1978) (confirming that limiting 917Individual commenter, FTC–2023–0007– competition, even if based on the specific 10919. advantages of doing so because of the particular 915Individual commenter, FTC–2023–0007–5502. 918Individual commenter, FTC–2023–0007– nature of an industry, is not a cognizable 916Individual commenter, FTC–2023–0007–6782. 19441. justification). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38445 worker to use their general skills and after leaving employment. Moreover, underlying the methodologies used in knowledge to successfully perform the employers stand to benefit from the both studies. A third study—a study of job—generates such goodwill. To the final rule through having access to a the mutual fund industry by Cici, extent employers do seek to protect broader labor supply—including Hendriock, and Kempf—finds that investments in goodwill, the employer incoming experienced workers—with mutual fund managers increase their has less restrictive alternatives to attract fewer frictions in matching with the best firms’ revenue when non-competes are and retain workers and customers or worker for the job. more enforceable by investing in higher clients. performing funds, attracting new
b. Industries With Apprenticeships or Some commenters representing fees.922This study uses three changes in Other Required Training financial services companies opposed non-compete enforceability, measured Some commenters representing the rule, arguing non-competes are in a binary fashion. industries with apprenticeships or that necessary for the industry and their A commenter representing a large require training as a part of industry is unique because non- group of public equity investors employment, such as real estate competes have been used for decades, supported the rule, stating that a appraisers, plumbers, and veterinarians, while numerous firms have entered the comprehensive ban would create an argued their industry should be market, workers are mobile, and there is inclusive labor market, which is integral excluded from the final rule. These no evidence of blocked or curbed entry, to long-term corporate value and a commenters contended that a significant lack of access to talent, lower dynamic, innovative, and equitable investment is needed to make workers innovation, or other negative impacts in economy. Financial services worker productive in their industries and that that market. These commenters mention commenters also supported the rule, they need to use non-competes to that mobility and access to talent is citing to their failure to be paid for their protect that investment. Each possible because new employers often skills over time, the threat of litigation commenter cited an apprenticeship or ‘‘buy out’’ a worker’s non-compete to in seeking new employment, and the training period during which they are hire a worker who may be otherwise overbroad nature of non-competes in the not able to bill or must bill a lower bound by a non-compete. Several industry. The following example is amount for a worker’s labor. commenters also contend that non- illustrative of the comments the Worker commenters from these competes are especially vital to firms Commission received: industries stated that non-competes that focus on securities or commodities leave them unable to launch or progress trading because disclosure of • I am a female finance professional with strong qualifications and experience. I am in their career because non-competes tie commercially sensitive information to subject to an extremely long and them to their first employer. Some competitors can be extremely damaging comprehensive non compete contract which appraiser commenters noted that, while to their former employers’ profitability. I was induced to sign at a young age. I have their share of the appraisal fee rises to Commenters identified three studies been offered many positions at other firms some extent after completing their which they contend suggest that non- who would be more willing to provide me apprenticeship, they cannot negotiate competes improve worker productivity. with leadership opportunities and a path to higher shares of the fee or other better First, commenters identified two studies further advancement, but I am unable to working conditions because of non- on the Broker Protocol, an agreement consider them and I am essentially trapped competes. A union commenter among financial advisory firms which at my firm. . . .923 representing plumbers noted that ostensibly limited the use of NDAs, non- The Commission declines to exclude plumbers with non-competes are not solicitation agreements, and non- financial services companies over which able to accept better offers of competes simultaneously. One study by it has jurisdiction from the final rule. employment, with better pay and Gurun, Stoffman, and Yonker finds that The Commission finds in Part IV.C that benefits, including union positions. firms that joined the Protocol non-competes are restrictive, Other worker commenters mentioned experienced higher rates of employee exclusionary, and also exploitative and geographic overbreadth and excessively misconduct and earned increased coercive for higher wage and highly long non-competes of two years. Many fees.920The other study, by Clifford and skilled workers, including workers in veterinarian commenters supported the Gerken, finds that firms which joined finance. The Commission also finds in proposed rule, stating that non- the Protocol invested more heavily in Part IV.B and IV.C that non-competes competes artificially held down their licensure and experienced fewer tend to negatively affect competitive compensation and did not allow them to customer complaints.921Commenters conditions in labor market through start new practices in areas where the noted that these two studies have reduced labor mobility and in the need for more veterinary services is conflicting findings on advisor product and services market through great, with some commenters stating misconduct. The authors themselves reduced innovation and new business that this contributed to consolidation. discuss these findings, with each formation. Evidence that new employers The Commission declines to exclude criticizing the approach of the other. sometimes buy out non-competes also industries, such as real estate appraisal, One commenter stated that, from a suggests that such clauses harm plumbing, and veterinary medicine, in technical standpoint, the Clifford and competition by raising the cost to which an industry must purportedly Gerken study has a superior approach compete and creating deadweight invest in significant training or due to its substantially larger sample economic loss for the new employer.924 apprenticeship of workers before the size and its analysis of the assumptions The empirical evidence provided by employer considers them to be commenters arguing for differentiation productive. The Commission finds that 920Umit G. Gurun, Noah Stoffman, & Scott E.
these employers have less restrictive Yonker, Unlocking Clients: The Importance of 922Gjergji Cici, Mario Hendriock, & Alexander alternatives—namely fixed duration Relationships in the Financial Advisory Industry, Kempf, The Impact of Labor Mobility Restrictions contracts—to protect their investment in 141 J. of Fin. Econ. 1218–43 (2021). on Managerial Actions: Evidence from the Mutual worker training. A return on investment 921Christopher P. Clifford & William C. Gerken, Fund Industry, 122 J. of Banking & Fin. 105994 Property Rights to Client Relationships and (2021).
in the training does not require that the Financial Advisor Incentives, 76 J. of Fin. 2409–45 923Individual commenter, FTC–2023–0007–0953. worker be unable to work for a period (2021). 924See Part IV.C.2.c.i. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38446 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations for the finance industry does not The Commission declines to exclude final rule addresses issues raised by the support their claims. The Commission on-air talent from the final rule. The commenter. For example, the finds that it is difficult to weigh the Commission finds the use of non- commenter notes that productivity in evidence in the two studies of the compete agreements is an unfair method the industry has been broadly declining Broker Protocol because they reach of competition as outlined in Part IV.B, for years. Notably, this downward trend conflicting results, though the and commenters do not provide exists with non-competes in use in the Commission agrees that the technical evidence that a purported reduction in industry. The Commission notes that, approach in the Clifford and Gerken investment in on-air talent would be so under its analysis of the effect of the study is superior due to its larger great as to overcome that finding. final rule, productivity will benefit sample size. More importantly, both Specifically, the success of on-air talent because the final rule frees up labor and studies primarily concerned non- is a combination of the employer’s allows for greater innovation. The NIST solicitation agreements, and do not investment and the talent of the worker, study raises ‘‘skilled labor availability’’ isolate any effects of non-competes. So both of which benefit the employer. As as the very first factor that affects even if the studies did not reach noted in Part IV.D, other less restrictive productivity. The Commission finds in conflicting results, the Commission alternatives, including fixed duration Part IV that non-competes suppress believes they still would yield little contracts and competing on the merits labor mobility and the Commission reliable information about the effects of to retain the talent, allow employers to believes the final rule will result in non-competes specifically. With respect make a return on their own investments. firms having access to workers who are to the study of the mutual fund Moreover, as stated in Part II.F, firms industry, the Commission notes that may not justify unfair methods of a better, more productive fit. The under section 5, firms may not justify competition based on pecuniary benefit McKinsey & Company report notes that unfair methods of competition based on to themselves. Employers in this context changes in the industry will require pecuniary benefit to themselves.925The do not establish that there are societal adaptation by firms. The Commission study does not establish that there were benefits from their investment in on-air believes the final rule will facilitate this societal benefits from the attraction of talent, but only that the firms benefited. adaptation by sharing non-confidential new clients or the increased fee e. Construction know-how across firms through revenue—just that the firms benefited. increased mobility of workers. The rule Therefore, this study does not establish A commenter representing companies may also help mitigate, and certainly a business justification that the who provide skilled workers in will not exacerbate, concerns over Commission considers cognizable under construction stated that the Commission increased concentration in the industry should exclude the industry from the section 5. raised in the McKinsey & Company rule because non-competes are report, as the Commission finds that d. On-Air Talent necessary to the industry’s success. The non-competes inhibit new business commenter states that non-competes are Some commenters opposing the rule necessary for investment in innovation formation in Part IV.B.3.b.i. Moreover, stated that investment in on-air talent and productivity in the industry. The the Commission believes non-competes would be considerably reduced without comment cites to three studies. Two of may increase concentration, as non-competes. Commenters argued that the studies find a general reduction in discussed in Part IV.B.3.b.iii. on-air talent becomes well-known productivity in construction and Additionally, the Commission finds because of employers’ investment and conclude, inter alia, further study is that less restrictive alternatives, reputation and that employers must be warranted to better understand the including appropriately tailored NDAs able to use non-competes to protect this trend—Goolsbee and Syverson927and and non-solicitation agreements, are investment. The Commission also Huang, Chapman, and Burty (‘‘NIST sufficient to address disclosure of received a number of comments from study’’928). The third study is a confidential information and concerns and on behalf of on-air talent. Those McKinsey & Company report published related to client business. With respect commenters stated that non-competes in 2020 predicting innovation in the to concerns that the construction are ubiquitous for on-air talent, that they construction industry in the coming industry as a whole is suffering from are often localized geographically, that years.929 under-investment in capital and that the they suppress compensation, and that The evidence cited by this commenter final rule may further disincentivize they force workers seeking a better is exclusively about broad trends in capital investment, as the Commission match to move out of their localities. productivity in the industry, and what finds in Part IV.B.3.b.i, non-competes The following example is illustrative of may impact those trends. None of the inhibit new business formation. The the comments the Commission received: studies explicitly examines non- increase in new business formation from • I am a professional broadcast journalist competes, and they do not support the final rule will bring new capital to subject to a non-compete agreement with inferences on the effects of non- bear in the industry. The Commission every employment contract I have ever competes in this particular industry. addresses the empirical literature and signed, which is the industry standard. I Indeed, the Commission finds that the comments related to capital investment understand the need for contractual agreements with on-air talent and some off- 927Austan Goolsbee & Chad Syverson, The in detail Part IV.D.1. The Commission air talent, but non-compete agreements have Strange and Awful Path of Productivity in the U.S. notes here that it is not clear any historically offered nothing to employees Construction Sector (NBER Working Paper 30845, purported capital investment associated besides restricting where they work, and how Jan. 2023). with non-competes is entirely beneficial much money they are able to earn . . . 928Allison L. Huang, Robert E. Chapman, & David because it may be the result of firms [while] knowing that employees would have Burty, Metrics and Tools for Measuring to completely relocate if they wanted to seek Construction Productivity: Technical and Empirical over-investing in capital because they Considerations, Nat’l Inst. of Standards and Tech., do not face competition on the merits. or accept another opportunity.926 Bldg. and Fire Rsch. Lab., NIST Special Even if there is some net decrease in Publication 110 (September 2009). capital investment due to the final rule, 925Id. 929McKinsey & Co., The Next Normal in commenters provide no reason to 926Individual commenter, FTC–2023–0007– Construction: How Disruption is Reshaping the 12779. World’s Largest Ecosystem (June 2020). believe it would be a material amount. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38447 4. Exclusion for Covered Market That is, coverage under the FTC Act— recognizes, however, that in some Participants That Have Competitors whether an employer is subject to the instances these entities may be Outside the FTC’s Jurisdiction FTC Act and enforcement by the FTC— organized in such a way that they are differs across a range of topics and long outside the Commission’s The Commission explained in the predates this final rule, which does not jurisdiction.934Whether a given Tribe or NPRM that some entities that would materially alter the status quo in that tribal business is a corporation within otherwise be employers may not be respect. Moreover, even in the absence the FTC Act will be a fact-dependent subject to the final rule to the extent of the rule, firms within the jurisdiction inquiry. The Commission is aware of no they are exempted from coverage under of the FTC Act are already subject to evidence suggesting the final rule would the FTC Act.930As described in Part potential FTC enforcement against disproportionately impact tribes or II.E.1, the Act exempts, inter alia, unfair methods of competition, tribal businesses.935 ‘‘banks,’’ ‘‘persons, partnerships, or including against non-competes, while corporations insofar as they are subject 5. Coverage of Healthcare Industry firms outside the FTC’s jurisdiction are to the Packers and Stockyards Act of
group. The non compete clause is not just basis that it provides a firm with 701, 1979 WL 199033 (FTC Oct. 12, 1979). affecting the life of the [doctor], but is also pecuniary benefits to help them 941In the Matter of Ky. Household Goods Carriers impacting many of us who rely on their compete with other firms that use Ass’n, Inc., 139 F.T.C. 404, 405 (2005) (‘‘The services.937 Supreme Court has made clear that the state action • As a family physician this has caused similar tactics.939In this case, for-profit doctrine only applies when (1) the challenged much grief and obstructs my desire to work and other covered entities have urged restraint is clearly articulated and affirmatively and provide care for underserved the Commission to allow them to expressed as state policy, and (2) the policy is populations. I am a NHSC scholarship continue to employ an unfair method of actively supervised by the State itself.’’) (citation and alterations omitted); see also id. at 410–13 recipient and due to non compete clauses competition (i.e., use non-competes) (applying test); Elec. Inspectors, Inc. v. Vill. of East was unable to continue working in the town because some competitors are not Hills, 320 F.3d 110, 117–19 (2d Cir. 2003). I served due to its rurality. This created a prohibited from doing so as they are 942Colo. Rev. Stat. sec. 8–2–113(5)(a) (Colorado maternity desert in the region I served. Now beyond the Commission’s jurisdiction. statute banning non-competes for physicians); D.C. in a more metropolitan area, there has been Code sec. 32–581.01 (D.C. statute banning non- an exodus of physicians in the area due to The Commission is committed to competes for medical specialists earning less than non compete clauses that has caused stopping unlawful conduct to the full $250,000, compared to $150,000 for other workers); worsening access to primary care, specialty extent of its jurisdiction. For example, Fla. Stat. sec. 542.336 (Florida statute banning non- services, including behavioral health and the Commission would not refrain from competes for physician specialists in certain circumstances); Ind. Code Ann. secs. 25–22.5–5.5– substance use disorder treatment.938 seeking to enjoin unlawful price fixing 2 and 2.5(b) (Indiana statute banning non-competes A number of physician group by a for-profit within its jurisdiction for primary care physicians and restricting non- commenters stated that nonprofit because entities outside its jurisdiction competes for other physicians); Iowa Code sec. 135Q.2(3)(a) (banning non-competes for health care healthcare organizations regularly employment agency workers who provide nursing impose non-competes on physicians, 939See Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 services); Ky. Rev. Stat. sec. 216.724(1)(a) (Kentucky and that the impact of the rule would be (1965) (‘‘Upon considering the destructive effect on statute banning non-competes for temporary direct limited if nonprofits are not required to commerce that would result from the widespread care staff of health care services agencies); N.M. use of these contracts by major oil companies and Stat. Ann. secs. 24–1I–1 and 2 (New Mexico statute suppliers, we conclude that the Commission was banning non-competes for several types of health 937Individual commenter, FTC–2023–0007– clearly justified in refusing the participants an care practitioners); S.D. Codified Laws secs. 53–9– 10085. opportunity to offset these evils by a showing of 11.1–11.2 (South Dakota statute banning non- 938Individual commenter, FTC–2023–0007–0924. economic benefit to themselves.’’). Continued VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38450 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations the final rule’s coverage extends only to finding that use of certain non-competes recognized, the tax-exempt status as hospitals that do not identify as tax- is an unfair method of competition, as nonprofits of merging hospitals does not exempt non-profits based on AHA data, further discussed in Part IV. mitigate the potential for harm to as explained in Part IV.A.1, the While the Commission shares competitive conditions.945 Commission finds every use of covered commenters’ concerns about Commenters provide no empirical non-competes to be an unfair method of consolidation in healthcare, it disagrees evidence, and the Commission is competition and concludes that the with commenters’ contention that the unaware of any such evidence, to evidence supports the Commission’s purported competitive disadvantage to support the theory that prohibiting non- decision to promulgate this final rule, for-profit entities stemming from the competes would increase consolidation which covers the healthcare industry to final rule would exacerbate this or raise prices. To the contrary, as the full extent of the Commission’s problem. As some commenters stated, elaborated in Parts IV.B.3.a and IV.B.3.b, authority. the Commission notes that hospitals the empirical literature suggests, and the Relatedly, in response to commenters’ claiming tax-exempt status as nonprofits Commission finds, that the final rule concern that large numbers of are under increasing public scrutiny. will increase competition and efficiency healthcare workers will not benefit from Public and private studies and reports in healthcare markets, as workers at for- the final rule because they work for reveal that some such hospitals are profit healthcare entities will be able to entities that the final rule does not operating to maximize profits, paying spin off new practices or work for cover, the Commission notes many multi-million-dollar salaries to different employers where their workers at hospitals, including those executives, deploying aggressive productivity is greater. This is true even that claims tax-exempt status as a collection tactics with low-income if the Commission does not reach some nonprofit or government-owned patients, and spending less on portion of healthcare entities. While the hospital, contract with or otherwise community benefits than they receive in Commission’s prior research may work for a for-profit entity, such as a tax exemptions.943Economic studies by indicate, as one commenter suggested, staffing agency or physician group. FTC staff demonstrate that these that nonprofit hospitals set higher prices Although some of these individuals may hospitals can and do exercise market when they have more market power, the work at an excluded hospital, the final power and raise prices similar to for- Commission finds that the final rule is rule applies to their employer—the profit hospitals.944Thus, as courts have not likely to increase healthcare prices staffing agency or for-profit physician group—because it is covered by the final 943See, e.g., Press Release, Office of U.S. Sen. increases resulting from a merger of nonprofit, community-based hospitals, and determining that rule. Chuck Grassley, Bipartisan Senators Probe Potential mergers involving nonprofit hospitals are a The Commission disagrees with Abuse Of Tax-Exempt Status By Nonprofit legitimate focus of antitrust concern); Steven Tenn, Hospitals (Aug. 9, 2023), https:// commenters stating the ability to use The Price Effects of Hospital Mergers: A Case Study www.grassley.senate.gov/news/news-releases/ non-competes will provide a material bipartisan-senators-probe-potential-abuse-of-tax- of the Sutter-Summit Transaction, 18 Int’l J. Econ.
disadvantage in their ability to recruit Pottstown Sch. Dist. v. Montgomery Cnty. Bd. of 945See, e.g., FTC v. OSF Healthcare Sys., 852 F. Supp. 2d 1069, 1081 (N.D. Ill. 2012) (‘‘[T]he workers, even if they derive some short- Assessment Appeals, 289 A.3d 1142 (Pa. Commw. evidence in this case reflects that nonprofit term benefit from trapping current Ct. 2023) (holding that for-profit hospitals hospitals do seek to maximize the reimbursement purchased by nonprofit claiming tax exempt status workers in their employment. rates they receive.’’); FTC v. ProMedica, No. 3:11 CV under Federal law do not qualify under State law Furthermore, commenters’ concern that for nonprofit tax exemption); Phoenixville Hosp., 47, 2011 WL 1219281 at *22 (N.D. Ohio Mar. 29, 2011) (finding that a nonprofit hospital entity for-profit healthcare entities will be at a LLC v. Cnty. of Chester Bd. of Assessment Appeals, ‘‘exercises its bargaining leverage to obtain the most competitive disadvantage is based on 293 A.3d 1248 (Pa. Commw. Ct. 2023); Brandywine favorable reimbursement rates possible from Hosp., LLC v. Cnty. of Chester Bd. of Assessment the false premise that entities outside commercial health plans.’’); United States v. Appeals, 291 A.3d 467 (Pa. Commw. Ct. 2023);
the jurisdiction of the FTC will not be Jennersville Hosp., LLC v. Cnty of Chester Bd. of Rockford Mem’l Corp., 898 F.2d 1278, 1284–87 (7th
94615 U.S.C. 18; 15 U.S.C. 45; Univ. Health, Inc., Improving Health Care: A Dose of Competition, exiting their franchise relationships. 938 F.2d at 1214–16. supra note 945. Franchisees also stated that their non- 947Id. 950See, e.g., FTC, FTC Policy Perspectives on competes harm their negotiating 948See, e.g., In the Matter of RWJ Barnabas Health Certificates of Public Advantage (Aug. 15, 2022), position in bargaining over franchise and Saint Peters Healthcare Sys., Docket No. 9409 www.ftc.gov/copa; FTC, Physician Group and renewal terms. These franchisees stated
(Jun. 2, 2022) (complaint); FTC v. Advoc. Health Healthcare Facility Merger Study (ongoing, initiated Care, No. 15 C 11473, 2017 WL 1022015, at *1 (N.D. Jan. 2020), https://www.ftc.gov/enforcement/ that franchisors can impose higher Ill. Mar. 16, 2017); FTC v. Penn State Hershey Med. competition-matters/2021/04/physician-group- royalty rates or other less favorable Ctr., 838 F.3d 327, 332 (3d Cir. 2016). healthcare-facility-merger-study; Christopher terms over time as the franchisees feel 949See, e.g., FTC, Competition in the Health Care Garmon, The Accuracy of Hospital Merger powerless to refuse or make effective Marketplace, https://www.ftc.gov/tips-advice/ Screening Methods, 48 RAND J. of Econ. 1068 competition-guidance/industry-guidance/health- (2017), https://www.ftc.gov/system/files/ counteroffers, due to their non- care; FTC, Overview of FTC Actions in Health Care documents/reports/accuracy-hospital-merger- competes. Many franchisees asserted Services and Products (2022), https://www.ftc.gov/ screening-methods/rwp_326.pdf; Joseph Farrell, et that their non-competes are overbroad system/files/ftc_gov/pdf/2022.04.08 al., Economics at the FTC: Hospital Mergers, %20Overview%20Healthcare%20 Authorized Generic Drugs, and Consumer Credit because they restrain individual owners’ %28final%29.pdf; Joseph Farrell et al., Economics Markets, 39 Rev. Indus. Org. 271 (2011), http:// spouses and other close relatives from at the FTC: Retrospective Merger Analysis with a link.springer.com/content/pdf/10.1007%2Fs11151- competing in the same industry. Some Focus on Hospitals, 35 Rev. Indus. Org. 369 (2009), 011-9320-x.pdf; Devesh Raval, Ted Rosenbaum, & franchisees stated that their non- http://link.springer.com/content/pdf/ Steve Tenn, A Semiparametric Discrete Choice 10.1007%2Fs11151-009-9231-2.pdf; FTC, Model: An Application to Hospital Mergers, 55 competes include penalties for choosing Examining Health Care Competition (Mar. 20–21, Econ. Inquiry 1919 (2017). 2014), https://www.ftc.gov/news-events/events- 951NPRM at 3511, 3520. 954Trade Regulation Rule on Franchising and calendar/2014/03/examining-health-care- 952Id. at 3511. Business Opportunity Ventures, 43 FR 59614, competition; FTC & Dep’t of Justice, Examining 953Id. at 3520. 59625 (Dec. 21, 1978). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38452 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations not to renew their contracts even if they may in some cases present concerns necessary authority to the Commission do not compete. under section 5 similar to the concerns or because of federalism principles. Other commenters, primarily presented by non-competes between They argued there must be clear franchisors and trade organizations, employers and workers. The comments Congressional intent to preempt State stated that franchisor/franchisee non- from franchisors, franchisees, and others laws relating to non-competes.957 competes should be excluded from the provide the Commission with further Numerous commenters asserted the final rule. Many of these commenters information about non-competes in the Commission lacks clear authority from argued that franchisor/franchisee non- context of the franchisor/franchisee Congress to preempt State laws on non- competes are more similar to restrictive relationship, but the evidentiary record competes, arguing the FTC’s statutory covenants between businesses than non- before the Commission continues to authority neither expressly nor competes between employers and relate primarily to non-competes that impliedly authorizes preemption of workers. Some of these commenters arise out of employment. Accordingly, non-competes. Commenters made argued that franchisor/franchisee non- the final rule does not cover franchisor/ similar points based on cases about the competes are more justified than non- franchisee non-competes. Non-competes preemptive force of the Commission’s competes in the employment context used in the context of franchisor/ UDAP regulations. For example, one because, unlike employment franchisee relationships remain subject commenter asserted the FTC may not relationships, entering into a franchise to State common law and Federal and have the authority to preempt less agreement is completely voluntary. State antitrust laws, including section 5 restrictive State laws, citing American Some commenters argued that, unlike of the FTC Act. Optometric Association v. FTC, in non-competes in the employment VI. Section 910.4: Relation to State which the court noted the need for context, franchisor/franchisee non- Laws and Preservation of State congressional authorization for the competes are only entered into by Authority and Private Rights of Action Commission to preempt an entire field individuals with access to substantial of State laws that arise from the State’s capital and who therefore always have In proposed §910.4, the Commission police powers.958 the option of starting their own addressed State laws and preemption. The Commission finds it has the businesses. Based on comments, the Commission authority to promulgate regulations that Many of these commenters argued adopts a modified provision clarifying preempt inconsistent State laws under that prohibiting non-competes for and explaining that States may continue section 6(g), together with section 5, of franchisees would threaten to severely to enforce laws that restrict non- the FTC Act. Even without an express disrupt or destroy the franchise business competes and do not conflict with the preemption provision, Federal statutes model, and that this would harm final rule, even if the scope of the State and regulations preempt conflicting franchisors and franchisees alike, as restrictions is narrower than the final State laws. Under the Supreme Court’s franchising offers a unique opportunity rule.955 conflict preemption doctrine, a Federal for working people to become
Commenters supporting the exclusion the savings clause by offering greater conflicting State laws. To provide a of franchisor/franchisee non-competes protection and was not inconsistent clear explanation of the Commission’s from the final rule also asserted that the with proposed part 910.956 intent and the scope of preemption effected by the final rule, the final rule Commission lacked an evidentiary basis B. Authority for Preemption includes an express preemption for covering such non-competes. These Numerous commenters supported the commenters also claimed no State has preemption of inconsistent State laws.
prohibited non-competes for 957Comments on the Commission’s authority to Some commenters asserted the promulgate this final rule, separate from the issue franchisees, and the Commission would Commission lacks the legal authority to of preemption of State law, are summarized in Part therefore lack data from natural preempt State laws, including State II. experiments to justify extending a final 958Am. Optometric Ass’n v. FTC, 626 F.2d 896, common law, on non-competes because rule to the franchise context. 910 (1980).
c. The Final Rule Cong. Rsch. Serv., 23 (May 18, 2023) (Report The Commission continues to believe 955State statutes, regulations, orders, or R45825), https://crsreports.congress.gov/product/ interpretations, including State common law, are pdf/R/R45825/3. that, as many commenters attested, referred to as ‘‘State laws’’ for ease of reference. 960Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, franchisor/franchisee non-competes 956NPRM at 3515. 458 U.S. 141, 153 (1982). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38453 provision at §910.4.961As discussed in categories of workers and different wage State law variations.964As described in Part VI.D, the Commission has modified levels, making it difficult for workers to Part IX.C, the Commission has proposed §910.4 to make clear that even know whether employers can enforce a determined that declining to issue this when the scope of non-compete particular non-compete. The commenter final rule and continuing to rely solely prohibitions under a State law is less stated that variations in the legal on State laws and case-by-case than that of the final rule, State authority of State attorneys general to adjudication would be less effective authorities and persons may enforce the take action on the public’s behalf also than issuing a clear national standard. State law by, for example, bringing limit the effectiveness of State The Commission concludes, however, actions against non-competes that are restrictions on non-competes. A number that supplementing the final rule with illegal under the State law. of commenters explained that the additional State authority and resources, difficulties arising from variations in so long as the State laws are not C. The Benefits of Preemption State non-compete laws are exacerbated inconsistent with the final rule, will Numerous commenters stated that by the increase in remote and hybrid assist in protecting both workers and variations in State laws chill worker work, and workers who travel to work competition. mobility and expressed support for a across State lines. Accordingly, many uniform Federal standard. Some D. The Extent of Preemption commenters favored a uniform Federal commenters explained that a standard that would promote certainty Some commenters strongly supported preemption clause could bring clarity to for employers and workers. Even some the NPRM but expressed concern that the law’s effect. commenters who generally opposed the preemption provision as proposed The U.S. Department of Justice banning non-competes favored could undermine States’ efforts to curb commented that, due to the patchwork preemption to eliminate the patchwork non-competes and would thereby of State laws, a worker may be free to of State laws that makes it difficult for undercut the final rule’s effectiveness. switch jobs in one jurisdiction but workers to know the applicable law and These commenters stated that under one subject to a non-compete in another, encourages forum shopping by interpretation, proposed §910.4 could creating uncertainty as to the non- employers who want to bring suits in preempt State laws that prohibit non- compete’s enforceability for both firms sympathetic jurisdictions. competes for workers earning less than and workers.962In another commenter’s Other commenters opposed a specified income because the law as view, the variation in State non-compete preemption, asserting that State a whole may not be deemed to provide laws creates competitive disadvantages legislatures and courts are best situated greater protection than the final rule. In for companies in States that ban such to address non-competes and that the their view, such an interpretation would clauses, necessitating a Federal ban.
or greater protection[.]’’) (emphasis added); Mail, recommended a ‘‘savings clause’’ that internet, or Telephone Order Merchandise Rule, 16 Moreover, as discussed in Part IX.C, CFR 435.3(b) (‘‘This part does supersede those preemption furthers a primary goal of would exempt from preemption State provisions of any State law, municipal ordinance, the final rule: to provide a uniform, high laws that provide workers with or other local regulation which are inconsistent protections substantially similar to or level of protection for competition that with this part to the extent that those provisions do greater than those afforded by the not provide a buyer with rights which are equal to is easy for both employers and workers or greater than those rights granted a buyer by this to understand and makes it less likely part.’’) (emphasis added); Franchise Rule, 16 CFR that employers will subject workers to 964See, e.g., Comment of Mech. Contractors Ass’n 436.10(b) (‘‘The FTC does not intend to preempt the of Am., FTC–2023–0007–18218 (although opposed illegal non-competes or forum shop.
franchise practices laws of any [S]tate or local to the proposed rule, MCCA’s position supports a government, except to the extent of any Indeed, some commenters who single Federal rule and some level of preemption). inconsistency with part 436. A law is not otherwise opposed the proposed ban on 965See Comment of the Attys. Gen. of 17 States inconsistent with part 436 if it affords prospective non-competes regarded the patchwork and DC, FTC–2023–0007–21043, at 14–15 franchisees equal or greater protection[.]’’) (‘‘jurisdictions like Colorado, Illinois, Washington, itself burdensome to employers as well (emphasis added); Labeling and Advertising of and the District of Columbia have passed laws that Home Insulation, 16 CFR 460.24(b) (preemption of as workers and noted the rule would ban non-competes for workers making under a ‘‘State and local laws and regulations that are reduce burden by eliminating specified income threshold and also include inconsistent with, or frustrate the purposes of this uncertainty and confusion caused by remedies provisions that authorize [S]tate agencies regulation’’). See also Part II.B. and residents to enforce the law’’); id. at 9–11 962Comment of Dep’t of Justice Antitrust Div., (discussing State enforcement, private action, and FTC–2023–0007–20872 at 7. 963See Part IX.C. damages in several State non-compete laws). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38454 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations rule.966They also recommended that Accordingly, §910.4(a) states that the persons retain the right to bring a claim the rule not preempt State antitrust and final rule will not be construed to annul, or regulatory action under State laws consumer protection laws that may or exempt any person from complying unless the laws conflict with the final protect workers against non-competes with, any State statute, regulation, rule and have been superseded as and other restrictive employment order, or interpretation applicable to a described in §910.4(a). arrangements as those laws can provide non-compete, including, but not limited These modifications are consistent another enforcement avenue for State to, State antitrust and consumer with many commenters’ agencies and residents. protection laws and State common law. recommendations and recognize State- Another commenter recommended Rather, the final rule supersedes such based enforcement as a potent force that including a narrow reverse preemption laws to the extent, and only to the supplements Federal enforcement. In provision so that relevant State laws in extent, that such laws would otherwise addition, the modifications, particularly States that enact the Uniform Restrictive permit or authorize a person to engage those that explain §910.4 does not Employment Agreement Act967would in conduct that is an unfair method of exempt any person from complying not be preempted.968The comment competition under §910.2(a) or conflict with State laws, are intended to curb the asserted that by doing so, a final rule with the notice requirement in use of preemption as a defense against would preserve a role for the States and §910.2(b).970These revisions provide State restrictions of non-competes.971 encourage their cooperation with the that when States have restricted non- Commission, and also provide greater competes and their laws do not conflict Under the final rule, States may protections for employees than the with the final rule, employers must continue to play a critical role in proposed rule provided in several ways, adhere to both provisions, and workers restricting the use of non-competes. In such as allowing for greater enforcement are protected by both provisions contrast to the FTC Act, which cannot and including classes of employers that (including State restrictions and be enforced by private persons or State the final rule would not cover.969The penalties that exceed those in Federal authorities,972the non-compete laws of uniform law would ban non-competes law). numerous States provide for such for workers earning at or below the For example, §910.4 makes clear that enforcement.973Non-competes that are State’s annual mean wage and would the final rule does not preempt State outside the FTC’s jurisdiction or allow non-competes for those earning law enforcement where a State bans otherwise outside the scope of the final more, but apply limits and require non-competes only for workers earning rule may be covered by State non- disclosures for any non-compete. below a certain amount and thus has a compete laws.974State penalties can be Based on comments, the Commission ban that is narrower than the final rule. substantial and may be particularly has modified the final rule’s preemption Thus, if a State’s law bars non-competes important as a deterrent. provision to clarify and explain that only for workers who earn less than The modifications also reflect the State laws that restrict non-competes $150,000 per year, the final rule and the Commission’s long history of working in and do not conflict with the final rule law are different in scope of protection concert with States and encouraging are not preempted. Section 910.4 also but not directly inconsistent. The State concurrent enforcement of State laws to expressly references State common law, may continue to enforce its ban for pursue common goals. While the antitrust law, and consumer protection workers earning less than $150,000, but Commission recognizes this will leave law, so that the intended scope of all non-competes covered by the final some variation in the enforcement preemption is clear. State common law rule, regardless of a worker’s earnings, exposure covered persons face among is expressly referenced because many remain an unfair method of competition States, that variation will be greatly States do not have a general non- under the final rule and are therefore reduced by the final rule, which sets a compete statute, and the common law unlawful.
varies considerably. In response to concerns raised by Section 910.4(b) reflects the commenters and to further bolster the 971See, e.g., Sprietsma v. Mercury Marine, 537 U.S. 51, 62–70 (2002) (finding Federal Boat Safety Commission’s intent that States may consistent use of State laws, the Act did not relieve defendant from liability for State continue to enforce in parallel laws that Commission expressly recognizes State common law tort claim because it did not expressly restrict non-competes and do not authority and the existence of private nor impliedly preempt State common law). conflict with the final rule, even if the 972See, e.g., FTC, A Brief Overview of the Federal rights of action arising under State laws scope of the State restrictions is Trade Commission’s Investigative, Law that restrict non-competes or bar unfair Enforcement, and Rulemaking Authority App. A narrower than that of the final rule. That methods of competition. This is set forth (May 2021), https://www.ftc.gov/about-ftc/mission/ is, State laws cannot authorize non- in §910.4, now titled ‘‘Relation to State enforcement-authority; Holloway v. Bristol-Myers competes that are prohibited under this Corp., 485 F.2d 986, 997 (D.C. Cir. 1973). laws and preservation of State authority final rule, but States may, for example, 973Comment of the Attys. Gen. of 17 States and and private rights of action,’’ and is continue to pursue enforcement actions DC, FTC–2023–0007–21043 at 7 (‘‘jurisdictions like detailed in §910.4(b). That section Colorado, Illinois, Washington, and the District of under their laws prohibiting non- provides that unless a State law Columbia have passed laws that ban non-competes competes even if the State laws prohibit conflicts with the final rule and is for workers making under a specified income a narrower subset of non-competes than threshold and also include remedies provisions that superseded as described in §910.4(a), this rule prohibits. authorize state agencies and residents to enforce the part 910 does not limit or affect the law’’). See also 2023 Cal. Legis. Serv. Ch. 157 (S.B. authority of State attorneys general and 699) West (adding Cal. Bus. & Prof. Code sec. 966Another comment recommended a similar other State agencies or the rights of a 16600.5, Sept. 1, 2023) (providing for a private right formulation, which would exempt from preemption of action in regard to California’s non-compete State laws that offer workers protection that is equal person to bring a claim or regulatory statute). to or greater than the protection provided by the action arising under State laws, 974See Part II.E (discussing the Commission’s final rule. This commenter asserted that this including State antitrust and consumer jurisdiction under the FTC Act). See, e.g., Cal. Bus. formulation would allow existing State law to protection laws and State common law. & Prof. Code secs. 16600–16602 (broad coverage); stand. Minn. Stat. Ann. sec. 181.988, subdiv. 1 (b) 967See Uniform Restrictive Employment Section 910.4(b) also explains that (‘‘‘Employer’ means any individual, partnership, Agreement Act, supra note 332 at sec. 5, sec. 8. association, corporation, business, trust, or any 968See Comment of ULC, FTC–2023–0007–20940. 970The effect of part 910 is limited to non- person or group of persons acting directly or 969See also Part II.E (discussing comments on the competes. It would not broadly preempt other uses indirectly in the interest of an employer in relation Commission’s jurisdiction under the FTC Act). of State antitrust and consumer protection law. to an employee.’’). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38455 floor that applies nationally.975As it has The Commission finds that each of and service markets. The Commission done in the past, the Commission will the provisions, parts of the provisions, further analyzes and quantifies these ‘‘share the field’’ with States and partner and applications of the final rule effects in Part X.F.6, including with them in the battle against abusive operate independently and that the sensitivity analyses that compare the non-competes.976As set out in Part evidence and findings supporting each estimated effects of smaller changes in IX.C, the Commission considered and provision, part of each provision, and enforceability and larger changes in rejected the alternative of relying on application of each provision stand enforceability. existing State laws alone. Consistent independent of one another. In this final Based on this empirical evidence and with that determination, the rule, the Commission determines that analysis, the Commission believes that Commission declines to adopt the certain conduct is an unfair method of more limited application of the rule— suggestion from a comment that relevant competition in Part IV.B and Part IV.C which might result were a court to State laws in States that enact the and differentiates between senior render the final rule inapplicable in Uniform Restrictive Employment executives and workers who are not some way—may be equivalent to Agreement Act not be preempted. senior executives with respect to smaller changes in the enforceability of existing non-competes. The final rule non-competes in the empirical VII. Section 910.5: Severability distinguishes between the two in both literature. As described in Part IV.B.3.a The Commission stated in the NPRM the final rule’s operation and in the and IV.B.3.b, smaller changes in that it may adopt a severability bases for adopting the final rule. The enforceability change the magnitude, clause977and it received a comment difference in restrictions among but not the directional nature, of the stating the Commission should adopt different workers, and the distinct bases labor market and product and service such a clause to protect the rights and for adopting the restrictions, is market effects.979Accordingly, securities of workers if one part of the described in detail in Parts IV.B and consistent with the findings related to rule or one category of workers were IV.C. The Commission also estimates the use of certain non-competes being invalidated. The Commission adds the effect of excluding senior executives an unfair method of competition in Part §910.5, together with this section, to entirely from the rule in Part X.F.11 and IV, the empirical evidence on the use of clarify the Commission’s intent.978 finds that the benefits of covering only non-competes, the regulatory impact Section 910.5 states that if any those workers who are not senior analysis in Part X, and its expertise, the provision of the final rule is held to be executives justify the costs. Commission finds that any smaller invalid or unenforceable either facially, The Commission promulgates each reduction in enforceability resulting or as applied to any person or provision, part of each provision, and from circumstances in which a court circumstance, or stayed pending further application of each provision as a valid stays or invalidates some application of agency action, such invalidity shall not exercise of its legal authority. Were any the final rule would not impair the affect the application of the provision to provision, part of any provision, or any function of the remaining parts of the other persons or circumstances or the application of any provision of the final final rule nor would it undermine the rule stayed or held inapplicable to a justification or necessity for the final validity or application of other particular category of workers, to rule as applied to other persons, provisions. Section 910.5 also states that particular conduct, or to particular conduct, or circumstances. The if any provision or application of the circumstances, the Commission intends Commission intends for any remaining final rule is held to be invalid or the remaining elements or applications application of the final rule to be in unenforceable, the provision or of the final rule to prohibit a non- force because it is committed to application shall be severable from the compete between covered persons and stopping any and all unlawful conduct final rule and shall not affect the covered workers as an unfair method of related to the use of certain non- remainder thereof. This provision competition. competes and the Commission finds confirms the Commission’s intent that In Parts IV.B and IV.C, the every use of a non-compete covered by the remainder of the final rule remain in Commission finds that the use of non- the final rule to be an unlawful unfair effect in the event that a reviewing court competes is an unlawful unfair method method of competition under section 5 stays or invalidates any provision, any of competition under section 5 of the of the FTC Act.980 part of any provision, or any application FTC Act because it is restrictive and In Part X, the Commission conducts a of the rule—including, for example, an exclusionary conduct that tends to regulatory impact analysis for the final aspect of the terms and conditions negatively affect competitive conditions rule as applied to all workers, as applied defined as non-competes, one or more of in several independent ways. In support to all workers other than senior the particular restrictions on non- of its finding that the use of non- executives, and as applied to senior competes, or the standards for or competes is an unlawful unfair method executives. The Commission finds that application to one or more categories of of competition for workers who are not the asserted benefits of the use of non- workers.
978In the NPRM, proposed §910.5 addressed the of non-competes tends to negatively 979See also Part X.F.6. compliance date. affect competitive conditions in product 980See NPRM at 3518–19. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38456 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations For instance, if, for any reason, a enforce the final rule to the fullest B. Comments Received reviewing court were to stay or possible extent.
conduct or workers, the Commission’s 983Id. (addressing compliance with proposed 984The comment did not consider the limitations intent is to otherwise preserve and §910.2(b)(2)). on the effective date imposed by the CRA. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38457 day compliance period to stop these non-competes. Employers will also need compliance period proposed in the unfair methods of competition as soon to assess and revise, if necessary, any NPRM is no longer warranted and as practicable. The Commission finds employment policies or handbooks that would allow the use of certain non- that a 120-day period appropriately purport to bind workers even after the competes that are an unfair method of balances the interests at hand. effective date. competition—and their related harms The Commission has taken several To the extent they have confidential and costs—to continue for longer than steps in the final rule to make business information, trade secrets, or necessary. The substantial benefits to compliance as simple as possible for other investments to protect with competition and to workers of the final employers. These steps make it respect to a particular worker, rule taking effect as soon as possible practicable and reasonable to require employers will be able to assess their outweigh any concerns about potential compliance within 120 days. The final options to lawfully protect that difficulties in meeting an earlier rule allows regulated entities to enforce information. However, new protections compliance date. existing non-competes with senior will be unnecessary in many cases, The Commission also adopts a 120- executives, who commenters contended because, for example, 95.6% of workers day effective date. The Commission are most likely to have complex subject to non-competes are already concludes that it would ease the burden compensation arrangements that subject to an NDA.989In the rare case of implementation and reduce possible include non-competes. Accordingly, where compensation might be tied to a confusion by having a uniform date for there is no need for a lengthy non-compete that is not with a senior when the final rule goes into effect and compliance period, as the most complex executive, the employer and worker can when compliance under the final rule is existing arrangements are left in place. determine whether to amend their required. A 120-day effective date The Commission also eliminated the original employment agreement. The complies with the requirements of the rescission requirement for all workers. Commission concludes that the 120-day Congressional Review Act that a ‘‘major Under the final rule, employers will not compliance period gives employers rule’’ may not take effect fewer than 60 need to rescind (i.e., legally modify) more than sufficient time to complete days after the rule is published in the existing non-competes for any workers; these tasks. For example, firms routinely Federal Register. rather, employers will simply be complete entire onboarding processes
987§910.2(b)(2)(ii). 989Balasubramanian, Starr, & Yamaguchi, supra 992Id. at 3521. 988§910.2(b)(3). note 74 at 44. 993Id. at 3497.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38458 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations competes. In this section, the that the Commission’s analysis of effective than the final rule for Commission discusses the comments empirical research on non-competes achieving the Commission’s stated received regarding these alternatives cannot substitute for the lengthy goals. A rebuttable presumption also and the reasons it has decided not to experience courts usually have with a presents administrability concerns that adopt them. This Part IX addresses these particular restraint before giving it the final rule does not. comments but does not address quick-look treatment. A few Overall, the comments reinforced the alternatives related to the design of commenters contended that a rebuttable Commission’s concerns that a rebuttable specific regulatory provisions, which presumption would increase litigation presumption would foster substantial are discussed in the Part addressing the and raise employers’ compliance costs uncertainty about the validity of a given relevant provision. by complicating the determination of non-compete and would do little to whether a given non-compete is likely reduce the in terrorem effects of non- A. Categorical Ban vs. Rebuttable valid, requiring more lawyer competes. Research demonstrates that Presumption involvement in drafting clauses and employers maintain non-competes even 1. The Rebuttable Presumption more reliance on courts to determine a where they likely cannot enforce Alternative Generally non-compete’s validity. them,996that many workers are not A few commenters supported a aware of the applicable law governing While preliminarily finding that a rebuttable presumption, arguing the non-competes or their rights under categorical ban would best achieve the Commission’s proposed ban on non- those laws,997and that the degree to proposed rule’s objectives, the competes was too blunt an instrument. which non-competes inhibit worker Commission nevertheless sought Some also contended that a rebuttable mobility is affected not only by whether comment on the alternative of a presumption would offer a more flexible a non-compete is actually enforceable rebuttable presumption, under which it approach akin to the majority of State but also on whether a worker believes would be presumptively unlawful for an law approaches. At least one commenter their employer may enforce it.998 employer to use a non-compete, but a stated a rebuttable presumption would Accordingly, the Commission concludes non-compete would be permitted if the make the final rule more likely to that a rule implementing a rebuttable employer could meet a certain survive judicial review. A few presumption would be inadequate to evidentiary burden or standard.994The commenters stated a rebuttable reduce the prevalence of non-competes, Commission also sought feedback on the presumption would provide more their chilling effect on worker mobility, form any rebuttable presumption should protections than most State laws by or their tendency to negatively affect take.995 allowing only non-competes that the competitive conditions. Relatedly, the Most commenters that addressed this commenter contended are not unfair to Commission believes a rebuttable issue, including those both supporting the worker, such as where highly paid presumption would increase litigation and opposing the proposed rule, workers agree to narrow non-competes costs for workers and employers relative discouraged the Commission from in exchange for bargained-for to the final rule as adopted. including a rebuttable presumption in consideration. One commenter argued a The Commission also believes that, in the final rule. These commenters rebuttable presumption would enable important respects, a rebuttable contended that a rebuttable the Commission to accrue more presumption for non-competes is presumption would add complexity and experience adjudicating non-competes inconsistent with the Commission’s uncertainty to the rule. and assessing their impact on findings in this final rule. As discussed Supporters of the proposed rule competition. in greater detail in Part IX.C, a rule that asserted that a rebuttable presumption Commenters advocating for a provides for case-by-case, would undermine the rule’s rebuttable presumption generally individualized assessment of non- effectiveness, failing to deter employers preferred a test focusing on one or more competes is unlikely to address the from imposing non-competes while factors, including: the non-compete’s negative effects of non-competes on making litigation too uncertain and geographic scope and duration; the competition in the aggregate. In costly for most workers to pursue. Some presence and amount of any liquidated addition, by focusing on considerations of these commenters contended that a damages or penalty provision; whether specific to the worker and the employer, rebuttable presumption would also do the clause is narrowly tailored to a rebuttable presumption is unlikely to little to reduce the chilling effects of prevent competition with actual address the external effects of non- non-competes. They argued that competitors; the restrained worker’s competes (i.e., the effects on persons employers would continue to impose duties and income; and the availability other than the parties to the non- non-competes that are unlikely to of less restrictive alternatives. A few compete), including their negative survive a rebuttable presumption. commenters supported a effects on the earnings of workers who Many commenters critical of the ‘‘preponderance’’ (as opposed to a are not covered by non-competes.
proposed rule opposed a rebuttable ‘‘clear and convincing’’) standard to The Commission recognizes there presumption for essentially the same permit as many non-competes as may be some benefits to a rebuttable reasons they opposed the rule in possible but acknowledged that such a presumption relative to the status quo. general. They contended that, in States rule may be so similar to the existing Because it puts the burden of proof on where non-competes are generally common law as to be redundant. employers, a rebuttable resumption enforceable, a rebuttable presumption After carefully reviewing and would be stricter than the current law would inappropriately shift the burden considering the comments, the in States where non-competes are of proof from workers to employers. Commission concludes that a rule allowed, and research suggests even a Many of these commenters specifically implementing a rebuttable presumption small decrease in enforceability would opposed a rebuttable presumption that is not preferrable to the final rule as increase worker mobility, raise wages, would use a test similar to antitrust adopted. Based on the Commission’s law’s ‘‘quick look’’ analysis, contending expertise, including careful review and 996See Part IV.B.2.b.
994Id. at 3517. record, the Commission finds that a 998Starr, Prescott, & Bishara, supra note 68 at 633, 995Id. at 3517–19. rebuttable presumption would be less 652, 664. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38459 and promote innovation.999But the could, for example, require an employer an employment offer, and that a categorical ban adopted in the final rule to disclose to a worker prior to making disclosure rule would therefore not have would have greater benefits in these an employment offer that the worker the effect of making non-competes less respects without the drawbacks will be subject to a non-compete and/or unfair or coercive. A few commenters explained in this Part IX.A.1. to explain the terms of the non-compete opposed a disclosure rule generally but and how the worker would be affected urged the Commission to adopt a
2. Discrete Alternatives Related to by signing it.1002The Commission noted disclosure requirement for any non- Rebuttable Presumptions that a 2021 study by Starr, Prescott, and competes permitted by the final rule, In the NPRM, the Commission also Bishara finds that disclosure of non- including for any non-competes entered sought comment on four discrete competes to workers prior to the into by a person who is selling a alternatives to the proposed rule: acceptance of a job offer was associated business. Alternative #1 (categorical ban below with increased earnings, rates of On the other hand, some trade some threshold, rebuttable presumption training, and job satisfaction.1003The organizations, advocacy groups, and above); Alternative #2 (categorical ban authors of the study, however, businesses that generally opposed the below some threshold, no requirements cautioned that their analysis ‘‘should rule advocated for the Commission to above); Alternative #3 (rebuttable not be interpreted causally,’’ a point the adopt a disclosure rule in lieu of the presumption for all workers); and Commission noted in explaining why it proposed categorical ban. These Alternative #4 (rebuttable presumption gave minimal weight to the study.1004 commenters contended that a disclosure below some threshold, no requirements The Commission preliminarily rule would substantially mitigate the above).1000 concluded in the NPRM that a unfairness of non-competes that are As explained in Part IX.A.1, the disclosure requirement would not entered into without adequate notice to Commission finds a rebuttable achieve the objectives of the proposed the worker without drastically altering presumption would be ineffective in rule.1005 the legal status quo, thereby maintaining addressing the harms to competitive In general, commenters stated they the protections for trade secrets, training conditions caused by non-competes. For agreed with the Commission’s expenditures, and intellectual property the same reasons, the Commission preliminary view that, while there may they contend that non-competes declines to adopt Alternatives #1, #3, be some benefits to a disclosure rule, it provide. They stated that eight States and #4, all of which contemplated a would not achieve the objectives of the and the District of Columbia have rebuttable presumption for some or all rule. Workers and worker advocacy statutory notice requirements for non- workers.
While the vast majority of often presented to workers on their first Most of the commenters who commenters supported the day on the job, or after they accept an supported a disclosure rule also argued Commission’s proposal to ban non- employment offer. Although these that rather than demonstrating that non- competes categorically for all workers, a commenters generally supported a competes tend to negatively affect number of commenters suggested that comprehensive ban, they noted that if competitive conditions, the available the Commission permit non-competes the Commission did not pursue a ban, evidence merely demonstrates with senior executives (or other highly a disclosure requirement may help opportunistic behavior by employers skilled or highly paid workers) and improve workers’ awareness of non- (such as presenting non-competes only other workers. The Commission competes before accepting an offer. On after prospective workers have taken addresses these comments in Part IV.C the other hand, these commenters hard-to-reverse steps towards accepting and V.D.1, where it finds that such non- contended that a disclosure rule would employment) and workers (such as competes tend to negatively affect do little to reduce the prevalence of seeking to be excused from a non- competitive conditions in labor markets non-competes, because workers have compete after recognizing its impact on and in product and service markets, and little choice but to accept non-competes, future job prospects). These commenters that non-competes are also exploitative which are typically presented as ‘‘take- asserted that a disclosure rule would be and coercive for workers other than it-or-leave-it’’ terms and are ubiquitous better suited to address these types of senior executives. For these reasons, the in many fields. opportunistic behaviors than a Commission declines to adopt Many trade organizations, advocacy categorical ban.
Alternative #2, which contemplated groups, and academics who were Some commenters based their support imposing no requirements on workers generally supportive of the rule stated for a disclosure rule on their contention above a certain wage or other threshold.
B. Other Discrete Alternatives mitigate the competitive harms caused power to negotiate over non-competes by non-competes in the aggregate. While when they are provided with notice of 1. Disclosure Rule acknowledging a disclosure rule may them. One such commenter pointed to In the NPRM, the Commission sought ameliorate some problems related to the cited research by Starr, Prescott, and comment on the potential alternative of worker awareness of non-competes, Bishara finding that disclosure of non- adopting disclosure requirements these commenters contended that non- competes to workers prior to acceptance related to non-competes.1001The competes are unfair and coercive of a job offer may increase earnings, Commission explained that the rule because employees generally lack increase rates of training, and increase adequate bargaining power to refuse to job satisfaction.1006The commenter also 999Johnson, Lavetti, & Lipsitz, supra note 388 sign or bargain over non-competes even referenced the study’s finding that of (decreasing enforceability increases worker mobility when they are presented at the time of those workers who did not attempt to and earnings); Johnson, Lipsitz, & Pei, supra note 526 at 2–5 (enforceability negatively impacts patent negotiate a non-compete, 52% reported quantity and quality). 1002Id. at 3521. that they thought the terms were 1000NPRM at 3519. 1003Id., citingStarr, Prescott, & Bishara, supra reasonable and 41% reported that they 1001Id. at 3521 n.446 (noting certain provisions in note 68 at 75. assumed the terms to be non- the Commission’s Franchise Rule (16 CFR part 436), 1004Id. at 3487, citing Starr, Prescott, & Bishara, such as §436.5(i) and (q), require non-competes to supra note 68 at 73. be disclosed to a franchisee). 1005Id. at 3521. 1006Starr, Prescott, & Bishara, supra note 68 at 75. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38460 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations negotiable.1007The commenter As a result, workers have limited would meaningfully increase the share contended that a disclosure rule would practical ability to negotiate non- of workers who actually bargain over decrease the number of workers who competes even if they are notified of non-competes. assumed non-competes were non- such clauses prior to accepting their A disclosure rule may address some negotiable. employment offer. Indeed, as described deceptive or misleading practices in A few commenters contended a in Part IV.B.2.b.i, the comment record connection with non-competes. disclosure rule may be more likely to reflects that very few workers (other However, considering that a disclosure withstand judicial review because the than senior executives) bargain over rule is not likely to significantly reduce Commission could promulgate a their non-competes—whether the the negative competitive impacts of disclosure rule in this context under its worker knew about the non-compete non-competes on labor markets and on UDAP authority pursuant to the before the job offer and understood its product and service markets, this Magnuson-Moss Act. In addition, a few terms, or not. benefit is significantly outweighed by commenters requested the Commission The Commission gives the findings of the limitations of a disclosure rule.1012 adopt timing rules for when the the Starr, Prescott, and Bishara study on The Commission further concludes disclosure must be provided, such as by the impacts of disclosure little weight that a disclosure rule is not necessary requiring that employers disclose a non- because the study reflects only for non-competes in the context of sales compete in the job advertisement, at the correlation, not causation, with respect of a business entity. As described in Part time of the job offer, or at least five to the effects of a disclosure rule V.A, persons selling a business entity business days prior to the worker’s (similar to the ‘‘use’’ studies the tend to have bargaining power in the deadline to sign an employment Commission gives little weight to, as context of the transaction, and the agreement. described in Part IV.A.2). The study Commission is unaware of evidence that The Commission declines to adopt a merely compares a set of workers whose deceptive and misleading practices in disclosure rule.1008The Commission firms disclosed the non-compete and connection with non-competes (such as finds that merely ensuring workers are workers whose firms did not, and any waiting to disclose a non-compete until informed about non-competes would correlation may thus be attributable to after the job offer) are common with not address the negative externalities confounding factors. This comparison— respect to business sales. non-competes impose on workers, similar to comparisons of workers with rivals, and consumers. As described in and without non-competes—may be 2. Reporting Rule Part IV.B.3.a.ii, non-competes suppress polluted by differences between firms In the NPRM, the Commission sought wages for workers across the labor force, that opt to disclose non-competes and comment on a reporting rule as a including workers who are not subject those that do not, or differences between potential alternative to the proposed to non-competes. Ensuring that a worker workers who are the beneficiaries of rule.1013The Commission stated that it who enters into a non-compete is disclosure versus those who are not.1010 could require employers to report informed about the non-compete does For example, it is possible that firms certain information to the Commission not address the harm to these other that disclose non-competes are also relating to their use of non-competes; for workers. In addition, it does not address more responsible employers in general example, employers that use non- the ways in which non-competes harm that tend to pay their workers more, competes could be required to submit a consumers and the economy through train their workers more, and have more copy of the non-compete to the reduced new business formation and satisfied workers. The Commission Commission.1014As the Commission innovation, described in Part IV.B.3.b. therefore does not find that this explained, a reporting rule might enable In other words, non-competes have evidence represents a causal the Commission to monitor the use of negative spillover effects on workers, relationship between the disclosure of non-competes and could potentially consumers, businesses, and the non-competes and earnings and other discourage employers from using non- economy that disclosure cannot outcomes. Moreover, the weight of the competes that are not clearly justified remediate. evidence discussed in Parts IV.B and under existing law.1015 The Commission also finds that a IV.C finding increased earnings, new The Commission stated in the NPRM disclosure requirement would not be as business formation, and innovation that it did not believe a reporting rule effective as a categorical ban in from the final rule significantly surpass would achieve the objectives of the addressing the exploitation and the potential effects of disclosing non- proposed rule. The Commission stated coercion of workers through non- competes. that merely requiring employers to competes. As described in Part One commenter stated that the Starr, report their non-competes to the IV.B.2.b.i, there is a significant Prescott, and Bishara study suggests that Commission would not meaningfully imbalance in bargaining power between a disclosure rule would decrease the reduce the prevalence of non-competes employers and most workers, which is number of workers who assume a non- and would therefore fail to reduce the particularly acute in the context of compete with which they are presented negative effects non-competes have on negotiating employment terms such as is non-negotiable. The study suggests competitive conditions in labor markets non-competes. And, as many comments that the potential effects of a disclosure and product and service markets.1016At from workers and worker advocacy rule in this respect would be, at best, the same time, the Commission stated groups attest, non-competes are often limited.1011For the reasons described in that a reporting rule would impose included in standard-form contracts and this Part IX.B.1, the Commission is offered on a take-it-or-leave-it basis.1009 skeptical that a disclosure requirement 1012The Commission considered whether a disclosure rule would be appropriate for senior 1007Id. at 72. 1010Indeed, the authors of this study note that executives, but concludes that it is not because it 1008The Commission notes that the Franchise ‘‘unobservables may more plausibly account for would fail to address many of the ways in which Rule requires franchisors to disclose any non- these estimates.’’ See Starr, Prescott, & Bishara, non-competes are restrictive and exclusionary and compete that franchisees must impose on managers. supra note 68 at 77 n.35. tend to negatively affect competitive conditions. 16 CFR 436.5(o)(3). These non-competes are 1011Id. at 72. The study finds that 38% of workers 1013Id. at 3521. prohibited by the final rule. See Parts III.D and asked to sign a non-compete before accepting a job 1014Id. V.D.6. offer assumed they could not negotiate, versus 48% 1015Id. 1009See Part IV.B.2.b.i. of workers asked after accepting a job offer. 1016Id. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38461 significant and recurring compliance geographic scope or duration limitations to the non-compete that was standard or costs on employers.1017 on non-competes is unlikely to have a typical in their field. Even these Most commenters addressing this substantial impact, pointing to the commenters, however, explained how topic agreed with the Commission’s continued prevalence of overly broad they were exploited and coerced in preliminary view that a reporting rule non-competes despite State laws connection with non-competes because would not achieve the goals of the designed to set upper limits on the non-compete was unilaterally proposed rule. At least one business geographic scope and duration. imposed and because the non-compete opposed any reporting requirement due The Commission declines to adopt a trapped them in worse jobs or forced to the cost of compliance and to avoid standard providing that the geographic them to bear significant harms or costs. exposing any confidential information scope or duration of non-competes must For these reasons, the Commission contained in employment agreements. be ‘‘reasonable.’’ The Commission is declines to adopt bright-line limits on At the same time, some commenters concerned a reasonableness standard the scope and duration of non- stated that a reporting rule may assist would foster significant uncertainty competes. enforcement and provide quantitative among workers and businesses about
3. Limitations on Scope and Duration matching between workers and in Parts IV.B.3.b and IV.C.2.c.i that non- In addition to those alternatives listed employers, with spillover effects on new competes inhibit new business in the NPRM, a few commenters business formation and innovation formation and innovation, which affects suggested adopting an alternative rule through the mechanisms described in consumers. Therefore, even if a worker that allows non-competes but sets a Parts IV.B and IV.C. Furthermore, were fully compensated for a non- limitation on their geographic scope limitations on the scope and duration of compete, the fact of that compensation and/or duration. Some commenters non-competes would not address the would not redress these negative suggested a geographic limit of five, ten, spillover effects from non-competes on externalities. Second, this alternative or thirty miles and/or a temporal limit other workers and consumers. In short, would be ineffective or significantly less of six months or one, two, or three even if a non-compete applies only to a effective because of the in terrorem years, while others suggested a fact- relatively delimited location or time effect of non-competes, which the specific requirement that the geographic period, it still—by design—cuts off free Commission finds to be grounded in scope or duration of a non-compete be and fair competition in labor and empirical evidence and supported by ‘‘reasonable.’’ Many of these product and service markets. the comment record described in Part commenters cited State laws that take a In addition, most of the commenters IV.B.2.b. Third, such a rule would be similar approach. who stated that they were exploited and difficult to administer and potentially A few commenters opposed this coerced by non-competes did not do so easy to evade, as employers could alternative. One worker advocacy group on the basis that the non-compete was suppress other wages or job quality argued that any bright-line limit may overbroad in scope or duration. Instead, while labeling some compensation as end up serving as a default, encouraging most of the commenters who described attributable to the non-compete.
employers to impose non-competes of the terms of their non-competes the maximum allowable scope or described limits on scope and duration 5. Combination of Different Alternatives duration even if that limit is longer or that were within the bounds of what is Some commenters suggested the broader than they otherwise would have typically permissible under State possibility of combining two or more of imposed. At least one academic law.1018Some of these commenters even the alternatives discussed in this Part IX commenter argued that setting stated expressly that they were subject 1019Mass. Gen. Laws Ann. ch. 149, sec. 24L; Or.
ban. In particular, a combination such as to businesses operating in between rulemaking and approach would lack the clarity of a multiple jurisdictions. adjudication.1022Based on the empirical comprehensive ban and thus would not In addition, according to commenters, evidence, the comments, and the be as effective as a categorical ban in case-by-case adjudication under State Commission’s expertise, the addressing the exploitation and law cannot address the harms caused by Commission finds that rulemaking is the coercion of workers through non- non-competes through their use in the appropriate method of addressing non- competes. Moreover, as noted aggregate. Some commenters also competes. previously, the alternatives discussed asserted that the patchwork of State The prevalence of non-competes would do little to address the tendency laws is complicated by remote and across the economy, described in Part of non-competes to negatively affect hybrid workers. Others argued that State I.B.2, and the scale of the harms they competitive conditions and to cause laws are skewed in favor of employers cause, described in Parts IV.B and IV.C, spillover effects on other workers and or leave workers vulnerable to show that it is more efficient to address on consumers. Accordingly, a unreasonable agreements. Some argued the harms to competition from non- combination of these alternative that many workers, businesses, non- competes via rulemaking compared to regulations or limitations would fail to competes, and labor markets cross State case-by-case adjudication. As the D.C. remedy the aggregate and spillover lines, demonstrating the need for one Circuit stated in ruling that the effects of non-competes and thus would standard. Several State Attorneys Commission had the authority to not achieve the Commission’s stated General also said that numerous promulgate unfair methods of goals. complications arise when localities span competition rules, ‘‘the availability of more than one State and those States substantive rule-making gives any C. The No-Action Alternative: Reliance have different laws on non-competes; agency an invaluable resource-saving on Existing Legal Frameworks Instead of workers become confused and flexibility in carrying out its task of a Clear National Standard enforcement of non-competes can have regulating parties subject to its statutory The Commission sought comment on spillover effects in another State.1021 mandate.’’1023The Commission whether a Federal standard for non- In contrast, many commenters stated estimates that there are 2.92 million competes would promote certainty for that case-by-case adjudication is firms using non-competes in the employers and workers.1020The preferable to a Federal rule because it U.S.1024Adjudicating individual cases Commission finds that a clear national allows individual facts to be considered. against even just one-tenth of 1% of standard for non-competes will more In addition, many commenters argued these employers would be slow, effectively address non-competes’ that existing State legislative and inefficient, and costly for the tendency to negatively affect judicial decisions are sufficient to Commission, employers, and workers. competitive conditions than case-by- impose limitations on non-competes Rulemaking provides notice of the case adjudication or relying on existing while recognizing legitimate business application of section 5 to non-competes law alone. The Commission also finds interests. Commenters also argued that in a clearer and more accessible way that declining to adopt the final rule, States should be allowed to continue than piecemeal litigation and avoids and instead relying on case-by-case their natural experiments with non- compliance delays.1025The final rule adjudication or existing law alone, competes; that non-competes will provide all market participants would not address the exploitation and historically have been and should greater clarity about their obligations coercion of workers through non- remain an issue of State law; and that under section 5 of the FTC Act, competes. States are best suited to make policy facilitating compliance. Additionally, judgments for their citizens.
1. Comments Received Some commenters argued that 1022SEC v. Chenery Corp., 332 U.S. 194, 203 Many commenters expressed support unenforceable or overly broad non- (1947); NLRB v. Bell Aerospace Co. Div. of Textron, for the NPRM because they viewed competes are not a problem because Inc., 416 U.S. 267, 293 (1974); Wright & Miller, Federal Practice and Procedure sec. 8117 (2d ed.
current laws as insufficient to protect all courts can strike down or reform them. 2023).
workers, rivals, or consumers, regardless Some employers asserted that they 1023Nat’l Petroleum Refiners Ass’n v. FTC, 482 of where they are located, from the specifically, or employers more F.2d 672, 681–82 (D.C. Cir. 1973); see also id. at 690 negative effects of non-competes on generally, did not enter into (stating that ‘‘the historic case-by-case purely adjudicatory method of elaborating the Section 5 competitive conditions in labor markets unenforceable non-competes. Other standard and applying it to discrete business and markets for products and services. commenters argued that employers did practices has not only produced considerable Numerous workers, businesses, and not use choice of law clauses to evade uncertainty’’ but has also spawned lengthy other commenters said the patchwork of State laws, stating the clauses are the litigation). State laws and confusion about those products of arms-length bargaining and 1024See Part X.F.6 (estimating that 49.4% of the
laws, particularly reasonableness tests, provide certainty and predictability. 1025See Wright & Miller, Federal Practice and makes it difficult for workers and Procedure sec. 8117 (2d ed. 2023); Nat’l Petroleum
innovation (and what effects it does impose on other workers, other For every covenant that finds its way to have would be difficult to measure), but employers, consumers, and the court, there are thousands which exercise an the Commission finds based on economy from their use in the aggregate. in terrorem effect on employees who respect empirical evidence that the use of many Many commenters addressed the their contractual obligations and on non-competes across the labor market shortcomings of individual litigation as competitors who fear legal complications if does have these aggregate net negative a means for addressing the harms of they employ a covenantor, or who are effects.1027For this reason, rulemaking non-competes. Numerous commenters anxious to maintain gentlemanly relations is preferable to individual litigation for noted that litigation is costly and many with their competitors. Thus, the mobility of untold numbers of employees is restricted by addressing the negative effects of non- workers cannot afford to litigate their the intimidation of restrictions whose competes. Past Commission experience non-competes.1031Many commenters, severity no court would sanction. If has also illustrated that case-by-case including workers, entrepreneurs, and severance is generally applied, employers enforcement, education, and other employment attorneys, shared examples can fashion truly ominous covenants with enforcement mechanisms are not always of five-figure and six-figure litigation confidence that they will be pared down and sufficient to stop widespread harms.1028 costs related to non-compete lawsuits. enforced when the facts of a particular case Numerous commenters reported that the are not unreasonable.1034 A Federal rulemaking is the most fear of litigation costs induced them to efficient method to address the scale of If there is no penalty for drafting refrain from seeking or accepting other harm to competitive conditions in labor, overbroad non-competes (as is true in work or starting a business, even though product, and service markets caused by most States),1035employers have little they thought the non-compete was non-competes. incentive to draft non-competes likely unenforceable. Many other narrowly, particularly if a court is likely Finally, ‘‘utilizing rule-making commenters stated that they complied to revise it rather than strike it down, or procedures opens up the process of with a non-compete after they were if a worker is unlikely to be able to agency policy innovation to a broad threatened with enforcement, even litigate at all. An employment attorney range of criticism, advice and data that though they were unsure about the non- commented it is particularly difficult to is ordinarily less likely to be compete’s enforceability. One study advise workers about whether their forthcoming in adjudication.’’1029 finds that 53% of workers subject to specific non-compete is enforceable Rulemaking is particularly beneficial non-competes are hourly workers,1032 when it is possible a court may modify when, as here, ‘‘a vast amount of data who are particularly unlikely to be able the underlying non-compete.
had to be compiled and analyzed, and to afford a court challenge. Commenters also noted some non- Case-by-case litigation under other the Commission, armed with these data, competes include liquidated damages antitrust laws alone is also insufficient had to weigh the conflicting clauses or fee-shifting provisions to address the harms from non- policies.’’1030Rulemaking also allows requiring the worker to pay the competes. Non-competes restrain trade for more fulsome engagement from the employer’s attorney and other costs if and therefore are subject to the Sherman public by providing for public comment the employer wins, further increasing Act.1036While private litigants may on a complete regulatory scheme. The the costs (and risks) of challenging a bring private causes of action to enforce Commission greatly benefited from the non-compete. In addition, commenters the Sherman Act,1037the Commission submitted comments. stated that litigation is time-consuming views private litigation under the and could take as long or longer than Sherman Act as an ineffectual response 1026See Nat’l Petroleum Refiners, 482 F.2d at 690 the non-compete period. For example, in the context of non-competes based on (‘‘With the issues in Section 5 proceedings reduced one commenter shared a decision in the the history of cases by private litigants by the existence of a rule delineating what is a commenter’s own case where the arising under that Act, as explained in violation of the statute or what presumptions the Commission proposes to rely upon, proceedings appellate court found the non-compete the NPRM.1038For an individual will be speeded up.’’). violated public policy by leaving an area litigant, proving harm to competition in 1027See Part IV.B.3.a–b. with only one surgeon in a specialty— the relevant geographic and product 1028See, e.g., Combating Auto Retail Scams Trade but reached that decision only after the markets is a resource-intensive task that Regulation Rule, 89 FR 590, 600 (Jan. 4, 2024) two-year non-compete had already run (stating that rulemaking was necessary because certain unfair and deceptive acts and practices had its course.1033Commenters also said 1034Blake, supra note 22 at 682–83 (noting that persisted despite more than a decade of Federal and this may not be applicable if the worker has State enforcement, education, and other action in 1031See also Part IV.B.2.b.ii (describing bargaining power and it may be inefficient to tailor the motor vehicle dealer marketplace). exploitative and coercive effects of the risk and cost non-competes to each worker, and recommending 1029Nat’l Petroleum Refiners, 482 F.2d at 683 of being subject to a non-compete suit). that courts only sever when they determine the (citations omitted); see also Wright & Miller, 1032Lipsitz & Starr, supra note 72 at 144 employer acted fairly). Federal Practice and Procedure sec. 8117 (2d ed. (analyzing data from the Starr, Prescott, & Bishara 1035See NPRM at 3495. 2023). survey). 1036See Part I.B.1.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38464 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations typically requires expert testimony.1039 processing and reviewing merger filings; compete cases are not well-suited for This makes an already expensive and investigating and challenging a redressing these harms. For example, proposition even less palatable for most wide range of consumer protection while the precise reasonability test for workers and further tips the risk-versus- issues.1044 non-competes differs from State to State, reward calculus away from litigation. In Similarly, several State Attorneys the test typically considers the business addition, to succeed on a Sherman Act General commented that the multi- interest asserted by the employer; the claim, a plaintiff must show harm to factor common law approaches to non- harm to the worker; and the injury to competition as a whole, not just to compete law result in piecemeal the public from the loss of the worker’s themselves. It may be difficult or decisions that do not address the non- services.1048This test does not generally impossible for a worker to establish that compete problem in a uniform account for the harms experienced by their individual non-compete—or a manner.1045These State Attorneys other workers, other firms, consumers, single firm’s use of a non-compete— General also noted that some State and the economy resulting from the adversely affected competition in a enforcement agencies lack negative effects of non-competes on labor market or product/service market straightforward authority to enforce competition.
sufficiently to violate the Sherman existing common law protections Act.1040Section 5, on the other hand, is related to non-competes and argued that Furthermore, because the significant more inclusive than the Sherman the challenges associated with common harms of non-competes result from their Act.1041As outlined in Part II.F, section law enforcement underscore the need aggregate use, they are unlikely to be 5 requires a showing of indicia of for a Federal rule.1046And the resource captured by an assessment of an unfairness and a tendency to negatively limitations to pursue non-competes individual worker’s non-compete or an affect competitive conditions. It does comprehensively through enforcement individual firm’s use of non-competes. not require a separate showing of market limit States equally—if not more. This is true regardless of whether those power or market definition—nor does it The Commission estimates that there non-competes are challenged under require proof of harm to competition by are approximately 30 million individual State non-compete laws or under other each non-compete.1042 non-competes in the U.S.1047In contrast antitrust laws. It is likewise true Case-by-case litigation by public to the large volume of non-competes, regardless of whether non-competes are enforcers, such as the Commission or the resources of public enforcement challenged by private litigants or public State attorneys general, is a potential agencies are limited. Public enforcers enforcers. Accordingly, the Commission alternative or supplement to private must balance competing demands for litigation under other antitrust laws. But resources and priorities when they bring finds that case-by-case litigation alone is the ability of public enforcers to engage public enforcement actions. Public insufficient to address the negative in effective case-by-case litigation enforcers cannot conceivably investigate externalities of non-competes. related to non-competes, absent a rule, the specific details of every non- The Commission, by contrast, is well- is limited. compete or initiate litigation concerning positioned to evaluate non-competes As cited in Parts I.B. and II.C.2, the more than a small fraction of unlawful holistically. The Commission is an FTC has previously secured consent non-competes. A Federal rule provides expert agency and has used its expertise orders premised on the use of non- clarity to market participants, engages to assess the weight of the empirical competes being an unfair method of all stakeholders in the development of evidence and comment record to competition under section 5, and the the rule, and more effectively ceases an evaluate the aggregate effects of non- Commission has the authority to unfair method of competition. competes. The Commission here determine that non-competes are unfair The significant limitations on the implements a clear national standard methods of competition through ability of private and public litigants to through notice-and-comment adjudication. However, FTC resource challenge unlawful non-competes have constraints limit the potential rulemaking to protect competition, practical implications. Courts cannot effectiveness of enforcement of section 5 based on the evidence that the use of strike down an unenforceable non- on a purely case-by-case basis. The non-competes in the aggregate compete that they never had the Commission is an independent agency negatively affects competition and opportunity to review. Moreover, as that works to promote fair and open harms workers and consumers. detailed in Part IV.B.2.b, non-compete markets and protect the entire American restrictions may still have significant in For all these reasons, the Commission public from unfair and deceptive terrorem effects when workers are finds that case-by-case litigation is not business practices. The Commission has uncertain about the enforceability of a viable alternative to the final rule.1049 fewer than 1,500 employees for its their non-competes or lack the ability to entire body of work related to this challenge their use. 1048See NPRM at 3494–95.
mission,1043which includes Furthermore, case-by-case litigation is 1049A few commenters suggested that the investigating, challenging, and litigating insufficient to address negative Commission could create guidelines instead of a anticompetitive mergers and conduct; externalities from non-competes (i.e., rule to explain what factors the agency would look at in an enforcement action. By definition, however, harms non-competes cause to persons a guidance document would ‘‘not have the force 1039See, e.g., U.S. Healthcare, Inc. v. other than the parties to the non- and effect of law.’’ Perez v. Mortg. Bankers Ass’n, Healthsource, Inc., 986 F.2d 589, 599 (1st Cir. 1993)
c. State Law Alone Cannot Address the from State to State. For example, States (and, in turn, the enforceability of the Negative Effects of Non-Competes on vary in how narrowly or broadly they non-compete) will be resolved.1061 Competition define legitimate business interests and Several commenters agreed that a the extent to which courts are permitted Federal rule would alleviate these The Commission appreciates that States have enacted legislation in recent to modify an unenforceable non- problems. years to ban or restrict non-competes compete. States also differ with respect Choice of law provisions may also and ameliorate their negative effects.1050 to statutory restrictions on non- mean that workers lose their own State’s The Commission has long recognized competes.1054As a result, among the 46 protections. For example, workers from the value of concurrent enforcement of States where non-competes may be States where non-competes are banned Federal and State law and believes enforced, variation exists with respect to commented that they faced enforcement States have an important role to play in the enforceability of non-competes.1055 of non-competes that selected the law of restricting the use of non-competes. State law also differs with respect to another State. This raises the concern Indeed, in this final rule, the the steps courts take when they that choice of law clauses can be used Commission has revised §910.4 to conclude that a non-compete is to evade State bans or restrictions by ensure that States may continue to unenforceable as drafted. As noted in forum shopping.1062As two scholars enforce laws that restrict non-competes the NPRM, the majority of States have note, when ‘‘the parties or issues and do not conflict with the final rule. adopted the ‘‘reformation’’ or ‘‘equitable involved have connections to multiple However, the Commission believes that reform’’ doctrines, which allow courts jurisdictions,’’ the law ‘‘confounds reliance on State law alone is to revise the text of an unenforceable lawyers and commentators because of insufficient to address the negative non-compete to make it enforceable.1056 its complexity and effects of non-competes on competition. Because the enforceability of non- unpredictability.’’1063 The practical ability of States to address competes and courts’ positions with Employers may also impose the harms to their residents from non- respect to unenforceable non-competes arbitration clauses, which require that competes is limited by various factors, vary from State to State, the question of legal disputes with the employer— including employers’ use of choice-of- which State’s law applies in a legal including disputes related to non- law, forum-selection, and arbitration dispute can determine the outcome of a competes—be resolved through binding clauses; significant confusion among non-compete case. Non-competes often arbitration rather than in court.1064 both employers and workers resulting contain choice-of-law provisions Where such clauses are valid, the from the patchwork of State law, which designating a particular State’s law for Federal Arbitration Act requires that chills workers from engaging in resolution of any future dispute.1057 courts enforce them.1065Choice of law, competitive activity even where non- Furthermore, some non-competes forum selection, and arbitration clauses competes are likely unenforceable under include forum-selection provisions create opportunities for employers to State law and also increases employers’ specifying the court and location where forum-shop in ways that undermine any compliance costs, particularly given the a dispute may be heard.1058The default given State’s ability to effectively increase in interstate remote work; rule under conflict-of-laws principles is regulate non-competes. spillover effects from other States’ laws; that the court honors the parties’ choice Numerous workers, businesses, and and incentives for States to adopt of law, meaning that the burden is other commenters said the patchwork of permissive non-compete policies. typically on the worker—the vast State laws and confusion about those Many States have adopted statutory majority of whom the Commission finds laws makes it difficult for workers and restrictions or compete bans on non- are exploited and coerced when businesses to understand whether a competes. Four States—California, entering into a non-compete—to particular non-compete would be Minnesota, North Dakota, and negotiate for the law of a different forum enforceable. The lack of a clear national Oklahoma—have adopted statutes to apply.1059 standard, and resulting confusion, rendering non-competes void for nearly There is significant variation, all workers.1051The majority of the however, in how courts apply choice of 1061Id. at 395 (‘‘The state of the law is perhaps characterized more by inconsistency than anything remaining 46 States have statutory law rules in disputes over non- else, so much so that commentators lament the provisions or case law that ban or limit competes.1060As a result, it can be ‘disarray’ and ‘mish-mash’ of the law, and criticize the enforceability of non-competes for difficult for employers and workers to courts for their ‘post-hoc rationalizing of intuitions’ workers in certain specified predict how disputes over choice of law or their use of a ‘hodgepodge of factors, often with insignificant explanation of how they decide what occupations.1052The general language weight to give each.’’’) (internal citations omitted).
of the test for whether a non-compete is 1054See, e.g., Beck Reed Riden Chart, supra note 1062See generally Timothy P. Glynn, reasonable is fairly consistent from State 1052. Interjurisdictional Competition in Enforcing Non- to State.1053However, the specifics of 1055NPRM at 3495. Compete Agreements: Regulatory Risk Management 1056Id. and the Race to the Bottom, 65 Wash. & Lee L. Rev. the application of the standard differ 1057Gillian Lester & Elizabeth Ryan, Choice of 1381, 1386 (2008) (noting ‘‘judicial attempts to Law and Employee Restrictive Covenants: An preempt other courts from disregarding the parties’ 1050See NPRM at 3494 (summarizing recent State American Perspective, 31 Comp. Lab. & Pol’y J. 389, choice of law’’). Some States have attempted to non-compete legislation). 396–402 (2010). defend against this by enacting statutes banning 1051See Cal. Bus. & Prof. Code sec. 16600; N.D. 1058Id. at 402–04. selection of a different State’s law for a non- Cent. Code sec. 9–08–06; Okla. Stat. Ann. tit. 15, 1059Id. at 397 (‘‘In general, courts defer to choice compete. See Minn. Stat. Ann. sec. 181.988(3)(a) sec. 219A. Minnesota banned non-competes signed of law clauses because they are presumed to (Minnesota); Cal. Lab. Code sec. 925 (California); on or after July 1, 2023, after the comment period represent the express intention of the parties.’’). Cf. Colo. Rev. Stat. sec. 8–2–113(6) (Colorado); Mass. closed. Minn. Stat. Ann. sec. 181.988. Cal. Lab. Code sec. 925(a) (stating that employers Gen. Laws ch. 149, sec. 24L(e) (Massachusetts); La. 1052In most States, those limits apply to just one shall not require an employee who primarily Rev. Stats. 23:921(2) (Louisiana). Many of these or two occupations (most commonly, physicians). resides and works in California, as a condition of statutes are relatively recent, however, and it See Beck Reed Riden LLP, Employee Noncompetes: employment, to agree to a provision that would remains to be seen how effective they will be. A State-by-State Survey (Feb. 19, 2024), https:// either (1) require the employee to adjudicate 1063Lester & Ryan, supra note 1057 at 389. beckreedriden.com/wp-content/uploads/2024/02/ outside of California a claim arising in California or 1064See, e.g., Alexander J.S. Colvin, Econ. Pol’y BRR-Noncompetes-20240219-50-State-Noncompete- (2) deprive the employee of the substantive Inst., Report, The Growing Use of Mandatory Survey-Chart.pdf (hereinafter ‘‘Beck Reed Riden protection of California law with respect to a Arbitration (Apr. 6, 2018). Chart’’). controversy arising in California). 1065See, e.g., Nitro-Lift Techs. v. Howard, 568 1053See NPRM at 3494–95. 1060Lester & Ryan, supra note 1057 at 394–95. U.S. 17, 20–22 (2012). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38466 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations contributes to non-competes being used Finally, several comments argued that Commission’s rulemaking is it resolves in jurisdictions where they are State regulation of non-competes should this problem. The rulemaking record unenforceable. Starr, Prescott, and continue by quoting Justice Brandeis’s shows banning non-competes will Bishara find that employers frequently dissent in New State Ice Co. v. improve competitive conditions in all use non-competes even when they are Leibmann: ‘‘[i]t is one of the happy States and will benefit workers in all unenforceable under State law.1066 incidents of the [F]ederal system that a States. Similarly, Colvin and Shierholz find single courageous State may, if its
81. in which enforceability changed, but taper off as the economic actors possible. Several of the 1067Colvin & Shierholz, supra note 65 at 5–6. distance to the bordering State increases). benefits and costs were quantifiable, but 1068See FTC, Analysis of Agreement Containing 1073New State Ice Co. v. Leibmann, 285 U.S. 262, not monetizable—especially with Consent Order to Aid Public Comment, In re 311 (1932) (Brandeis, dissenting). Prudential Sec., Inc. et al., Matter No. 211 0026 at 1074See Beck Reed Riden Chart, supra note 1052. respect to differentiating between 1, 5–7 (Dec. 28, 2022). transfers, benefits, and costs. The 1075See, e.g., Glynn, supra note 1062 at 1385–86 1069Starr, Prescott, & Bishara, supra note 68 at (stating that ‘‘because employers typically are the Commission preliminarily found that 633, 663. first movers in [non-compete] litigation, they often others were not quantifiable. The 1070Id. at 633, 652, 664. can litigate in a hospitable judicial forum,’’ and 1071Id. noting a rise in interjurisdictional disputes related 1072See, e.g., Johnson, Lavetti, & Lipsitz, supra to non-compete enforcement and ‘‘judicial attempts 107615 U.S.C. 57b–3(b)(2)(C), (E). note 388 (finding that increases in non-compete to preempt other courts from disregarding the 1077NPRM at 3521–31. enforceability in one State have negative impacts on parties’ choice of law’’). 1078See 15 U.S.C. 57b–3(b)(1)(A) through (C). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38467 preliminary analysis discussed any especially in the absence of data enforceability.1081Similarly, while the bases for uncertainty in the estimates. supporting such an approach, the effect of the final rule on corporate The Commission preliminarily found Commission notes the linear effect of profits is unclear,1082the Commission’s substantial positive effects of the non-compete enforceability on earnings analysis is focused on overall gains or proposed rule: an increase in workers’ was statistically tested in the economic losses in economic surplus—i.e., the net earnings by $250–$296 billion annually literature.1079 benefits to society, not to individual (with some portion representing an corporations.
(e.g., increases in competition may fully linking non-competes to worker Specifically, the Commission assumes or in part drive decreases in prices and misconduct and therefore does not that the historical average change1080in increases in innovation). The consider such costs.1083Costs related to non-compete enforceability observed at Commission also preliminarily found litigation over the validity of the rule are the State level represents the total some costs of the proposed rule. Direct outside the scope of the regulatory change in enforceability that results compliance and contract updating analysis under section 22, which is from the rule. This approach is hereafter would result in $1.02 to $1.77 billion in concerned with costs and benefits referred to as the ‘‘average enforceability one-time costs, and firm investment in should the final rule be implemented. change approach.’’ It likely human capital and capital assets would Some commenters stated the rule may underestimates the effects of the rule fall. have beneficial tax ramifications for because the State-level changes that The Commission preliminarily businesses and workers with non- would occur under the rule (which concluded that the substantial labor competes that are no longer enforceable, adopts a near comprehensive ban)
market and product and service market including based on changes in benefits of the proposed rule would would be substantially larger than the amortization schedules. In response, the exceed the costs. Furthermore, the changes observed historically. The Commission notes that any tax savings Commission preliminarily found the Commission also conducted sensitivity under the final rule represent transfers benefits would persist over a analyses with two other approaches— from the government to firms that substantially longer time horizon than described further in Parts X.C and previously used non-competes. most costs of compliance and contract X.F.6.a—that use linear extrapolation to Significantly, the Commission is updating. scale up the effects estimated in the allowing existing non-competes with literature to estimate the effects of the senior executives, who may be most C. Public Comments on the Preliminary final rule (i.e., a near comprehensive likely to have non-competes with tax Regulatory Impact Analysis ban).
commenter stated there can be difficulty of the final rule. The Commission The estimate is therefore adjusted to reflect a ascertaining the value of patenting. The further discusses investment in human national rate by multiplying by the ratio of the Commission finds that there are several capital in Part X.F.7.a. hourly wage of attorneys nationwide to the hourly wage of attorneys in the Washington, DC metro estimates of the private value of a patent Some commenters stated that costs area, based on BLS Occupational Employment and (e.g., the value to the patenting firm) in associated with rescinding existing non- Wage Statistics data. The Commission the literature, but no estimates of the competes and updating contractual conservatively uses the rates of a tenth-year social value of a patent, as further practices may be greater than estimated attorney—a much more experienced attorney than is likely to be needed (and indeed no attorney at all may be needed). See Fitzpatrick Matrix, https:// 1084Starr, supra note 445. 1086Commenters used the words ‘‘requisite’’ and www.justice.gov/usao-dc/page/file/1504361/ 1085See Part IV.B.3.b.ii, discussing Johnson, ‘‘discretionary’’ in lieu of ‘‘core’’ and ‘‘advanced,’’ dl?inline. See BLS Occupational Employment and Lipsitz, & Pei, supra note 526. respectively. Wage Statistics, https://www.bls.gov/oes/data.htm. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38469 be $100,000 to $200,000 per firm but secrets under the final rule, much less D. Summary of Changes to the did not support this assertion with any that any change would be material. As Regulatory Analysis evidence. The Commission disagrees detailed in Part IV.D, employers have In the final regulatory analysis with this assertion, which does not align less restrictive alternatives to non- presented in Part X.F, the Commission with its careful estimates based on competes that mitigate these concerns. updates its analyses based on the empirical evidence and significant Some commenters reference the Starr, parameters of the final rule, comments expertise presented in Part X.F.7.b.ii. Balasubramanian, and Sakakibara received, supporting empirical evidence The Commission’s estimates also study1089and the Commission’s raised by commenters, changes in the acknowledge and account for interpretation of it in the NPRM to status quo regarding regulation of non- potentially heterogeneous costs across assert that firms founded because of the competes, and reanalysis of evidence firms. rule may be of lower quality than presented in the NPRM.1091This Some commenters stated that existing firms in terms of average includes the Commission’s attempt to employers would need to spend quantify and monetize, to the extent employment and survival rates, and substantial resources to litigate trade feasible, all costs and benefits of the adjustments should be made to the secret disputes and violations of post- final rule, as well as transfers and Commission’s analysis to account for employment restrictions other than non- distributional effects. The Commission these differences. Upon further review, competes. One commenter stated that additionally analyzes hypothetical the Commission interprets the authors’ the cost of a trade secret case may range scenarios to assess what otherwise from $550,000 to $7.4 million, findings to show that within-industry unmonetized benefits and costs would depending on the monetary value of the spinouts resulting from lessened non- lead to a final rule that is net beneficial. trade secret claim. The Commission compete enforceability tend to be lower Finally, the Commission elects to analyzes costs of litigation in Part quality than non-within industry include an analysis of an alternative the X.F.7.c. The Commission agrees with spinouts resulting from lessened non- Commission considered, namely an commenters that trade secret litigation, compete enforceability. However, both analysis of fully excluding senior and litigation over post-employment types of spinouts are better, on average, executives.1092 restrictions other than non-competes, than spinouts that form under stricter Under the final rule, existing non- may be costly. However, the non-compete enforceability. The study’s competes with senior executives may Commission notes that no evidence results therefore suggest that, if remain in effect. While this change exists to support the hypothesis that anything, the Commission likely affects some costs and benefits litigation on these fronts will increase underestimates the final rule’s benefits associated with the final rule because of the final rule. Indeed, recent from new business formation, because temporarily, the Commission does not evidence suggests that trade secret the estimates do not adjust for quality. specifically quantify or monetize those litigation does not increase following Some commenters asserted that, effects. The effect on persistent costs bans on non-competes.1088Moreover, and benefits would be temporary, as because of the positive effects of the the final rule, with its clear and bright- senior executives will eventually move proposed rule on labor mobility, firms line standard (as compared to the out of their jobs and retire or move into may face greater costs associated with current patchwork of State laws), would new jobs, to which the final rule will turnover (especially firms that currently likely decrease litigation attempting to apply. The Commission notes use non-competes) due to the cost of enforce non-competes, including throughout its analysis, however, how finding a replacement, the cost of litigation initiated by former employers different estimates may be affected by training a replacement, and the cost of against workers who start their own this differential treatment of senior lost productivity. Based on Pivateau business or who find a new employer. executives even if it cannot quantify the (2011),1090one commenter estimated While the Commission does not have precise effect.
757. The Commission notes that this study 1091As described in detail in this Part X, the supplements—but is not necessary to support—its Commission’s final analysis, including its finding that no evidence supports the conclusion 1089Starr, Balasubramanian, & Sakakibara, supra quantification and monetization of effects, therefore that litigation costs will increase under the final note 518. is not precisely the same as its preliminary analysis. rule. That finding is based on the Commission’s 1090Griffin Toronjo Pivateau, Preserving Human 1092The Commission is not required to analyze expertise and the rulemaking record, including Capital: Using the Noncompete Agreement to costs and benefits of regulatory alternatives in its relevant comments. This study was published after Achieve Competitive Advantage, 4 J. Bus. final regulatory analysis. See 15 U.S.C. 57b– the close of the comment period. Entrepreneurship & L. 319 (2010). 3(b)(2)(B). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38470 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations discusses important nuance or uncertainty.
Innovation ...................................... Quantified ..................................... Annual count of new patents esti- Estimates of the societal value of mated to rise by 3,111–5,337 in innovation are not available. the first year, rising to 31,110– The two effects on innovation 53,372 in the tenth year. An- together represent a benefit be- nual spending on R&D esti- cause more output (amount of mated to fall by $0-$47 billion. innovation) is produced with Effect on innovation represents less input (R&D spending). a benefit of the final rule.
Prices ............................................. Partially Quantified ....................... The estimated ten-year present Price changes encompass trans- discounted value of decreases fers (from firms to consumers) in spending on physician and and benefits (since price clinical services is $74-$194 bil- changes are likely due to in- lion. Prices in other sectors may creased competition); however, decrease as well but are not the exact split is not clear. In- quantified. The effect on prices creased competition may also partially represents a transfer increase consumer quantity, and partially represents a ben- choice, and quality. Prices out- efit of the final rule. side of physician and clinical services may fall due to changes in competition be- cause of new entrants; how- ever, the literature has not quantified this effect.
Investment in Human Capital ........ Monetized ..................................... The estimated ten-year present The range in estimates reflects discounted value of the net ef- uncertainty over whether de- fect of the final rule on invest- creased investment in human ment in human capital ranges capital under the final rule re- from a benefit of $32 billion to a flects reductions in advanced cost of $41 billion. The effect on investment (which the firms opt investment in human capital into to increase productivity) or may represent a cost or benefit core investment (which is no of the final rule. longer necessary if more expe- rienced workers are hired) and uncertainty over the workers for whom investment in human capital (all workers or workers in occupations which use non- competes at a high rate) is af- fected.
Legal and Administrative Costs ..... Monetized ..................................... One-time legal and administrative costs are estimated to total $2.1–$3.7 billion. Legal and ad- ministrative costs represent a cost of the final rule.
Litigation Effects ............................ Not quantified or monetized ......... The final rule may increase or de- Estimates of the effect of the final crease litigation costs. Effects rule on total litigation costs are on litigation costs may rep- not quantifiable. Litigation costs resent a cost or benefit of the may rise or fall depending on final rule. firms’ subsequent use of other contractual provisions and trade secret law and how the costs of such litigation compare to the cost of non-compete litigation, as well as the decreased uncer- tainty associated with a bright- line rule on non-competes.
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38471 TABLE 1—Continued Category Extent of characterization Description of estimate Discussion Firm Expansion and Formation ..... Quantified ..................................... The final rule is estimated to in- New firm formation is generally a crease new firm formation by benefit, but may also crowd out 2.7–3.2% and decrease capital incumbent firms and is there- investment at incumbent firms fore not a pure benefit. De- by 0–7.9%. These effects rep- creased capital investment at resent a shift in productive ca- incumbent firms may be pacity from incumbent firms to counterbalanced by increased new firms. The overall effect on capital investment at new firms firm expansion and formation or rebalancing across indus- represents a distributional effect tries, and therefore may or may of the final rule. not be a cost in net.
Distributional Effects on Workers .. Not quantified or monetized ......... The rule may reduce the gender and racial earnings gap, may disproportionately encourage entrepreneurship among women, and may mitigate legal uncertainty for workers, espe- cially relatively low-paid work-
Labor Mobility ................................ Partially Monetized ....................... Some firms may save on turnover The estimate of the increase in costs (due to easier hiring as turnover costs for firms using more potential workers are non-competes is an upper available), while some firms bound, since it encompasses may have greater turnover effects on investment in work- costs (due to lost workers newly ers’ human capital, hiring work- free from non-competes). The ers, and lost productivity of latter is estimated to be no workers, all of which are ex- more than $131 per worker with pected to diminish under the a non-compete, while estimates final rule.
Note: Present values are calculated using than it believes is likely the case. With earnings represents increased discount rates of 2%, 3%, and 7%. respect to costs, the Commission productivity resulting from improved, The Commission finds that, even in assumes costs are on the higher end of more productive matches between the absence of a full monetization of all the estimated range, which is higher workers and employers, the benefits costs and benefits of the final rule, the than the Commission believes is likely will outweigh the costs. In Part X.F.6.a, final rule has substantial benefits that to be the case. Through this analysis, the Commission explains that the clearly justify the costs. While data provided in detail in Part X.F.10, the economic literature does not provide a limitations make it challenging to Commission further bolsters its finding way to separate increased productivity monetize all the expected effects of the that the benefits of the final rule justify from the total effect on earnings (i.e., final rule, the Commission believes it the costs.1093 transfers versus benefits in the has quantified the effects of the final Specifically, the Commission finds regulatory impact analysis sense). rule likely to be the most significant in that even if only 5.5% of the estimated However, the Commission finds that magnitude, and thus, potentially drive $400–$488 billion increase in worker based on the literature, some part of the whether and the extent to which the increase in worker earnings represents final rule is net beneficial. This includes 1093The Commission notes that it does not increased productivity and believes that believe there is a likely scenario in which firm exit both benefits and costs. Based on those 5.5%, and likely more, represents and lost capital investment, especially when quantifications, the Commission is able balanced against firm entry and gained capital increased productivity. Similarly, even to make conservative assumptions, investment at new firms, would change this presuming that no part of the effect on based on its expertise, under which the outcome. Firm exit and lost capital investment, earnings is a benefit (as opposed to a which are not quantified and are discussed as final rule would be net beneficial. In transfer), the Commission finds that if distributional effects in Part X.F.9, would not, for this context, by conservative example, result in costs large enough to overcome the social value of a patent were at least assumption, the Commission means that the break-even analyses (even if, for example, the $297,144, then the monetizable benefits it is presuming the benefits it quantifies value of earnings representing productivity will exceed monetized costs. Notably, increases or the social value of patents had to be to be relatively low in value for the literature finds that the average marginally higher) or the finding that the benefits purposes of this analysis, i.e., lower justify the costs. private value of a patent may be as high VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38472 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations as $32,459,680, again making this The second economic problem is that sample used for the computation, since assumption regarding the social value of non-competes tend to harm competitive these States already generally do not a patent quite conservative. Finally, conditions in product and service enforce non-compete agreements. even presuming none of the earnings are markets. Non-competes create a barrier To estimate the coverage rate, workers benefits (rather than transfers) and that to new business formation and are classified according to three criteria: the social value of a patent is zero (an entrepreneurial growth, which (1) whether the individual is identified implausibly low estimate), if all the lost negatively affects consumers by as working for the government; (2) investment in human capital is core, the lessening competition in product and whether the individual is identified as monetized benefits would also exceed service markets. Non-competes also working for a non-profit organization; monetized costs. Notably, in conducting make it difficult for competitors to hire and (3) whether the individual works in these analyses, in each instance, the talented workers, which reduces these an industry or in a capacity that is likely Commission further makes the very competitors’ ability to effectively to be outside the jurisdiction of the FTC conservative assumption that compete in the marketplace. Act. Government employment consists monetizable benefits other than the Additionally, non-competes impede of employment with local, State, and benefit being analyzed are zero. That is, innovation by preventing the churn1094 Federal governments, in addition to the Commission assumes that patents of innovative workers between firms, individuals on active duty in the U.S. have no social value and that no limiting the spread and recombination Armed Forces or Commissioned Corps. reduced investment in human capital is of novel ideas, which may negatively Nonprofit status is self-reported by core when considering how much of affect technological growth rates. survey respondents. Industries are earnings must represent increased defined based on the North American
F. Final Regulatory Analysis compete.1095The final rule also exempt some firms that are classified as provides that, with respect to senior non-profits but not others, as described 1. Background executives, it is an unfair method of in Part II.E. Also, in some instances, As discussed in Part IV.B.3.a, non- competition—and thus a violation of only a subset of a given NAICS category competes inhibit worker mobility, section 5 of the FTC Act—for a person (and not the entire category) appeared creating worse matches between to enter into or attempt to enter into a likely to fall outside the jurisdiction of workers and firms and decreasing non-compete; enforce or attempt to the FTC Act. When ambiguity arose, the workers’ productivity and therefore enforce a non-compete entered into after Commission was overinclusive in their earnings. Non-competes also the effective date; or represent that the excluding workers. For example, the prevent firms from hiring talented and worker is subject to a non-compete, Commission classified all nonprofits as experienced workers; inhibit new where the non-compete was entered outside the coverage of the final rule for business formation; and reduce the flow into after the effective date.1096 the purposes of estimating the coverage of innovative workers between firms, rate. Moreover, in estimating the
2. Economic Rationale for the Final Rule level data on the characteristics of the is likely to cover 80% of the private U.S. The final rule addresses two primary workforce from the American workforce. economic problems. First, non-competes Community Survey (ACS) for 2017 to
matches in the labor market, resulting in competes relative to what it would be in 1097The preliminary analysis in the NPRM did diminished worker and firm the baseline. Currently, non-competes not estimate or apply a coverage rate based on productivity and in lower wages. jurisdiction. are broadly prohibited in four States: VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38473 California, North Dakota, Oklahoma, the Commission to consider the effect of unreliable estimates absent evidence and Minnesota. In some other States, non-compete enforceability on several that the economic effects the non-competes are prohibited for some, economic outcomes. The studies that Commission is attempting to measure but not all, workers. For non-competes use this score form much of the basis for would scale up linearly. that are not prohibited expressly by the final regulatory analysis. The Commission notes in X.C that statute, some version of a empirical studies show a linear
Ann. sec. 181.988. selection. Moreover, the Commission reports the 1099Bishara, supra note 501 at 751. estimates resulting from a full extrapolation in this 1100Different researchers have rescaled this score final analysis, which does not use this average score 1103Johnson, Lavetti, & Lipsitz, supra note 388 at in different ways (e.g., from zero to 470, or scaled change in its sensitivity analysis, and is the method 17. such that the mean score is zero and the standard used in the NPRM. As noted, the Commission 1104When considering studies which do not deviation of the score is one). The Commission uses believes that the full extrapolation method is a report the relationship between non-compete the scaling from zero to one because that is the way valid, but potentially less precise method. enforceability and economic outcomes based on a it is used in the majority of the studies which are Accordingly, the use of this score supplements—but numeric score, the Commission is unable to scale relied on in the final analysis, as well as for easy is not necessary to support—the Commission’s the effect to reflect the average magnitude change interpretability and consistency across the final ultimate finding that the benefits to the final rule of 0.081. analysis. justify the costs. 1105See, e.g., Jeffers, supra note 450. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38474 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations analyses, the estimated effects from the Increase in worker earnings = (% literature). However, it may understate empirical literature are scaled up on a Increase in Earnings caused by the the increase in workers’ earnings State-by-State basis (rather than taking change in enforceability of non- resulting from the final rule. Thus, the the average) to account for the estimated competes) * (Total Affected Commission conducts two sensitivity size of the decrease in each State’s Earnings) analyses to assess how the estimated score. The Commission notes that linear The primary approach in this analysis effect of the rule would change if effects extrapolation provides a robust estimate is to estimate the percentage increase in are extrapolated to represent changes in of earnings changes based on the earnings assuming that the effect of the enforceability scores greater than those empirical literature, but for consistency, final rule will be the same as the effect examined in the literature. the Commission reports effects based on of an average magnitude change in non- The first sensitivity analysis, hereafter the average magnitude change as its compete enforceability, as discussed in referred to as the ‘‘full extrapolation’’ primary analysis. Part X.F.5. The Commission estimates approach, calculates the effect on worker earnings in an identical fashion 6. Benefits of the Rule the percentage increase in workers’ to the primary analysis but relies on an earnings to be 0.86%.1107The The Commission finds several Commission estimates total affected estimate of the percentage increase in benefits attributable to the final rule, as annual earnings to be $6.2 trillion (in worker earnings which extrapolates to reflected in part by the effects of the rule 2023 dollars).1108 the effect of a complete prohibition on on earnings and prices, and all the Multiplying the percentage effect the use of non-competes. This results in effects on output and innovation, as (0.86%) by overall affected annual an effect on worker earnings equal to summarized in Table 1 in Part X.E. earnings ($6.2 trillion) results in an 3.2% (instead of 0.86% in the primary analysis).1110For this estimate, total annual earnings effect of $53 billion.
a. Earnings affected earnings are equal to $7.3 The ten-year effect on earnings, The Commission finds labor markets discounted separately by 2%, 3%, and trillion in 2023 dollars.1111The will function more efficiently under the 7%, is reported in the first row of Table estimated effect on earnings across the workforce for this first sensitivity final rule, which will lead to an increase 2.1109 in earnings or earnings growth. This primary approach requires no analysis is therefore given by the Specifically, in this regulatory analysis, extrapolation (i.e., it does not scale the percentage effect on earnings (3.2%) the Commission finds that the estimated effect on economic outcomes to account multiplied by the total annual wages in ten-year present discounted value of for the fact that the effect of the rule on the U.S. for the affected population increased worker earnings is $400–$488 enforceability scores will be greater than ($7.3 trillion). This results in an annual billion. The final rule will result in the changes studied in the economic additional earnings stemming from 1110The percentage effect, 3.2%, is reported by improvements in allocative efficiency 1107Calculated as ¥(e¥0.107*0.081¥1), where Johnson, Lavetti, & Lipsitz (supra note 388) as the due to more productive matching ¥0.107 is the estimated coefficient of earnings on l n o o w n e -c r o e m nd p e o t f e s a , r r a e n la g t e i v o e f t p o o n ss o i n b - l c e o e m ff p ec e t t s e of a ban on non-compete enforceability score in Johnson, between businesses, which are enforceability in 2014. The estimate is constructed Lavetti, & Lipsitz (supra note 388), and 0.081 by calculating the change in the enforceability score economic benefits. In other words, the represents the size of an average magnitude change in each State which would bring that State’s score increase in worker mobility will allow calculated in Johnson, Lipsitz, & Pei (supra note to zero (representing no enforceability of non- employers to hire workers who are a 526) which scales the effect to represent the effect competes) and scaling the estimated effect on of an average sized change in the non-compete better, more productive fit with the worker earnings by that amount. The Commission enforceability score. uses the low end of the reported range in order to positions they are seeking to fill, which 1108This figure represents total annual earnings exercise caution against extrapolation, since the in turn will increase productivity in the U.S. in the most recent year with data estimate uses an out-of-sample approximation: the overall. A portion of the additional available (2022), adjusted to 2023 dollars: see changes in most States necessary to arrive at a score earnings are transfers from firms to h ta t b tp le s _ :/ m /d a a k t e a r . . b h l t s m .g # o t v y / p ce e w =0 /a & p y p ea s/ r t = a 2 b 0 le 2 _ 2 m &q a t k r e = r A /v & 4/ o st f u z d e y ro ( t a h r o e u g g r h e a t t h e i r s t a h p a p n r t o h x e i m ch a a ti n o g n e s is e c x o a n m s i i n st e e d n t i n w t i h th e workers resulting from more plentiful own=5&ind=10&supp=0. Earnings from California, the results of a test in Johnson, Lavetti, and Lipsitz employment options outside the North Dakota, Oklahoma, and Minnesota (States which shows that the effect of enforceability on firm,1106as workers who are not bound which broadly do not enforce non-competes) are earnings is roughly linear: namely, a change in by non-competes will be in a different subtracted out, since enforceability in those States enforceability that is twice as large results in a will be broadly unaffected by the rule. The estimate change in earnings that is twice as large). The bargaining position with their employer. is additionally adjusted to account for the Commission also notes that the estimated range is To the extent other better opportunities proportion of the workforce the Commission based on enforceability in 2014. Since then, some with different employers exist for a estimates are currently covered by the changes in State law have made non-competes more Commission’s jurisdiction (80%), as discussed in difficult to enforce for subsets of their workforces given worker, their current employers Part X.F.4.a. Numerically, $6.2 trillion is calculated so that a prohibition on non-competes today is will now be competing with those other as ($9.1 trillion ¥ $1.6 trillion) * 80% = $6.0 likely to have a slightly lesser effect than a employers and may increase worker trillion, adjusted to $6.2 trillion to adjust to 2023 prohibition would have had in 2014. compensation to keep those workers. dollars. $9.1 trillion is total private earnings in 2022 1111This estimate differs from total affected The Commission finds that the in the U.S. (the most recent year with data earnings for the primary analysis because the available), and $1.6 trillion is total private earnings estimate of 3.2% takes into account enforceability economic literature does not provide a in 2022 in CA, ND, OK, and MN. in California, North Dakota, and Oklahoma. way to separate the total effect on 1109For illustrative purposes, State-specific Earnings in those States is therefore added back into workers’ earnings into transfers and estimates are displayed in Appendix Table A.1. In total affected earnings. However, earnings in benefits. this table, the estimated number of covered workers Minnesota are still omitted, since the prohibition in is calculated as 80% * (total employed population that State was enacted after the conclusion of the The increase in worker earnings in the State); the estimated increase in total study period in Johnson, Lavetti, and Lipsitz (2023): resulting from the final rule is earnings is calculated as 0.86% * (estimated total see Minn. Stat. sec. 181.988. Total annual earnings calculated as follows: covered earnings), where estimated total covered in the U.S. for the affected population excluding earnings is calculated as (estimated number of MN are calculated as ($9.1 trillion ¥ $0.2 trillion) covered workers) * (average annual earnings); and * 80%, updated to adjust to 2023 dollars. $9.1 1106By transfers, the Commission refers to ‘‘a gain the estimated increase in average earnings is trillion is earnings for all workers in the US in 2022 for one group and an equal-dollar-value loss for calculated as 0.86% * (average annual earnings). (the most recent year with available data) and $0.2 another group.’’ See Off. of Mgmt. & Budget, Total employed population and average annual trillion is earnings for workers in MN. See https:// Circular A–4 (Nov. 9, 2023), 57, https:// earnings are taken from the Census Bureau data.bls.gov/cew/apps/table_maker/v4/table_ www.whitehouse.gov/wp-content/uploads/2023/11/ Quarterly Census of Employment and Wages for maker.htm#type=0&year=2022&qtr=A& CircularA-4.pdf. 2022 (see https://www.bls.gov/cew/data.htm). own=5&ind=10&supp=0. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38475 estimated earnings gain of $234 prohibit non-competes (a more Total affected earnings in each State billion.1112The ten-year effect, moderate extrapolation). The minimum are calculated by multiplying total discounted at 2%, 3%, and 7%, is observed enforceability score excluding earnings in that State (adjusted to 2023 displayed in the second row of Table 2. States that broadly prohibit non- dollars) by the estimated percentage of The second sensitivity analysis, competes is 0.53 (on a scale of zero to covered workers (80%). For example, in hereafter referred to as the ‘‘partial one), which is the enforceability score West Virginia, total earnings are extrapolation’’ approach, uses the same in New York.1113This analysis estimated to be $0.24 trillion.1116 formula as the other two analyses (% calculates the change in each State’s Next, the percent increase in earnings effect on earnings * total affected score that would bring it to 0.53, and in each State is multiplied by total earnings) but is more conservative in its scales the effect on worker earnings affected earnings in that State. In West estimate of the percent effect on estimated in the empirical literature by Virginia, this results in an earnings earnings than the full extrapolation that amount.1114For example, West estimate. The full extrapolation Virginia’s enforceability score is 0.59. increase of 0.64% * $0.24 trillion = $152 approach assumes that enforceability To change to New York’s enforceability million. Finally, the earnings increases scores fall to zero. The partial score would imply a decrease in West are added across States. The overall extrapolation approach instead assumes Virginia’s score of 0.06 (calculated as estimated effect is an annual increase in that enforceability scores fall to the 0.59—0.53). This implies a percent earnings of $161 billion. The ten-year minimum observed enforceability score effect on earnings in West Virginia of effect, discounted at 2%, 3%, and 7%, ignoring scores in States that broadly 0.64%.1115 is displayed in the third row of Table 2. TABLE 2 Estimated ten-year increase in earnings ($ billions), assuming:
workers in the neighboring State displayed in Table 3.
affected workers are not bound by non- 1128This is the number of granted utility patents, competes themselves, the differential in 1125The Commission notes that Part IV.B.3.a.ii which are patents for new or improved innovation earnings likely does not completely does not measure or consider whether earnings are and are the types of patents studied by Johnson, represent a transfer resulting from a transfers or benefits because to the extent that the Lipsitz, & Pei (Id.). The figure comes from 2020, earnings that are transfers represent firms’ ability to which is the most recent data available from the suppress earnings using an unfair method of U.S. Patent and Trademark Office. It excludes States 1122Johnson, Lavetti, & Lipsitz, supra note 388. competition, the transfer of such earnings from in which non-competes are not enforceable 1123Id. (note: a new version of this paper, posted firms to workers through the use of non-competes (California, Oklahoma, North Dakota, and in 2023 after the NPRM was published, revised this still reflect the tendency of non-competes to Minnesota). Data available at https:// estimate slightly). negatively affect competitive conditions in the labor www.uspto.gov/web/offices/ac/ido/oeip/taf/st_co_ 1124Starr, Frake, & Agarwal, supra note 469. market. 20.htm. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38477 percentage increase in patenting to 1.9%–3.6% in the first year, rising to broadly decreased legal enforceability of reflect the size of the change in that 19.2%–35.6% by the tenth year. non-competes in recent years, the State’s enforceability score. For The annual State-specific percentage changes necessary to move to lower example, as noted in Part X.F.6.a, West changes are multiplied by the number of enforceability are likely overestimated Virginia’s score would fall from 0.59 to annual patents granted in each State.1130 in this sensitivity analysis. This causes 0.53 as a result of this analysis. The Finally, the changes in patenting across the values estimated by this method to percentage change in patenting in West States are combined across States for a likely overestimate the true extent of the Virginia would therefore average 9.0%– national estimate. The results are benefit.
16.6%,1129resulting in an increase of reported in Table 3. As States have TABLE 3 Estimated annual Estimated annual Estimated annual Estimated annual count of additional count of additional count of additional count of additional patents using low patents using high Year relative to publication of the rule patents using low patents using high estimate of estimate of estimate of inno- estimate of innovation effect innovation effect vation effect innovation effect and extrapolation and extrapolation approach approach 1 ............................................................................................... 3,111 5,337 8,927 19,306 2 ............................................................................................... 6,222 10,674 17,853 38,611 3 ............................................................................................... 9,333 16,012 26,780 57,917 4 ............................................................................................... 12,444 21,349 35,706 77,222 5 ............................................................................................... 15,555 26,686 44,633 96,528 6 ............................................................................................... 18,666 32,023 53,560 115,833 7 ............................................................................................... 21,777 37,360 62,486 135,139 8 ............................................................................................... 24,888 42,697 71,413 154,444 9 ............................................................................................... 27,999 48,035 80,339 173,750 10 ............................................................................................. 31,110 53,372 89,266 193,055 The Commission is not aware of also increases when non-competes as reductions in R&D spending resulting estimates that assess the overall social become less enforceable.1134 from the rule could have countervailing value of a patent and therefore the The second effect of the final rule effects on innovation, the estimated Commission does not monetize the associated with innovation is a possible increase in innovative output represents estimated effects on innovative output. change in spending on R&D. The change the net effect, which would otherwise Estimates of the effect of a patent on a in R&D spending due to the final rule is be even larger, if R&D spending were firm’s value in the stock market exist in calculated as follows: held constant. the empirical literature,1131as do Reduction in R&D Spending = (% Notably, empirical estimates of R&D estimates of the sale value of a patent at Reduction in Spending) * (Total spending are based on observed changes auction.1132However, those estimates Affected Spending) among incumbent firms and therefore do not include the effects on follow-on The Commission estimates that the may not reflect market-level effects. innovation, consumers (who may percentage reduction in spending is 0– Decreased investment at the firm level benefit from more innovative products), 8.1%, with the broad range reflecting (the level of estimation in the studies competitors, or the rents that are shared disagreement in the empirical that report effects of enforceability on with workers, and instead reflect solely literature.1135Total affected spending is R&D spending) does not necessarily the private effect of a patent to the $575 billion (in 2023 dollars).1136 mean that investment would decrease at relevant firms. Multiplying the percentage effect by the market level, since new firms The Commission notes that patent total affected spending, the overall entering the market may contribute counts may not perfectly proxy for annual effect is a reduction of $0-$47 additional R&D spending not captured innovation. However, by using citation- billion in R&D spending in 2023 dollars. in the referenced studies. For these weighted patents, as well as other The Commission notes that, in light of reasons, the Commission stops short of measures of quality, the study by the increases in innovation identified in classifying the effect on R&D spending Johnson, Lipsitz, and Pei shows that this Part X.F.6.b, reductions in R&D as a benefit of the final rule. patent quality, not just patent quantity, spending represent a cost savings for The Commission notes that, as increase when non-competes become firms. Put differently, reductions in R&D discussed in Part X.E, the estimated less enforceable.1133Similarly, the study spending may cause commensurate effects on innovation do not take into by He shows that the value of patents reductions in innovative output. Insofar account that some senior executives 1129Calculated as e(1.43*0.06)¥1 and e(2.56*0.06)¥1, 1132Ariel Pakes, Patents as Options: Some with finalized estimates, excluding nonprofits, where 1.43 and 2.56 represent the coefficients Estimates of the Value of Holding European Patent higher education, and nonfederal and Federal reported in Johnson, Lipsitz, & Pei (Id.) as the lower Stocks, 54 Econometrica 755 (1986). government. Nat’l Ctr. for Sci. and Engrg. Stats., and upper bounds of the reported coefficient range, 1133Johnson, Lipsitz, & Pei, supra note 526. New Data on U.S. R&D: Summary Statistics from and 0.06 is the decline in the enforceability score 1134He, supra note 560. the 2019–20 Edition of National Patterns of R&D in West Virginia. 1135Johnson, Lipsitz, & Pei (supra note 526) find Resources (Dec. 27, 2021), https://ncses.nsf.gov/ a negative effect on R&D spending of 8.1% due to pubs/nsf22314; Nat’l Ctr. for Sci. and Engrg. Stats., 1130Data available at https://www.uspto.gov/web/ offices/ac/ido/oeip/taf/st_co_20.htm. an average magnitude change in non-compete U.S. R&D Increased by $51 Billion in 2020 to $717 enforceability, while Jeffers (supra note 450) finds Billion; Estimate for 2021 Indicates Further Increase 1131Leonid Kogan, Dimitris Papanikolaou, Amit no economically or statistically significant effect on to $792 Billion (Jan. 4, 2023), https://ncses.nsf.gov/ Seru, & Noah Stoffman, Technological Innovation, R&D spending. pubs/nsf23320. Note that the data are not broken Resource Allocation, and Growth, 132 The 1136Total U.S. R&D spending was estimated by out by State, and therefore the final analysis cannot Quarterly J. of Econ. 665 (2017). the NSF in 2019, the most recent available year exclude CA, ND, OK, and MN. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38478 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations may continue to work under non- prices is $74–$194 billion. The jurisdiction) to arrive at total affected competes under the rule. The Commission finds some of the price spending.1139The ten-year sum of Commission is unable to separate the effects may represent transfers from discounted spending decreases for these effects of senior executives’ non- firms to consumers and some may analyses are presented in Table 4. competes from other workers’ non- represent benefits due to increased As a sensitivity analysis, mirroring competes on innovation. Some effects economic efficiency. Some of the the analysis in Part X.F.6.a, the estimated in this Part X.F.6.b may occur benefits may overlap with benefits Commission assumes that enforceability further in the future than assumed in otherwise categorized, such as benefits scores in each State will fall to the this analysis, based on the extent of related to innovation. lowest observed score among States continued use of non-competes for The decrease in prices for physician which do not broadly prohibit non- senior executives. services because of the final rule is competes. The Commission calculates Overall, the Commission finds that calculated as follows: the percentage change in prices in each the final rule will significantly increase Decrease in Prices = (% Decrease in State by extrapolating the percentage innovation. Furthermore, the increase in Prices) * (Total Affected Spending) decrease in prices to reflect the size of innovation may be accompanied by a The Commission estimates the the change in that State’s enforceability decrease in spending on R&D that percentage decrease in prices for score. As noted in Part X.F.6.a, West would, thus, be a cost saving to firms. physician services to be 3.5%.1137Total Virginia’s score would fall from 0.59 to spending on physician and clinical 0.53 as a result of this analysis. The c. Prices services was $801 billion in 2023 percentage decrease in prices in West The Commission finds that consumer dollars, excluding States that broadly do Virginia would therefore be 2.5%.1140 prices may fall under the final rule not enforce non-competes.1138The This percentage decrease is multiplied because of increased competition. The Commission separately multiplies by State-specific physician spending, only empirical study of this effect spending by 35%, 61.9%, and 75% adjusted by the relevant multiplier to concerns physician practice prices. (estimates of the proportion of hospitals account for the Commission’s Based on this study, the Commission covered by the Commission’s jurisdiction, and summed over States. estimates the ten-year present value jurisdiction as a proxy for total The ten-year present discounted value reduction in spending for physician and physician and clinical services spending of the spending decreases estimated by clinical services from the decrease in covered by the Commission’s this analysis are presented in Table 4. TABLE 4 Assumed Estimated spending reduction over ten years percent of (billions of dollars) assuming:
75 552 529 459 Several effects of the final rule, in quality increases in products, which changes in innovation, investment, including changes in capital investment, might increase prices (all else equal), market structure, wages, and other new firm formation, and innovation, but nevertheless, consumers may be outcomes that are measured elsewhere), may possibly filter through to consumer better off. New firm formation may the Commission considers evidence on prices. Prices, therefore, may act as a result in a broader set of product prices to be corroborating evidence, summary metric for the effects on offerings, even if prices are unaffected. rather than a unique cost or benefit, consumers. The Commission notes, Finally, some portion of this effect may though some portion of the total effect however, that prices are an imperfect represent a transfer from physician likely represents a standalone benefit of measure for the effect on consumers. For practices to consumers. For all these the rule. The Commission also notes example, increased innovation reasons, as well as to avoid double- increased competition brought about by catalyzed by the final rule could result counting (since prices may reflect the final rule will likely increase 11373.5% is calculated as ¥(e(0.427*0.081) ¥1), 1139In the absence of data on the percentage of force-behind-americas-fast-growing-nonprofit- where 0.427 is the coefficient relating non-compete physician practices that are non-profit, the sector-more). Finally, consistent with the enforceability and physician prices in Hausman & Commission uses a range of three different Commission’s findings in Part V.D.4, the Lavetti (supra note 590), and 0.081 represents the assumptions on the share of covered hospitals. In percentages of firms that report themselves as average magnitude non-compete enforceability the first two scenarios, the Commission assumes nonprofit in the data, which reflects registered tax- score, as described in Part X.F.5. that the set of covered hospitals is all hospitals that exempt status under IRS regulations, does not are not non-profit. The first scenario uses 2020 data equate to the Commission’s jurisdiction. It is likely 1138See https://www.cms.gov/Research-Statistics- from the American Hospital Association indicating the Commission may have jurisdiction over some Data-and-Systems/Statistics-Trends-and-Reports/ that 65% of hospitals report that they are non- hospitals and other healthcare organizations NationalHealthExpendData/National profits (based on data available at https:// identified as nonprofits. Therefore, the third HealthAccountsStateHealthAccountsProvider. www.ahadata.com/aha-dataquery). The second scenario assumes that 75% are covered. Spending in 2020, the most recent year with scenario uses 2017–2021 data from the American 1140Calculated as e(0.427*0.06) ¥1, where 0.427 available data, was $679 billion, which is $801 Community Survey indicating that 38.1% of is the coefficient reported in Hausman and Lavetti billion adjusted to 2023 dollars. CA, ND, OK, and hospital employment is at non-profits (see https:// (supra note 590), and 0.06 is the decline in the MN are omitted. www.washingtonpost.com/business/2023/05/12/ enforceability score in West Virginia. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38479 consumer quantity, choice, and quality. associated with the final rule, though it separately estimates the effects These effects are not quantified in the is not clear whether effects associated assuming lost investment in human literature. with investment in human capital are capital is core and assuming it is To draw inferences to other costs or benefits, and it is not clear advanced. industries, the Commission notes that if whether litigation costs would rise or The second source of uncertainty the relationship between non-compete fall under the final rule. pertains to the specific estimates of the enforceability and prices observed in effect of non-compete enforceability on a. Investment in Human Capital healthcare markets holds in other investment of human capital. Starr industries, then under the final rule The Commission estimates the ten- (2019) estimates the differential effect of prices would likely decrease, and year present discounted value of the net non-compete enforceability on training product and service quality would effect of the final rule on investment in in occupations which use non-competes likely increase. Insofar as such effects human capital (i.e., worker training) at a high rate versus those that use non- may be driven by increases in ranges from a benefit of $32 billion to competes at a low rate but does not competition, as discussed in Part a cost of $41 billion. The Commission estimate the absolute effect on IV.B.3.b.iii, e.g., because of new firm notes that this wide range represents investment across the workforce. formation, it is likely output would also substantial uncertainty in the Therefore, this final analysis separately increase. However, the evidence in the interpretation of the estimates that exist estimates the effects on training under literature addresses only healthcare in the economic literature. The two different assumptions—that the markets and therefore the Commission estimates contained in this Part X.F.7.a increase in training due to greater non- cannot say with certainty that similar are separated along lines created by that compete enforceability affects all price effects would be present for other uncertainty. workers, or only workers in high-use products and services. There are two primary sources of occupations—to demonstrate how this In many settings, it is possible that uncertainty. The first pertains to the uncertainty affects the estimates.1142 extent to which lost investment in The Commission notes that some of increases in worker earnings from human capital is ‘‘core’’ versus the estimates described in this Part restricting non-competes may increase ‘‘advanced.’’ As discussed in Part X.F.7 may overlap with estimates consumer prices because of higher IV.B.3.b.ii, when non-competes are reported in other sections of the firms’ costs.1141There is no empirical enforceable, fewer workers will be regulatory analysis. For example, if evidence that enforceability of non- available due to decreased labor decreased enforceability of non- competes increase prices due to mobility, including workers who would competes decreases investment in increased labor costs. Additionally, be a good skills match for a particular workers’ human capital, and this greater wages for workers freed from job, as well as workers moving to new decreased investment would be non-competes may result from better industries to avoid triggering a potential reflected in lower wages for workers, worker-firm matching, which could non-compete clause violation. This may then the estimate of the wage increase simultaneously increase wages and require retraining of workers forced into resulting from the final rule will already increase productivity, leading to lower a new field that would not otherwise be account for the extent to which prices.
necessary for an experienced worker decreased investment decreases wages. The Commission notes that, as within the same industry. The departure That is, if investment were held discussed in Part X.E, the estimates of of experienced workers from the constant, the earnings increase the effect of the rule on prices do not industry also means firms will be associated with the final rule may be separately account for the effect of required to invest in the human capital even larger.
senior executives who may continue to of inexperienced workers who replace have non-competes under the rule. The i. Estimates Assuming Lost Investment them. This type of investment in Commission is unable to monetize or in Human Capital Is Core Training training to address a skills mismatch— quantify these effects separately because which is referred to as the ‘‘core’’ The first set of estimates assumes that there is no accounting in the applicable training scenario—contrasts with what all lost training is core. This results in literature of why, nor to which groups is referred to as the ‘‘advanced’’ training estimated effects of the final rule that of workers, the observed price effects scenario, which is investment in represent upper bounds on the benefits occur. If such non-competes have a large training that builds upon the associated with the final rule’s effect on impact, some of the effects estimated in productivity of workers who may investment in human capital. In these this section may occur further in the already be experienced in an industry. scenarios, the final rule will allow firms future than described in this Part Insofar as reductions in investment in to hire experienced workers instead of X.F.6.c. human capital due to the final rule needing to provide costly training to 7. Costs of the Final Rule represent reductions in core investment, workers new to the industry or a the rule will save firms money and will position. The change in investment in The Commission finds costs additionally not require workers to forgo core training brought about by the rule associated with the final rule, including time spent producing goods and is calculated as follows: legal and administrative costs, and services to train. Therefore, such Effect of Decreased Investment in Core possibly costs related to investment in reductions would represent a benefit of Training = Additional Output of human capital and litigation, as the final rule. However, insofar as summarized in Table 1 in Part X.E. The reductions in investment in human 1142Whether this assumption yields an Commission notes the final analysis capital from the final rule represent overestimate or underestimate depends on what includes effects on investment in reductions in advanced investment, happens to training of workers in occupations with human capital and litigation costs in there may be productivity losses for a low-rate of non-competes use when the enforceability of non-competes changes. If the effect this Part X.F.7 discussing costs workers. The estimates in the literature of a change in non-compete enforceability on do not allow the Commission to workers in occupations that use non-competes at a 1141Sebastian Heise, Fatih Karahan, & Ay¸segu¨l distinguish between the types of forgone low rate is small, this assumption yields an S¸ahin The Missing Inflation Puzzle: The Role of the overestimate of the overall effect on training. If the human capital investment in the final Wage-Price Pass-Through, 54 J. Money, Credit & effect on those workers is large, it results in an Banking 7 (2022). analysis. This final analysis therefore underestimate. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38480 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations Workers Resulting From Less Time Average hourly output of workers is percentage point decrease in trained Spent Training + Reduced Direct estimated to be $60.77.1146 workers is estimated to be 0.4.1150 Outlays on Training The total additional output due to This calculation results in annual cost forgone training time is therefore savings of $1.6 billion, assuming the Additional Output of Workers Resulting From Less Time Spent Training calculated as $1.9 billion per year when training rates of workers in all all workers are assumed to be affected, occupations are affected and $0.7 billion The first component is additional or $0.8 billion per year when only assuming the training rates of workers output of workers resulting from less workers in high-use occupations are only in high-use occupations are time spent on otherwise unnecessary assumed to be affected. affected. The ten-year present value training if they were better matched effects of the final rule on investment in with firm and industry. The change in Reduced Direct Outlays on Human human capital, assuming that lost the output of workers from less time Capital Investment investment is core investment, spent training because of the final rule The second component of the discounted at 2%, 3%, and 7% and is calculated as follows: economic effect calculated in the final separately assuming effects on workers Additional Output of Workers Resulting analysis is reduced direct outlays on in all occupations versus just workers in From Less Time Spent Training = human capital investment—or the out- occupations that use non-competes at a (Total # of Affected Workers) * of-pocket cost to firms for training. The high rate, are presented in the first two (Percentage Point Decrease in change in direct outlays on human rows of Table 5. Trained Workers) * (Average Hours Spent Training Per Worker) * capital investment resulting from the ii. Estimates Assuming Lost Investment (Average Hourly Output of Workers) rule is calculated as follows: in Human Capital Is Advanced Training Reduced Direct Outlays = [(Total Direct The Commission estimates the total The second set of estimates of the Outlays)/(# of Workers Receiving number of affected workers as 101.1 effects on human capital investment in Training)] * [(Total # of Affected million workers, assuming all workers the final analysis assumes all training is Workers) * (Percentage Point are affected, and 45.3 million workers, advanced. The Commission begins with Decrease in Trained Workers)] assuming only workers in high-use the same approach (calculated in Part occupations are affected.1143The Total direct outlays on human capital X.F.7.a.i) to estimate the direct gain in percentage point decrease in trained investment are estimated to be $105 output of workers and reduced direct workers is estimated to be 0.4.1144 billion in 2023 dollars.1147The outlays from foregone advanced human Average hours spent training per worker estimated number of workers receiving capital investment because such is estimated to be 85 hours per year.1145 training is 23.5 million workers.1148The investment is costly for firms and Commission estimates the total number results in decreased time spent on 1143Excluding States which broadly prohibit non- of affected workers as 101.1 million productive activities by workers, competes (CA, ND, OK, and MN), the BLS reports workers, assuming all workers are regardless of whether the investment is employment of 126.4 million individuals in May affected, and 45.3 million workers, core or advanced. The major difference 2022 (the most recent year with occupation-specific data available), 56.6 million of whom work in assuming only workers in high-use is that the Commission nets out an occupations that use non-competes at a high rate, occupations are affected.1149The additional component which represents as defined in Starr, supra note 445; see https:// lost long-term productivity of workers www.bls.gov/oes/tables.htm. The Commission estimates that 80% of employed individuals are Harley J. Frazis & James R. Spletzer, Worker caused by lost investment in their covered by the Commission’s jurisdiction (see Part Training: What We’ve Learned from the NLSY79, human capital. The Commission nets X.F.4.a), resulting in 101.1 million covered workers, 128 Monthly Lab. Rev. 48 (2005). out this additional component based on 45.3 million of whom work in high-use 1146The Commission assumes that the average the assumption that advanced human occupations. The Commission notes that these hourly output of workers is twice their average capital investment results in some estimates include public employment, as data on earnings and estimates average earnings to be occupation-specific employment at the State level $30.38 per hour, which is the average hourly increased long-term productivity in are not available by firm ownership. Occupation- earnings for workers in training ages 22–64 workers (because it assumes that firms specific employment data are necessary to split currently holding one job in the Survey of Income would not otherwise make such a costly workers into low- and high-use occupations. and Program Participation for all waves from 1996 investment). This results in estimated Workers including those estimated to be bound by to 2008. The dollar value is adjusted to 2023 non-competes and those who are not are included dollars. effects of the final rule that represent in this estimate, since the empirical estimate of the 11472022 Training Industry Report, Training upper bounds on the costs associated increase in training reflects a sample representative Magazine (Nov. 2022) at 17. with changes in investment in human of the full workforce, not just those bound by non- 1148Calculated as 15.8% * 148.9 million, where capital. Therefore, the estimated effect competes. 15.8% is the percentage of workers who receive of the rule on advanced human capital 1144The coefficient reported by Starr (supra note training, according to Frazis & Spletzer supra note 445), 0.77%, corresponds to a one standard 1145 at 48. 148.9 million is the estimated number investment is calculated as follows: deviation increase on Starr’s scale, and represents of workers in the U.S. in May 2022 according to Effect of Decreased Investment in the percentage point effect on the percentage of https://www.bls.gov/oes/tables.htm. Note that all Advanced Training = Additional workers trained (rather than the amount of training workers are included in this estimate (not just they receive). Rescaling to a scale of zero to one, workers in States which enforce non-competes) Output of Workers Resulting from a one standard deviation increase is equal to a because the estimate of training expenditures also Less Time Spent Training + change in the enforceability measure of 0.17. Since covers all workers. Reduced Direct Outlays on estimates for earnings and innovation use a mean 1149Excluding States which broadly prohibit non- Training¥Lost Output Resulting enforceability change of 0.081 on a scale of zero to competes (CA, ND, OK, and MN), the BLS reports one, the coefficient in Starr is rescaled to 0.77 * employment of 126.4 million individuals in May from Foregone Advanced Training (0.081/0.17) = 0.364%, which represents the change 2022 (the most recent year with occupation-specific The first two components—additional in the fraction of covered workers receiving training data available), 56.6 million of whom work in output of workers due to less time spent due to an average magnitude change of 0.081. occupations that use non-competes at a high rate, 114585 hours per year is calculated as 5.7 weeks as defined in Starr (supra note 445) (see https:// training and reduced direct outlays on per year * 20.1 hours per week * 73.9%, where www.bls.gov/oes/tables.htm). The Commission training—are calculated in Part 73.9% is the percentage of training that is firm- estimates that 80% of employed individuals are X.F.7.a.i. The lost output of workers due sponsored (the type of training likely to be affected covered by the Commission’s jurisdiction (see Part to lost investment in their human by the final rule). These three estimates (5.7 weeks X.F.4.a), resulting in 101.1 million covered workers, per year, 20.1 hours per week, and 73.9% of 45.3 million of whom work in high-use training being firm sponsored) are estimated in occupations. See supra note 1143. 1150As discussed in Part X.F.7.a.i. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38481 capital due to the rule in each year is billion or $0.7 billion (under the advanced training in the tenth year is calculated as follows: separate assumptions of all workers therefore the sum of a depreciated Lost Output from Lost Investment in being affected and only high-use return to training from each of the prior Human Capital = (Total # of occupation workers being affected). nine years plus lost output from lost Affected Workers) * (Percentage Since the returns to advanced training training in the tenth year itself. persist to some extent over time, in the Point Decrease in Trained Workers) To arrive at estimates of overall lost second year, returns to advanced * (Average Hourly Output of productivity due to lost advanced training from the first year are assumed Workers) * (Average Hours Worked training, lost productivity in each year to depreciate by 20%,1156and the per Year) * (% Productivity Loss) (separately due to lost training in each calculation is redone according to the The Commission estimates the total prior year) is added together. Finally, depreciated return to advanced training.
number of affected workers as 101.1 In the third year, training from the first lost productivity due to lost advanced million workers, assuming all workers year again depreciates, and so on until training is subtracted from the two are affected, and 45.3 million workers, the tenth year (the end of the horizon components calculated in Part X.F.7.a.i assuming only workers in high-use considered). (additional output of workers from less occupations are affected.1151The Additionally, in the second year, a time spent training and reduced direct percentage point decrease in trained new round of advanced training is outlays). The ten-year discounted effects workers is estimated to be 0.4.1152 forgone. An additional $1.5 billion or of the final rule on investment in human Average hourly output of workers is $0.7 billion in lost output is therefore capital, assuming lost investment is estimated to be $60.77.1153The average incurred in the second year under the advanced training investment, number of hours worked per year is final rule, and the depreciation discounted at 2%, 3%, and 7%, and 1,784.1154The Commission assumes the calculations are again repeated for the separately assuming workers in all percent productivity loss to be 6.4%.1155 new round of advanced training until occupations versus just workers in In the first year, this yields a total year ten. New rounds of advanced occupations that use non-competes at a estimate of lost output from lost training are forgone in each year high rate, are presented in the last two investment in human capital of $1.5 through the tenth. Lost output from lost rows of Table 5. TABLE 5 2% Discount 3% Discount 7% Discount rate rate rate Estimated discounted ten-year effect assuming lost training is core and workers in all occu- pations are affected ................................................................................................................. $32 $31 $27 Estimated discounted ten-year effect assuming lost training is core and workers in high-use occupations are affected .......................................................................................................... 14 14 12 Estimated discounted ten-year effect assuming lost training is advanced and workers in all occupations are affected .......................................................................................................... ¥41 ¥39 ¥31 Estimated discounted ten-year effect assuming lost training is advanced and workers in high- use occupations are affected ................................................................................................... ¥19 ¥17 ¥14 Note: All values in billions of 2023 dollars. b. Legal and Administrative Costs the final rule are estimated to total $2.1- Negative values represent net cost estimates, Related to Compliance $3.7 billion. The Commission estimates while positive values represent net benefit two main components of legal costs: (1) The Commission finds that firms with estimates. updating existing employment existing non-competes will have related agreements or terms to ensure new hire As discussed in Part X.E, the legal and administrative compliance employment terms comply with the Commission notes that the estimates in costs as a result of the final rule. The this Part X.F do not account for senior Commission quantifies and monetizes final rule; and (2) advising employers executives who continue to work under these costs and conducts related about potential operational or non-competes under the rule. If the sensitivity analyses. contractual changes for workers who effects on training are due to effects on will no longer have enforceable non-
rule. Therefore, this component (excluding California, North Dakota, Oklahoma, and would be $5.6-$11.3 billion. Some additionally involves identifying senior Minnesota, where non-competes are broadly commenters stated that the hourly cost executives whose existing non-competes unenforceable) in 2021 (the most recent year with of lawyers’ time may be even greater data available): see https://www.census.gov/data/ are unaffected. For any such legal work, tables/2021/econ/susb/2021-susb-annual.html. This than the value assumed in the firms may use in-house counsel or value is multiplied by 49.4%, the percentage of sensitivity analysis ($483 per hour). The outside counsel. firms using non-competes in the U.S. according to Commission finds that the sensitivity Legal costs are therefore calculated as Colvin & Shierholz (supra note 65). analysis assuming a rate of $438 per follows: 1160The Commission emphasizes that this is an hour provides a reasonable estimate of average to underscore there would likely be large Legal Costs = Modify Standard Contract differences in the extent to which firms update their the costs under the assumption that Language/H.R. Materials and contractual practices. Many firms, including those outside counsel would be used, and that Manuals Costs + Revise Contractual that use non-competes only with workers who do higher rates (e.g., $749 per hour, as not have access to sensitive information, or those stated by one commenter) are Practices Costs which are already using other types of restrictive unreasonably high, especially as an One component of the legal cost will employment provisions to protect sensitive information, may opt to do nothing. There is average across many firms. be due to the modification of standard evidence indicating firms that use non-competes are The Commission believes the contracts to remove prohibited language already using other types of restrictive employment exclusion of existing non-competes with regarding non-competes which is provisions: Balasubramanian et al. (2024) find that senior executives could result in lower calculated as follows: 95.6% of workers with non-competes are also subject to an NDA, 97.5% of workers with non- net legal costs than the Commission’s Modify Standard Contract Language/ competes are also subject to a non-solicitation estimate. First, for senior executives H.R. Materials and Manuals = agreement, NDA, or a non-recruitment agreement, who currently work under a non- (Average Hours Necessary for and that 74.7% of workers with non-competes are compete, firms will have a longer time Modification) * (Cost per Hour) * a S l e s e o B su al b a j s e u c b t r t a o m al a l n t i h a r n e , e S o ta th rr e , r & ty Y p a e m s o ag f u p c r h ov i i ( s s i u o p n r s a . period during which they may update (# of Affected Businesses)
executive remains in their job for over its final cost estimates to account for The cost of mailed notice provision ten years, then the cost of updating this change. As noted in Part X.D, this would include the cost of postage and contractual practices would fall outside final analysis generally does not account the cost of a human resource the scope of the Commission’s estimates for the temporal difference in coverage professional’s time. Mailed notice altogether. of non-competes for senior executives.
c. Litigation Effects no evidence increased litigation will Similarly, some portion of the price Theoretically, under the final rule, result in increased costs associated with effects associated with the final rule certain litigation costs may fall. the final rule. The Commission cannot represents a transfer: while consumers Litigation related to non-competes may quantify or monetize the overall effect may achieve greater surplus with decrease because the final rule creates as a cost or benefit, but estimates the increased competition, the price bright line rules, reducing uncertainty magnitude of any change would be decrease itself is partially a transfer about the enforceability of non- sufficiently small as to be immaterial to from firms to consumers. competes. On the other hand, litigation the Commission’s assessment of 9. Distributional Effects costs may rise if firms turn to litigation whether the benefits of the rule justify The Commission finds several to protect trade secrets and if that its costs.
taking effect.1169The Commission finds Similarly, while new firms may enter that litigation costs will increase under the final the market, it is theoretically possible 1169Greenwood, Kobayashi, & Starr, supra note rule. That finding is based on the Commission’s that incumbent firms may exit the 757. The Commission notes that this study expertise and the rulemaking record, including supplements—but is not necessary to support—its relevant comments. This study was published after market without the ability to use non- finding that no evidence supports the conclusion the close of the comment period. competes (though no evidence of this VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38485 effect exists) or contract. Research finds and is statistically indistinguishable Commission also notes an estimate that decreased non-compete from zero (i.e., statistically specific to high-tech industries: that enforceability increases new firm insignificant): a decline in capital decreases in non-compete enforceability formation by 2.7% and may have no investment of 7.9% for the average led to a 3.2% increase in the effect on capital investment or may incumbent publicly-traded firm.1171 establishment entry rate.1177 decrease capital investment at Another study finds no effect on capital The benefits associated with new firm incumbent firms by up to 7.9%. To the investment, but includes the use of non- entry may include added surplus for extent there may be a decrease in capital competes in its estimating procedure, consumers (e.g., from increased investment at incumbent firms as a leading to concerns that the finding competition) or workers (from expanded result of the final rule, it may represent does not support a causal interpretation, labor demand). However, the a shift in productive capacity from as explained in Part IV.A.2.1172 incumbent firms to new firms. As The Commission notes two additional Commission is unable to quantify those discussed in Part IV.D, another estimates specific to high-tech or beneficial effects, though some may be purported justification for non-competes knowledge firms: a decline in capital captured by the effect on prices is that they allow firms to protect trade investment among incumbent publicly- discussed in Part X.F.6.c. Nor is it able secrets, which in theory might allow traded firms of 34%–39% (an estimate to quantify whether existing firms might firms to share those trade secrets more which corresponds to the estimate of a exit or contract in response to this new freely with workers, and so improve decline of 7.9% when all publicly firm entry (i.e., whether the new firms’ productivity. However, no empirical traded firms are examined),1173and an output would be wholly additive or evidence substantiates this claim or increase in capital investment of 3.1% crowd out some amount of existing would allow quantification or for the average publicly-traded high- firms’ output). New firm entry may also monetization of this effect. tech firm (an estimate that is statistically drive some of the innovative effects of Empirical evidence has studied parts, insignificant).1174The Commission the final rule if new firms are engaging but not all, of the contrasting effects on notes the study finding an increase in in substantial innovation. capital investment and new firm capital investment of 3.1% uses a more Overall, the Commission finds that formation. Studies have examined granular measure of non-compete the rule will likely result in a 2.7% effects of non-competes on capital enforceability than the study finding a increase in new firm formation and is investment by large, publicly traded decrease of 34%–39%, and the unable to quantify the net effects of this firms, who are likely incumbents.1170 Commission therefore gives it more on the productive capacity of the However, no study examines the effect weight.1175 economy. Benefits from new firm entry of capital investment economy-wide, The Commission reiterates that any and possible costs from decreased nor does any study specifically examine change in investment at the firm level capital investment may offset each other capital investment for new firms. does not necessarily mean investment but the degree to which this happens is Similarly, studies have examined new would change at the market level, since not quantifiable. The effect of the final firm formation, but no studies look at increased firm entry may also increase rule on firm expansion and formation firm exit among incumbents. the employed capital stock and It is thus not possible to measure the investment in that capital stock, which likely results in productive capacity benefit and costs of the full economy- may offset any possible decreases in shifting from incumbent firms to new wide effects on firm expansion and investment for incumbent firms. These firms. Consistent with findings in Part formation. The calculations that may be potential positive offsetting effects are IV.B.3.b.iii, productive capacity shifting performed using available data will not captured in the estimates herein. from incumbent to new firms may necessarily omit components of the decrease concentration, possibly tradeoff. The final analysis therefore ii. New Firm Formation contributing to decreases in prices, as quantifies the effects that the literature Research finds that new firm discussed in Part X.F.6.c. has examined but does not monetize formation increases by 2.7% across the those effects. economy due to decreases in non- increased non-compete enforceability on firms founded per million people in knowledge-sector compete enforceability.1176The i. Capital Investment industries and 0.008 for non-knowledge sector industries, with respective sample sizes of 78,273 Research finds that capital investment 1171The increase, 7.9%, is calculated as 0.00317/ and 190,665 (Table 9, Panel A, Columns 1 and 2). for incumbent firms at the firm level 0.04, where 0.00317 is the reported coefficient Using the sample sizes as weights, the Commission may decrease under the final rule for the (Table 4, Panel A, Column 1), and 0.04 is the mean estimates a weighted average of these coefficients of investment per million dollars of assets ratio, across ¥0.024. Applying this estimate to the average economy as a whole, though effects for all firms (Table 2, Panel C). Due to statistical number of firms founded per million people (Table high-tech industries may be positive, uncertainty, the estimate cannot rule out (with 95% 2, Panel B) results in an estimated increase in new negative, or close to zero. The confidence) values ranging from a gain in capital firm formation of 2.7%. The Commission did not Commission notes that the capital investment equal to 6.7% to a loss in capital calculate the effect for the economy as a whole in investment equal to 22.5% for the average firm. See the NPRM. The NPRM reported that increases in investment discussed in this Part X.F.9 Jeffers, supra note 450. non-compete enforceability decreased new firm relates to tangible capital, does not 1172Shi, supra note 84. entry by ‘‘0.06 firms per million people (against a reflect capital investment by newly- 1173Jeffers, supra note 450. The estimate pertains mean of 0.38) for firms in the knowledge sector,’’ formed firms, and is distinct from R&D to firms in Technology and Professional, Scientific, NPRM at 3526, which was consistent with the spending, which is discussed in Part and Technical Services. version of the Jeffers study cited in the NPRM. The 1174Johnson, Lipsitz, & Pei, supra note 526. The final rule cites the updated version of the Jeffers X.F.6.b.
b. Distributional Effects on Workers Affected Industries with Non- productivity due to better matching competes) between workers and firms, the cost of The Commission finds that the final lost productivity will be lower. The cost rule may reduce gender and racial The Commission estimates the of lost productivity will also be lessened earnings gaps, may especially encourage baseline turnover rate, i.e., the turnover because the pool of workers available to entrepreneurship among women, and rate in the status quo, to be 47% firms may be more talented or may mitigate legal uncertainty for annually.1181The estimated percent experienced, since such workers would workers, especially relatively low-paid increase in turnover from the final rule no longer be bound by non-competes workers. is 1.0%.1182The estimated rate of use of Specifically, the Commission finds non-competes in affected industries is (relative to new entrants to the gender and racial wage gaps may close 23.9%.1183Estimated overall earnings of workforce, who are not experienced and significantly under a nationwide affected workers is $5.25 trillion.1184 also are not bound by non-competes). prohibition on non-competes, according The estimated cost of turnover as a This would allow firms to recruit to economic estimates.1178Another percentage of earnings is 25%.1185 workers who are more likely to be estimate indicates that the negative Finally, the estimated number of highly productive upon entry at a new effect of non-compete enforceability on workers in affected industries with non- job. The Commission reiterates its finding within-industry entrepreneurship is competes is 11.8 million.1186 that the costs of turnover for many firms significantly greater for women than for The annual estimated increase in may diminish due to a more plentiful men.1179 turnover costs per worker with a non- The Commission finds the rule may compete is $131. supply of available labor. Without be especially helpful for relatively low- The Commission notes the actual estimates of the effect of the final rule paid workers, for whom access to legal costs of turnover to businesses may be on the cost of recruiting a worker, the services may be prohibitively expensive. substantially lower under the final rule net effect of the final rule on turnover Workers generally may not be willing to than this estimate reflects. This is costs is not quantified. file lawsuits against deep-pocketed because the specific components of 10. Break-Even Analysis employers to challenge their non- turnover costs—finding a replacement, The Commission believes it has competes, even if they predict a high training, and productivity—are likely to quantified the effects of the final rule probability of success. The Commission be affected by the final rule. An that are likely to be the most significant finds that the bright-line prohibition in increased availability of experienced in magnitude, but data limitations make the final rule, which the Commission workers results when non-competes no it challenging to monetize all the could enforce, may mitigate uncertainty longer constrain those workers, and expected effects of the final rule, i.e., to for workers.1180 finding replacements will be less costly numerically estimate the impact of to firms. Additionally, training should c. Labor Mobility particular effects on the economy as a not be counted in the costs of turnover The Commission finds the overall presented in this Part X.F.9.c, since it is whole. Most of the estimated costs of effect of the final rule on turnover costs separately accounted for in Part X.F.7.a, the final rule are monetized in Part due to increased labor mobility is but is nevertheless included in the 25% X.F.7. However, the Commission is ambiguous and represents a estimate used to arrive at the estimate of unable to monetize the estimated distributional effect of the rule. The $131 per worker with a non-compete, benefits of the final rule without Commission finds turnover costs for since there is no reliable way to remove additional assumptions. Two of the firms seeking new workers may fall with training costs from that estimate; it is major benefits—innovation and a greater availability of experienced thus double-counted. Finally, because earnings—are quantified but they are labor. For firms losing workers newly the Commission finds increased labor not monetized because a particular freed from non-competes, the mobility will likely increase worker parameter or data point that would Commission estimates the effect of the allow the Commission to estimate their final rule to be $131 per worker with a 1181Based on annual worker mobility rates effect in dollars is unavailable. For earnings, this parameter is an estimate non-compete. The Commission (separations divided by employment) in 2022 as therefore finds the effect on turnover calculated using the Job Openings and Labor of the percentage of the effect on Turnover Survey, conducted by BLS. earnings that represents a benefit versus costs represents a distributional effect of 1182Calculated as ¥e((¥0.241∂0.112)*0.081)¥1), a transfer.1187For innovation, this the final rule because it costs firms that where ¥0.241+0.112 represents the estimated effect parameter is an estimate of the social use non-competes to constrain workers in Johnson, Lavetti, and Lipsitz (supra note 388) on and benefits firms that do not. workers in high use industries. The corresponding value of a patent. Making an assumption To calculate the potential $131 estimate for other industries is statistically about these parameters allows the increase in turnover costs for workers indistinguishable from zero and those industries are Commission to monetize the benefits therefore omitted from calculations. The multiplier whose non-competes are no longer 0.081 is the average magnitude change in non- associated with the effect on earnings enforceable after the rule, this final compete enforceability, as discussed in Part X.F.5. and innovation. A break-even analysis analysis calculates: 1183Calculated as the average usage rate in high- based on such assumptions confirms the use industries in Starr, Prescott & Bishara (supra Commission’s finding that the benefits Additional Turnover Cost per Worker note 68). of the rule clearly justify the costs. with a Non-compete = (Baseline 1184Based on data from BLS for industries The analysis in this Part X.F.10 Turnover Rate) * (% Increase in classified as high-use in Starr, Prescott & Bishara Turnover) * (Rate of Use of Non- (supra note 68), excluding CA, ND, OK, and MN. calculates the sum of the monetizable See https://data.bls.gov/cew/apps/data_views/data_ costs of the rule, separately under the competes in Affected Industries) * views.htm#tab=Tables. assumption that lost investment in (Overall Earnings of Affected 1185See Pivateau, supra note 1090. human capital is core training (in which Workers) * (Cost of Turnover as % 1186Calculated as 49.4 million * 23.9%. 49.4 case monetizable costs are direct of Earnings)/(Number of Workers in million is equal to 0.8 * 61.8 million, where 0.8 is the coverage rate (see Part X.F.4.a) and 61.8 million is the number of workers in high-use industries 1187Though the estimated effect on earnings is 1178Johnson, Lavetti, & Lipsitz, supra note 388 at (https://data.bls.gov/cew/apps/data_views/data_ presented in dollars, the Commission considers this 38. views.htm#tab=Tables). 23.9% is the average usage value to be quantified, but not monetized, since 1179Marx (2022), supra note 524 at 8. rate in high-use industries in Starr, Prescott, & some part of the estimate may represent a transfer 1180NPRM at 3531. Bishara (supra note 68). and not a benefit. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00146 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38487 compliance costs and the cost of b. Estimate of Net Benefit Assuming a wide range of possible valuations, updating contractual practices), and Lost Human Capital Investment Is these values all represent the private under the assumption that lost Advanced Training value of a patent to certain actors (e.g., investment in human capital is In this Part X.F.10.b, the Commission the purchaser or seller of a patent, or advanced training (in which case calculates the net monetizable costs and shareholders of a patenting company). monetizable costs are the net cost of lost benefits of the final rule assuming that These values do not account for productivity from decreased human lost human capital investment is innovative spillovers (e.g., follow-on capital investment, direct compliance advanced training, and under varying innovation) or product market spillovers costs, and the cost of updating assumptions about the values of the two to competitors (who may lose business contractual practices). The analysis monetization parameters identified (the to innovating firms), and therefore do conservatively assumes that training for social value of a patent and the not necessarily represent the social all workers is affected (versus just those percentage of the earnings effect that value of a patent. However, they serve in high-use occupations, as described in represents a benefit). Then, the as benchmarks against which to assess Part X.F.7.a). Commission calculates break-even the breakeven points of the analysis of the final rule.
a decrease in core training, the final rule compete enforceability is a benefit Break even points are calculated by results in net benefits without versus a transfer. The Commission finding the values of the social value of monetizing or counting any positive separately assumes that the percentage a patent and the benefit percent of the effects on the economy from earnings or is equal to 0%, 5%, 10%, and 25%. earnings increase such that:
innovation. The savings or benefit to the The computed breakeven points are (Net Costs Associated with Investment economy from reduced core training reported in Table 7, under the in Human Capital) + (Direct would be greater than the combined assumption that lost investment in Compliance Costs) + (Costs of monetized costs of the final rule in human capital is advanced. Panel A Updating Contracts) = (Earnings X.F.7.b. In other words, even if the reports necessary benefit percentages, Increase) * (Benefit % of Earnings benefit to the economy from earnings under each of the four assumed social Increase) + (Patent Increase) * and innovation were assumed to be zero values of a patent, that would cause the (Social Value of Patent)
(an implausible and extremely rule to result in zero net monetized As calculated in Part X.F.7, assuming conservative assumption), the final rule benefit. A reported value of 0% a 3% discount rate, the net cost would be net beneficial under the indicates that the assumed value of a associated with investment in human assumption that estimates of reduced patent itself covers the net monetized capital is $39.0 billion.1188Direct training reflect better matching of costs of the final rule. Panel B reports compliance costs plus the cost of workers and firms and therefore a the necessary social value of a patent, updating contracts are estimated to be reduced need to provide workers with under each of the four assumed benefit $3.7 billion.1189Net monetizable costs core training. percentages, that would cause the rule therefore total $42.7 billion.
Under the assumption that lost The estimated earnings increase of the A reported value of $0 indicates that the human capital investment is advanced, final rule over ten years, discounted at benefits associated with earnings cover the Commission calculates values of the 3% is $468 billion. The estimated effect the net monetized costs of the final rule social value of a patent and the benefit of the rule on innovation (using the low on their own.
percentage of the earnings effect that end of the primary estimate) ranges from would fully offset the net monetizable an additional 3,111 patents per year to TABLE 7 costs of the final rule. 31,110 patents per year, increasing as time goes on.1190 a. Estimate of Net Benefit Assuming The Commission presents estimates Assumed social Ne p c e e rc s e s n a t r a y g b e e o n n e fit Lost Human Capital Investment Is Core value of a patent that demonstrate break-even points by earnings Training making an assumption for the value of Under the assumption that lost one of the two monetization parameters, Panel A human capital investment is core, the and calculating the value of the other $94,886 ........................... 5.5 which implies equal monetized costs sum of the present discounted value of $234,399 ......................... 1.7 direct compliance costs and the cost of and benefits. Based on estimates of the $5,865,833 ...................... 0.0 private value of a patent, the contractual updating (the monetizable Commission separately assumes that the costs of the rule), using a 3% discount value of a patent, but has explored the private value rate, is $3.7 billion. In this case, the social value of a patent is $94,886, of a patent, with highly varied conclusions (all $234,399, $5,865,833, or reported here adjusted to 2023 dollars). Serrano final rule is net beneficial even ignoring $32,459,680.1191In addition to spanning estimates the average value of a patent (in terms of the benefits associated with innovation its sale price at auction) to be between $234,399 and and earnings. This is because the net $289,022. Pakes estimates the average value of a monetized cost ($3.7 billion) is less than 1188Note that this calculation considers the net patent (in terms of stock market reactions to cost of lost investment in human capital (i.e., the announcements) to be $5,865,833. Kogan et al. the monetized benefit associated with cost of lost productivity, minus the savings on estimate the average value of a patent (also in terms investment in human capital ($31 direct outlays and gained output due to less time of stock market reactions to announcements) to be billion or $13.9 billion, when all spent training). The Commission reiterates that this $32,459,680. Outside of the academic literature, a occupations are assumed to be affected calculation assumes that lost human capital Richardson Oliver Insights report notes that the investment is advanced, rather than core. average sale price of U.S. issued patents on a versus just high-use occupations, 1189This calculation assumes that updating brokered market was $94,886. See Carlos J. Serrano, respectively). The net monetizable contractual practices takes, on average, eight hours Estimating the Gains from Trade in the Market for benefit of the final rule—even ignoring per firm. Patent Rights, 59 Int’l Econ. Rev. 1877 (2018); benefits associated with innovation and 1190The estimates presented here conservatively Pakes, supra note 1132; Kogan, et al., supra note assume zero effect on R&D spending. 1131; Richardson Oliver Insights Report (2022): earnings—is therefore $27.3 billion or 1191The Commission points out that the https://www.roipatents.com/secondary-market- $10.2 billion, respectively. economic literature has not explored the social report. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00147 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38488 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations TABLE 7—Continued with senior executives from coverage The Commission cannot quantify what under the rule (as opposed to the final percentage of the innovation effect is Necessary benefit rule, which excludes only existing non- due to senior executives versus other Assumed social value of a patent percentage on competes with senior executives) would workers, though it is likely shared by earnings diminish both costs and benefits, but both groups.
11. Analysis of Alternative Related to Senior executives are involved in The Commission finds that the direct Senior Executives determination of the strategic path of costs of compliance with the final rule the firm and its execution, which likely may be partially affected if senior The Commission elects to provide an has a substantial effect on innovation. executives were categorically excluded. analysis of the effects of an alternative The final rule allows employers to with more limited coverage. enforce existing non-competes for senior 1192In particular, 0.75% represents the Specifically, the Commission provides percentage of employed individuals from 2017–21 executives, so there are no notice and an analysis of a rule that would cover— ages 22–64, excluding residents of CA, ND, OK, and re-negotiation costs for senior and therefore ban—non-competes with MN, and excluding workers reporting working for executives. However, in this scenario, all workers except senior executives. As non-profits or the government, whose earnings are costs associated with ensuring incoming above the inflation-adjusted threshold and who are compared to the final rule, under this coded as having occupation ‘‘Top Executive.’’ The alternative, it would not be an unfair Commission notes that this estimate may not 1194Solomon Akrofi, Evaluating the Effects of method of competition to enter into exactly match the definition in the final rule but the Executive Learning and Development on non-competes with senior executives Commission believes that this provides a reasonable Organisational Performance: Implications for estimate. Developing Senior Manager and Executive after the effective date. The Commission 1193See Part IV.A.2 (explaining the Commission’s Capabilities, 20 Int’l. J. of Training and Dev. 177 finds that excluding all non-competes concerns with these types of studies). (2016). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38489 senior executives’ contracts do not have discussed in Part IV.B.3.a.ii does not The Commission finds that a rule non-competes would be substantially exclude senior executives, but based on excluding senior executives would reduced. Because senior executives’ the percentage of the population that result in decreased levels of investment contracts are generally more complex represents senior executives, the in workers’ human capital. The than other workers’ contracts, this evidence largely pertains to workers empirical literature has not separately reduction may be relatively large, even other than senior executives. Therefore, assessed the effect of non-competes on though there are relatively few senior while studies focused on senior investment in human capital for senior executives in the workforce executives (largely) do not apply, executives versus other workers, though (approximately 0.75%). With respect to studies of the entire workforce mostly the study finding that training decreases the costs of updating contractual reflect the effects of non-competes on with greater non-compete enforceability practices, commenters noted the costs of other workers. In addition to the broader includes both workers who are and are updating senior executives’ contracts evidence on earnings discussed in Part not senior executives. The Commission may be greater than for other workers IV.B.3.a.ii, one study analyzes a therefore believes that some or much of because of the complexity of their population exclusively comprised of any cost or benefit of the rule from contracts. Therefore, excluding senior hourly workers, nearly all of whom are changing investment in human capital executives categorically might reduce highly likely not to be senior executives, would pertain to workers who are not costs associated with updating supporting the finding that even with senior executives. However, the contractual practices substantially. At senior executives excluded from a rule, Commission notes that, as discussed in the same time, senior executives’ there would be substantial benefits to Part X.F.7.a, if lost training under the contracts may already be bespoke and labor market competition and workers’ rule is lost ‘‘core’’ (as opposed to individualized to such an extent that earnings.1195 ‘‘advanced’’) training, then the final rule removing a non-compete would not The Commission is unable to quantify will cause a cost savings for firms, considerably raise the costs associated to what extent the estimated effects on which will have greater access to with revising contractual practices. innovation are driven by senior experienced workers and will therefore Moreover, these contracts may be even executives versus other workers, but spend less on ‘‘core’’ training. more likely than other workers to still finds that a final rule excluding The Commission finds that the direct already include NDAs and other similar these senior executives would result in costs of compliance with the final rule provisions. substantial benefits to innovation. First, may be partially diminished if senior Finally, the Commission finds there is evidence that productivity of executives were excluded. First, the exclusion of senior executives may inventors decreases when they take Commission reiterates that notice is not reduce litigation costs from the final career detours because of non- required for senior executives under the rule, though the overall effect is unclear. competes.1196Second, insofar as effects final rule. Therefore, that component of Senior executives are highly likely to on innovation are driven by increased the direct costs of compliance would have access to sensitive business idea recombination, having access to not be affected. However, even with information. To the extent costs those ideas (which innovators actively those senior executives excluded, costs associated with trade secret litigation or engaged in R&D must) implies that associated with ensuring incoming litigation over other restrictive moving to new firms would increase workers’ contracts do not have non- covenants increase under the final rule, innovation. Empirical studies have not competes would still be present. Insofar though no evidence supports this quantified the size of these effects as senior executives’ contracts may be possibility, then exclusion of senior relative to the overall effect of banning more complex than other workers’ executives may substantially reduce non-competes for workers including contracts, this cost may be substantially these costs. Litigation related to whether senior executives on innovation, diminished, however. Similarly, with a worker meets the definition of a senior however. respect to the costs of updating executive may also increase if senior The Commission finds that a rule contractual practices, as noted by executives are categorically excluded. excluding senior executives would still commenters, these costs may be Overall, excluding senior executives yield substantial benefits with respect to substantially greater for the contracts of from the final rule would substantially consumer prices. Many entrepreneurs senior executives due to the complexity reduce the benefits of the rule— were not formerly senior executives, of their contracts and the sensitivity of especially those associated with new meaning that encouraging the information they possess. Therefore, firm formation, innovation, and prices— entrepreneurship among workers who while some costs associated with but would also likely reduce costs, are not senior executives by prohibiting updating contractual practices would especially those associated with non-competes will yield more business survive if senior executives were investment in human capital and formation. That business formation excluded, their exclusion may reduce updating contractual practices. The increases competition, which may lead costs associated with the rule Commission finds that the benefits of a to lower prices. Additionally, firms will disproportionately to their (relatively rule excluding senior executives would not be foreclosed access to talent (which low) share of the workforce. justify the costs of such a rule. is likely important across the spectrum Finally, some litigation costs may still of workers, though evidence only be present if senior executives are b. Analysis of Benefits and Costs to specifically exists for senior executives), excluded. Litigation costs associated Workers Other Than Senior Executives which may also lead to lower prices. In with non-competes would still likely Now, the Commission turns to an the absence of empirical evidence fall for workers other than senior analysis of the benefits and costs that demonstrating which workers’ non- executives due to the bright-line remain if senior executives are excluded competes affect consumer prices, the coverage in the rule. Costs associated from the rule. Commission cannot estimate how much with litigation other than non-compete The Commission finds there would be of the effect is due to coverage of which litigation may rise if firms turn to those substantial benefits to labor market workers. methods, though no evidence suggests competition and workers’ earnings even they will.
if senior executives were categorically 1195Lipsitz & Starr, supra note 72. Overall, a rule that excludes senior excluded. The evidence on earnings 1196Mueller, supra note 569. executives will likely result in VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38490 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations substantial benefits, as well as some keeping with the Commission’s history entities. The Commission continues to costs. While the Commission largely of small business guidance and believe the final rule’s impact will not cannot quantify the extent to which outreach.1202 be substantial in the case of most small benefits and costs would fall if senior The Commission thereafter received entities, and in many cases the final rule executives were excluded from coverage over 26,000 public comments, many of will likely have a positive impact on under the rule, the Commission finds which identified themselves as being small businesses. However, the that the benefits quantified and from small businesses, industry Commission cannot fully quantify the monetized elsewhere in this impact associations that represent small impact the final rule will have on such analysis would likely be diminished businesses, and workers at small entities. Therefore, in the interest of relative to the final rule as adopted, businesses.1203The Commission greatly thoroughness and an abundance of especially those associated with appreciates and thoroughly considered caution, the Commission has prepared innovation and prices, but costs would the feedback it received from such the following FRFA with this final rule. also be diminished, especially those stakeholders in developing the final Although small entities across all associated with investment in human rule. The Commission made changes industrial classes—i.e., all NAICS capital and updating contractual from the proposed rule in response to codes—would likely be affected, the practices. The Commission finds that, such feedback and will continue to estimated impact on each entity would even in the absence of a full engage with small business stakeholders monetization of all costs and benefits of to facilitate implementation of the final be relatively small. The Small Business the final rule, the final rule has rule. Further, the Commission is Administration (‘‘SBA’’) states that, as a substantial benefits that clearly justify publishing compliance material to assist rule of thumb, the impact of a rule could the costs, which remains true even if small entities in complying with the be significant if the cost of the rule (a) senior executives were excluded from final rule. eliminates more than 10% of the coverage. Specifically, based on the businesses’ profits; (b) exceeds 1% of Commission’s expertise and after careful the gross revenues of the entities in a XI. Regulatory Flexibility Act review and consideration of the entire particular sector; or (c) exceeds 5% of The Regulatory Flexibility Act rulemaking record—including empirical the labor costs of the entities in the (‘‘RFA’’), as amended by the Small research on how non-competes affect sector.1207As calculated in Part XI.F, Business Regulatory Enforcement competition and over 26,000 public the Commission estimates that legal and Fairness Act of 1996, requires an agency comments—the Commission adopts this administrative costs would result in to provide an Initial Regulatory final rule, including with changes costs on average of $712.45 to $1,250.93 Flexibility Analysis (‘‘IRFA’’) and Final relative to the proposal to reduce for single-establishment firms with 10 Regulatory Flexibility Analysis compliance burdens on small business workers.1208These costs would exceed (‘‘FRFA’’) of any final rule subject to and other entities. For example, the the SBA’s recommended thresholds for notice-and-comment requirements, Commission allows existing non- significant impact only if the average unless the agency head certifies that the competes with senior executives to profit of regulated entities with 10 regulatory action will not have a remain in force,1204amends the safe workers is $7,125 to $12,509, average significant economic impact on a harbor notice requirement to ease revenue is $71,245 to $125,093, or substantial number of small entities.1197 compliance,1205removes the average labor costs are $14,249 to In the NPRM, the Commission provided requirement to rescind existing non- $25,019, respectively. Furthermore, an IRFA, stated its belief that the competes, and removes the ownership while there are additional proposal will not have a significant threshold from the sale of business nonmonetizable costs associated with economic impact on small entities, and exception.1206In light of the comments, the final rule, there are also solicited comments on the burden on the Commission has carefully nonmonetizable benefits which would any small entities that would be considered whether to certify that the at least partially offset those costs, as covered.1198In addition to publishing final rule will not have a significant explained in Part X.F.6. the NPRM in the Federal Register, the impact on a substantial number of small
Administration Office of Advocacy’s Basis 1203The Commission received over 26,000 (‘‘SBA Advocacy’’) roundtable on the comment submissions in response to its NPRM. See The Commission describes the proposed rule with small entities,1201in Regulations.gov, Non-Compete Clause Rule (Jan. 9, 2023), https://www.regulations.gov/document/FTC- objectives and legal basis for the final 2023-0007-0001. To facilitate public access, 20,697 rule in Part IV.B and IV.C and the legal 11975 U.S.C. 603–605. such comments have been posted publicly at authority for the final rule in Part II. 1198NPRM at 3531. www.regulations.gov. Id. (noting posted comments). 1199FTC, Press Release, FTC Proposes Rule to Ban Posted comment counts reflect the number of 1207SBA, A Guide for Government Agencies: How Noncompete Clauses, Which Hurt Workers and comments that the agency has posted to to Comply With the Regulatory Flexibility Act, at 19 Harm Competition (Jan. 5, 2023), https:// Regulations.gov to be publicly viewable. Agencies
C. Issues Raised by Comments, the frequently, and employment for them aerospace industry and suggested the Commission’s Assessment and did not change.1212An economist stated number of spinoffs could be greater with Response, and Any Changes Made as a the NPRM’s findings show that non- a nationwide ban on non-competes. The Result competes harm small business commenter stated that even delays in formation and that firms struggle to hire founding a startup slow innovation. The 1. Comments1209on Benefits to Small and grow in States that are more likely commenter looked at the employment Businesses and the Commission’s to enforce non-competes. Another history of these aerospace startup Findings1210 commenter identified an additional founders and stated that, while it could a. Comments study showing that Hawaii’s ban on not determine whether they had non- Numerous small businesses and small non-competes in the technology competes, their work history suggested business owners generally supported industry increased the number of they were not constrained in the labor the proposed rule and shared two technology startups.1213 market. primary reasons, among others, that the Some commenters cited the Small Many small businesses commented rule may uniquely benefit small Business Majority’s polling data on non- that non-competes prevented them from business owners. First, because non- competes. The survey finds that 67% of hiring the right talent and harmed their competes are expressly designed to small businesses that currently use non- businesses, often because small prevent workers from starting new competes support the proposed ban1214 businesses could not afford a lawsuit or businesses within the industry and and 46% of small business owners have even the legal costs of determining geographic market that worker is been subject to a non-compete that whether a non-compete with a experienced in, commenters said non- prevented them from starting or perspective employee was competes prevent new business expanding their own businesses.1215 unenforceable.1220A technology startup formation and threaten new small Additionally, 35% of small business organization stated that startups are businesses. Thus, consistent with the respondents reported that they have much more likely to survive with empirical evidence,1211commenters been prevented from hiring an employee experienced counselors and said a ban on non-competes will drive because of a non-compete.1216The mentors.1221A policy organization small business creation as survey also finds that of the 312 small stated that non-competes favor entrepreneurial employees will be free businesses that responded, 59% established and large companies, to compete against their former expressed agreement that NDAs could because they can use non-compete employers. Second, commenters said likely protect confidential information litigation strategically to chill movement non-competes harm small businesses by or trade secrets as effectively as a non- of experienced executives to startups preventing them from hiring compete.1217The online survey had a and smaller firms that lack the resources small sample size of 312 small business to contest the non-competes in court. experienced workers. The Commission owners and decision-makers, and had a The policy organization also stated considered all comments related to margin of error of +/¥6%.1218An workers with non-competes often go to small businesses and addresses many of economist commented that these survey an established competitor that has the them in Parts IV.B and IV.C and findings provide specific evidence resources to protect them in case of a throughout this document.
see also Small Bus. Admin., Table of Size of startups formed by alumni of five disproportionately reduce Standards, https://www.sba.gov/document/support- leading tech companies as well as key entrepreneurship for women, and table-size-standards. Because commenters did not within-industry spinoffs in the argued that disproportionate financial provide their NAICS number or annual receipts, challenges for women mean women and many did not provide the number of workers, the Commission is unable to determine whether 1212Kang & Fleming, supra note 536. entrepreneurs have fewer resources to each individual commenter meets the SBA’s 1213See Glasner, supra note 528. withstand other harms from non- definition of a small business. Instead, for purposes 1214Sm. Bus. Majority, Opinion Poll, Small competes, including lack of access to of considering comments from small businesses, the Business Owners Support Banning Non-Compete Commission relies on the commenter’s self- Agreements 2 (Apr. 13, 2023). The survey also finds talent.1222A law firm stated that a small description of being a small business or start-up. that 51% of small businesses that do not use non- business exception to the rule would 1210This section captures comments related to the competes support the proposed ban. lead to an inefficient ‘‘cliff’’ effect, potential benefits of the final rule for small 1215Id. where small businesses who previously businesses. These comments do not directly address 1216Id. fell within the exception would need to the IRFA. Comments on the IRFA are captured in 1217Id. at 3 (finding that 24% strongly agreed and Part XI.G. Many comments and issues concerning 35% somewhat agreed). small businesses are also discussed in Part 1218Id. at 2. 1220Id. IV.B.3.b.i. 1219See Part IV.B.3.b.i (summarizing these 1221Id. 1211See Part IV.B.3.b.i. comments). 1222See also Marx (2022), supra note 519. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38492 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations rescind their existing non-competes In response to the comment Commission addresses these comments after surpassing a threshold. Finally, discussing startups in the aerospace in this Part XI.C.2 and addresses direct and importantly, numerous workers at industry, the Commission notes that the potential costs in Part XI.E. The small businesses reported substantial conclusions of the commenter align Commission appreciates the small harms from non-competes consistent with the empirical evidence that the businesses and entrepreneurs who with the harms cited in Part IV.B.2 and most successful startups are within- shared their experiences in the IV.B.3.a, just as workers for large industry spinoffs.1223However, the comments. employers did. Commission notes that according to the Commenters raised concerns that data presented in the comment, some of eliminating non-competes for all b. Responses to Comments the founders the comment described as businesses would allow larger As the Commission explained in Parts being unrestrained in the labor market businesses and incumbents to easily IV.B.3.b and IV.C.2.c, the weight of the have significant gaps in their work hire away talent from smaller empirical evidence supports the history, though the Commission cannot competitors and startups. Other small conclusion that non-competes inhibit determine the cause of any gaps. businesses said they had been harmed new business formation and foreclose As explained in Part IV.C, the in the past by former workers competing small and other businesses from Commission adopts a partial exception against them, including by recruiting accessing the talent they need to grow in §910.2(a)(2) for senior executives clients and other workers, or by large and succeed. Most new businesses are under which their existing non- competitors hiring their workers. small, and non-competes are expressly competes—non-competes entered into Similarly, some industry associations designed to prevent workers from before the effective date—are not and small businesses said non-competes starting new businesses in the fields covered by the final rule. Employers protect independent businesses, they know best. The Commission cannot, however, enter into new non- including medical practices, from appreciates the small businesses and competes with senior executives as of dominant consolidators, as high entrepreneurs who shared their the effective date. The evidence and recruitment, retention, and other costs experiences in the comments. These comments describing the importance of may induce small businesses to sell comments and the many comments freeing senior executives from non- their business to consolidators. discussed in Parts IV.B.2 and IV.B.3 competes with respect to founding and Relatedly, some healthcare from small businesses align with and supporting new and small businesses organizations argued a ban that does not bolster the empirical evidence. The contributed to the Commission’s cover nonprofit hospitals and health comments illustrate the real-world decision to ban future non-competes for systems would provide those large impacts of non-competes on senior executives instead of excepting nonprofits with an unfair advantage entrepreneurs and would-be senior executives entirely from the final over independent medical practices. entrepreneurs, both before and after rule. The Commission is aware that Some small businesses offered the formation of a business. Moreover, the existing non-competes with senior same justifications as other businesses labor market effects—including executives will reduce some of the for using non-competes but emphasized reducing labor mobility and artificially benefits for new and small businesses as the heightened potential damage to suppressing wages and job quality—are fewer senior executives will be free to smaller businesses less able to bear not different or mitigated when a worker join or found those businesses costs, including being forced to close or works for a small business rather than beginning on September 4, 2024. sell.1225Many of these comments a large one. Studies finding harm from However, senior executives are a small, asserted that small businesses relying on non-competes examined both large and narrowly defined group, meaning there legitimate trade secrets would be small businesses, and the Commission will still be numerous experienced especially harmed if a worker took that believes that small businesses’ use of workers freed from non-competes that information to a competitor or new non-competes causes the same harms can found or support small businesses, business, particularly because they set forth in Parts IV.B and IV.C, and senior executive non-competes will would be least equipped to detect theft including harm to other small eventually become phased out. In or retain sophisticated legal counsel to businesses. addition, the Commission expects small litigate potential trade secrets or NDA Based on these and other comments, businesses to receive the other claims, thus reducing investment and the Commission believes that many anticipated benefits of the final rule. innovation.1226A law firm argued that small businesses are blocked from
VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00152 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38493 stated if non-competes are banned, they to small businesses that cannot protect addressing the different concerns of might silo workers and information to their workers, customers, and small entities and consider, analyze, limit the potential harm from a worker proprietary information with non- and tailor alternatives to the size and leaving for a larger competitor and competes. A small business stated that type of entity to minimize adverse would harm the business. One business NDAs and non-solicitation clauses were impacts to small entities.1230It stated stated that while banning non-competes too difficult to enforce, as it was told by that a categorical ban was inappropriate might allow more market entrants, those judges that in order to win a non- given the range of industries and nature new entrants will be more likely to fail solicitation suit against a former worker of economic impacts.1231One business without the protection of non-competes who purportedly took clients, the requested an exception for highly paid for worker retention and confidential business would need to subpoena its workers at small businesses, to create a information. Some business associations own former clients to testify, which predictable bright-line rule while stated small business owners often rely would damage the business’s leveling the playing field for small on independent contractors and sole reputation. businesses. An industry association proprietors such as marketers to build A physician said they were able to asked for an exception for newly formed their businesses and share proprietary start an independent practice while businesses to encourage capital information with them (meaning complying with a non-compete and hire formation among start-up entities. contractors may have access to others in compliance with their non-
capital than more established 1228SBA Off. of Advocacy, FTC–2023–0007– 1231Id.
businesses, while a community bank 21110 at 3. 1232See Parts IV.B and IV.C. similarly said it may be unable to lend 1229NPRM, proposed §910.1(e). 1233See id. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38494 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations on the merits to retain workers, are also considers the overall effect on all comments from small businesses, non- accessible to small businesses. On the business, including small businesses, competes limit their ability to hire latter, small businesses have potentially and finds that the final rule will not experienced, productive workers. While distinct options from larger firms reduce innovation by small business. it may be true in some cases that large because of their greater ability to be In response to the comments that businesses will be able to ‘‘poach’’ flexible and responsive to their workers’ businesses would limit sharing workers from smaller business, smaller preferences. Moreover, the Commission confidential information with their businesses would also be better able to notes that no evidence exists to support workers or that a small business’s hire talent from large (or other) the hypothesis that trade secret inability to protect confidential businesses under the final rule. In fact, litigation will increase after the final information would cause new theoretically, the final rule would be rule takes effect. Recent evidence businesses to fail, the Commission notes more beneficial to smaller businesses suggests trade secret litigation does not that use of less restrictive alternatives, because they would no longer be increase following bans on non- including, for example, NDAs, fixed hamstrung by the threat of non-compete competes.1234With a bright-line rule term contracts, and worker retention litigation by large firms when hiring banning non-competes, small policies, would allow small businesses experienced workers from those firms. businesses, like other business, will not to maintain the same or near same level To the extent large firms can afford to face or have to undertake litigation of protection for the confidential pay out a worker non-compete or to related to non-competes, which may information they might share and want litigate or threaten litigation to secure partially offset other litigation costs if to protect. Accordingly, to the extent it talent they want from a small firm, a ban firms do substitute other litigation. In is productive for a small business to on non-competes will better level the fact, the purported dynamic where protect such information or share it with playing field between small and large small firms are outspent and a worker, the firm would adopt these firms competing for talent. While as outmatched by large firms that drive up alternatives and be able to continue to stated by one commenter, some small the cost of trade secrets litigation, is the operate with the same or similar use of businesses may be successful if they are exact dynamic many small businesses confidential information. Moreover, the able to use non-competes, the empirical face when sued over a non-compete, Commission is not aware of any evidence supports the conclusion that which can also force small businesses to empirical evidence supporting the new business formation will increase close.1235While the Commission does conclusion that firms would share less overall under the final rule, and the not have data on the frequency of each confidential information or be less able Commission is not aware of any type of litigation or how often it forces to protect it. In fact, the evidence shows evidence of small business closure small businesses to close, these that both within-industry and non- patterns. Businesses also have other comments indicate that this alleged within industry spinouts are better alternatives to retain workers.1238 legal threat is already present in a quality, on average, when non-competes Finally, the empirical evidence different form. Moreover, the are less enforceable, which reinforces demonstrates ways in which non- overbreadth of non-competes that the conclusion that small businesses do competes advantage large businesses employers cite as the source of their not rely on non-competes to thrive.1237 against smaller ones.1239 benefits for reducing litigation costs is Indeed, no empirical evidence shows In response to comments that argued also the source of the negative effects of new businesses fail at a higher rate non-competes were needed to promote non-competes on competitive when (or because) non-competes are stability and worker retention, the conditions, and pecuniary benefits to a less enforceable. To the extent some Commission notes there is no evidence firm engaged in an anticompetitive businesses may choose to limit that stability and worker retention are practice are not a cognizable information sharing (as some individual economically productive in and of justification for an anticompetitive comments suggest), the Commission themselves. The overall evidence on the practice.1236 concludes that the benefits of the final harms from non-competes demonstrates Additionally, the Commission is rule with respect to earnings, new that retention of workers through non- unaware of any evidence that small business formation, and innovation competes has considerable costs to both businesses in States where non- justify any limited resulting negative labor markets and product and service competes are less enforceable are more effect. markets. Importantly, businesses also likely to experience trade secret In Parts IV.D.1 and X.F.7.a, the have other, less restrictive alternatives— misappropriation, or evidence that Commission examines the evidence on that do not tend to negatively affect small businesses are at a distinct human capital investment and other competitive conditions—to retain disadvantage in these States. Finally, investment and finds uncertainty workers as discussed in this Part and in the Commission notes that despite regarding whether the effects on training Part IV.D.2. In response to the comment claims that using non-competes to and other investment will be benefits or that small businesses will be less likely protect trade secrets supports costs under the final rule. The to afford retaining workers than large innovation, the empirical evidence Commission distinguishes between core businesses that can pay more, the shows increased enforceability of non- training and advanced training, finding Commission notes that increases in competes on net in the aggregate harms that businesses may be able to spend innovation are likely to make small innovation. Again, the Commission less on core training under the final rule businesses more productive and to the extent businesses are able to successful, allowing them to better 1234Greenwood, Kobayashi, & Starr, supra note better match workers with their needs. compete with their larger competitors.
757. The Commission notes that this study The Commission similarly finds that Moreover, the Commission notes that, in supplements—but is not necessary to support—its new business formation under the final addition to those retention alternatives, finding that no evidence supports the conclusion that litigation costs will increase under the final rule could result in an increase in many workers commented that their rule. That finding is based on the Commission’s overall capital investment or serve to non-competes prevented them from expertise and the rulemaking record, including offset any decreased capital investment seeking jobs with better working relevant comments. This study was published after in incumbent firms. As noted in the close of the comment period.
1236See Part II.F. 1237See Part X.F.9.a. 1239See Part IV.B.3.b. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38495 conditions, shorter commutes, more limited non-competes have been unable owners when they are selling their flexible hours, or more career to obtain financing and commenters business. While individual businesses advancement opportunities, among provide no related evidence. Again, might see decreased value in a sale from others.1240Small businesses have ways small businesses will have less being unable to use non-competes for to compete for workers beyond wages restrictive alternatives as a means of workers, any decrease is justified by the alone. protecting confidential information. net aggregate benefits of freeing labor Many of the comments from small Moreover, with respect to new business markets and product and service businesses, as well as from other formation, workers seeking to start their markets from non-competes. Again, commenters, appear to confuse non- own businesses will be able to reassure pecuniary benefits to a firm engaged in competes with other types of banks that their business will not face an anticompetitive practice is not a agreements, such as non-solicitation the threat of litigation or a court cognizable defense.1244 agreements or NDAs, and argue that enjoining them from continuing with In response to the proposed non-competes are needed to prevent their business because of a non- definitions of ‘‘small business,’’ first, as former workers from taking the compete. explained in Part X.H, the Commission employer’s customers or clients or In response to SBA Advocacy’s declines to create an exception for small disclosing confidential information. The comment on compensation for non- businesses. Second, the SBA already final rule does not ban non-solicitation competes, the Commission considered defines ‘‘small business’’ based on size clauses unless they meet the definition this issue in Part IV.C. and decided to standards set forth in 13 CFR 121.201, of non-compete clause.1241While one allow existing non-competes with senior and agencies are prohibited from commenter argued that non-solicitation executives, which the Commission finds deviating from this definition without clauses may be more difficult to enforce are most likely to have involved following the procedures set out in 13 than non-competes, the Commission consideration, to remain in force. CFR 121.903.1245 weighs the cost of this potential In response to the comment on the In response to the comments arguing increased difficulty against the harms 8(a) business development program, the that the Commission’s jurisdiction does from non-competes and finds that any Commission notes that there are likely not extend to tax-exempt nonprofit marginal benefit compared to a non- program participants in States where hospitals and healthcare organizations solicitation clause does not justify the non-competes are banned or partially and that the final rule would, thus, give costs of non-competes. And as banned and, thus, are not able to use large nonprofits an unfair advantage explained previously, pecuniary non-competes. Moreover, the program over small practices, the Commission benefits to a firm from an aims to help firms owned and addresses this question in Parts II.E.2 anticompetitive practice are not a controlled by socially and economically and V.D.4. In response to the comment cognizable defense.1242 disadvantaged individuals with various on difficulties in using TRAPs under the In response to comments that small supports and assistance to improve their proposed rule, the Commission notes businesses are more reliant on success in securing government the final rule does not ban TRAPs, but independent contractors and without contracts. There is no basis to believe covers terms and conditions of non-competes independent contractors such assistance hinges on these small employment that meet the definition of might have access to confidential businesses being able to use non- non-compete clause as delineated in information for multiple competitors, competes with their workers. Like other §910.1 and described in Part III.D. the Commission first notes that the final firms, program participants have viable, The commenter asserting that the rule does not prohibit agreements less restrictive alternatives that do not final rule would exacerbate a labor preventing a worker from working for tend to negatively affect competitive shortage for small businesses did not two firms simultaneously.1243Many conditions. The evidence presented in provide evidence to support this claim. alternatives to non-competes allow this Part shows that on the whole, small The Commission, however, finds that a businesses working with independent businesses—including 8(a) ban on non-competes will increase labor contracts to protect their confidential participants—are expected to benefit mobility and enable skilled workers information, including maintaining from the ban on non-competes by, for who are currently trapped by non- security of confidential information as example, having a larger pool of talent competes to work for others in the well as NDAs and other such from which to hire workers. industry. In response to the comment that large Finally, the Commission notes that agreements, as described in Part IV.D.
share confidential business information definition of non-compete clause in Part The Commission has carefully and, in fact, they are likely to be III.D, which the Commission believes considered all of SBA Advocacy’s and working under an agreement detailing will reduce both confusion and evasion. other stakeholders’ comments, their responsibilities and to be more To the extent the commenter is raising including those requesting a small familiar with ways to assure clients that the possibility that such other restrictive business exception. The Commission any confidential business information employment terms may tend to has made the following changes, which shared with them will remain negatively affect competitive conditions, the Commission believes will benefit confidential.
D. Comments by the Chief Counsel for the estimate cannot account for and comments the Commission received Advocacy of the SBA, the Commission’s differential use of non-competes across align with that anecdotal evidence. Assessment and Response, and Any industries, these firms span all Changes Made as a Result industries and various sizes below the F. Projected Reporting, Recordkeeping, and Other Compliance Requirements The Commission received and standards set in the SBA’s size carefully reviewed the comment from standards. To comply with the final rule, small the SBA.1247The issues raised by the The Commission sought comments on entities must do three things. First, to SBA and the Commission’s responses all aspects of the IRFA, including the comply with §§910.2(a)(1)(i) and are included in Parts XI.C and XI.F. description and estimated number of 910.2(a)(2)(i), which state it is an unfair small entities to which the rule would method of competition to enter into a E. Description and Estimated Number of apply. A business association claimed non-compete with a worker, small Small Entities to Which the Rule Will the IRFA estimated the number of small entities can no longer enter into new Apply businesses solely based on one non-competes with incoming workers, The final rule will impact all small incomplete study, the Colvin and including senior executives. This may businesses, across all industry classes, Shierholz study, which it argued include revising human resources that use non-competes. It may also counted only firms with no union materials and manuals and template or impact some small businesses that do members who said all employees signed form contracts to ensure they are not not use non-competes but are impacted misused on a forward-going basis, and by other businesses’ use of non- 1249See Small Bus. Admin., Table of Size making strategic decisions regarding competes. The Commission does not Standards, https://www.sba.gov/document/support- workers’ employment terms. Second, to table-size-standards.
expect that there are classes of comply with §910.2(a)(1)(ii) and (iii), 1250The Commission uses the latest data available businesses which will face from the Census Bureau’s Statistics of U.S. small entities cannot enforce (or make disproportionate impacts from the final Businesses database, available based on firm misrepresentations about) existing non- rule. revenue and firm size. Census Bureau, Statistics of competes for workers other than senior U.S. Businesses (SUSB) (last revised Nov. 17, 2023), For the vast majority of industries, executives after the effective date. That https://www.census.gov/programs-surveys/ there is no nationwide granular data susb.html. Values are deflated to current dollars is, businesses must refrain from suing or regarding the percentage of firms that using https://www.bls.gov/data/inflation_ threatening to sue workers other than use non-competes, which would calculator.htm. As used in this analysis, per the senior executives regarding a non- Census Bureau, ‘‘a firm is a business organization facilitate calculating the number of consisting of one or more domestic establishments compete after the effective date; but small entities in a given industry using in the same geographic area and industry that were formal contract rescission is not non-competes. Because of this data specified under common ownership or control.’’ On required. Third, businesses must the other hand, ‘‘an establishment is a single limitation and given the relatively stable provide notice to workers other than physical location at which business is conducted or percentage of firms using non-competes services or industrial operations are performed.’’ senior executives that the worker’s non- across the size distribution,1248the See Census Bureau, Glossary, https:// compete will not be enforced against the www.census.gov/programs-surveys/susb/about/ worker. The Commission provides a safe glossary.html. The number of small firms calculated 1246See generally Beck Reed Riden Chart, supra here has decreased compared to the IRFA based on harbor notice that must be provided note 1052. In 2023, Maryland increased its non- the updated Census Bureau data and SBA size only to workers with known contact compete compensation threshold to $19.88 per hour standards. information. These foregoing steps and set a slightly lower threshold for small 1251See Colvin & Shierholz, supra note 65. The entail some potential legal and e C m od p e lo s y e e c r . s 3 a – t 7 $ 1 1 6 9 . .20 per hour. Md. Lab. & Empl. C fir o m m s m w is h s i i c o h n u n s o e t e n s o t n h - a c t o t m he p e e t s e t s im is a b te a d se p d e o rc n e n a t s a u g r e v o e f y administrative costs. 1247SBA Off. of Advocacy, FTC–2023–0007– of businesses with employees. In addition, the As calculated in Parts X.D.1.a and 21110. Small Business Majority’s recent survey of small X.D.2.a, the Commission estimates the 1248See Colvin & Shierholz, supra note 65 at 5. businesses finds that 48% of respondents use non- legal and administrative costs would The Commission emphasizes that, since smaller competes. Sm. Bus. Majority Opinion Poll, supra firms generally use non-competes at a lower rate, note 1214. The Commission does not find that this based on the numbers reported in Table 1, the survey has a sufficiently representative sample size 1252See Colvin & Shierholz, supra note 65. estimate of the number of affected small entities is to be considered definitive but notes that it aligns 1253See generally id. likely larger than is true in practice. with the Colvin & Shierholz estimate. 1254Id. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38497 total $538.48 to $1,076.96 for each small $134.62),1257resulting in a total cost of restrictive covenants may not need to firm, plus an additional $155.85 for $134.62*2.71 million = $364.8 million. expand the scope of existing restrictive each establishment owned by that firm, There may be substantial heterogeneity employment provisions or enter into plus an additional $1.81 per worker. A in the costs for individual firms; new ones. single-establishment firm with 10 however, the Commission believes this Among the approximately one half of workers, for example, would bear number is conservative. For firms whose firms that use non-competes,1259the estimated costs of $712.45 to costs of removing non-competes for Commission assumes that the average $1,250.93.1255Only a small portion of incoming workers is greater, the work of firm employs the equivalent of four to the average cost estimated for each ensuring that contracts comply with the eight hours of a lawyer’s time to revise small firm—$155.85 per establishment, law would overlap substantially with its contractual practices.1260The plus $1.81 per worker—is required the costs of updating contractual Commission emphasizes that this is an under the rule. The remainder of the practices, described in Part X.F.7.b. average to underline the fact that there estimated cost is attributable to legal For each establishment of each firm, would likely be large differences in the costs which firms may (but are not estimated direct compliance costs total extent to which firms update their required to) undertake to revise their $21.23 + $134.62 = $155.85, plus $1.81 contractual practices. Many firms, contractual practices. The FRFA per worker with a non-compete. including those that use non-competes Some business commenters have only with workers who do not have assumes that the value of human indicated that they may add or expand access to sensitive information, or those resource professionals’ times and legal the scope of NDAs or other contractual that are already using other types of professionals’ time is equal to twice provisions. This legal work is not restrictive employment provisions to their average wages, which results in mandated or required by the rule; it protect sensitive information, may opt updated estimates.1256In an abundance would be undertaken only by the subset to make no changes. Other firms may of caution, the Commission has erred on of firms and workers for whom firms employ several hours or multiple days the side of overestimating costs.
1. Legal Costs costs firms to revise their contractual equivalent of 1.5 to 3 working days of To ensure that incoming workers’ practices when they can no longer use an attorney’s time, this would result in contracts do not include non-competes non-competes, and commenters did not the estimate of 4–8 hours on average. The Commission further emphasizes and that they fully comply with the provide evidence on costs. However, this estimate is an average across all final rule, firms may employ in-house there is evidence indicating that firms employers that would be covered by the counsel, outside counsel, or human that use non-competes are already using final rule. There is likely substantial resource specialists (depending on the other types of restrictive employment heterogeneity in the amount of time complexity of the relevant non- provisions. Balasubramanian et al. find firms would use to revise contractual compete). For many firms, this process that 95.6% of workers with non- practices; very large firms that use non- would likely be straightforward (i.e., competes are also subject to an NDA, competes extensively would likely incur simply not using non-competes or 97.5% of workers with non-competes greater costs.
removing one section from a boilerplate are also subject to a non-solicitation Under the assumption that the contract). Other firms may have more agreement, NDA, or a non-recruitment average firm that uses a non-compete complex agreements or choose to use agreement, and that 74.7% of workers employs the equivalent of four to eight more time. The Commission assumes with non-competes are also subject to hours of a lawyer’s time, this analysis that, on average, ensuring that contracts all three other types of provisions.1258 calculates the total expenditure on for incoming workers do not have non- Firms that are already using multiple updating contractual practices to range competes would take the equivalent of from $134.62*4*2.59 million = $1.4 one hour of a lawyer’s time (valued at 1257BLS, Occupational Outlook Handbook, billion to $134.62*8*2.59 million = $2.8 Lawyers (last modified Sept. 6, 2023), https:// www.bls.gov/ooh/legal/lawyers.htm (updated for billion. Note that this assumes decisions 1255‘‘Ten workers’’ is chosen as an illustrative inflation to 2023 dollars and based on updated BLS regarding protection of sensitive example. data). Assumed lost productivity is twice the information and contract updating are 1256See Part X.F.7.b for a detailed description of median wage. the calculation and assumptions. The Commission 1258Balasubramanian, Starr, & Yamaguchi, supra notes that a typographical error in the IRFA resulted note 74. The value 97.5% is calculated as (1–0.6%/ 1259Colvin & Shierholz, supra note 65 at 1. in the Commission reporting preliminary figures 24.2%), where 0.6% represents the proportion of 1260Part X.F.7.b.i. that were substantially larger than the comparable workers with only a non-compete, and no other 1261These estimates are derived from outreach to calculations in the preliminary section 22 analysis, post-employment restriction, and 24.2% represents employment attorneys active in assisting firms in which accounts for some of the differential between the proportion of workers with a non-compete, writing their non-competes. Commenters did not the preliminarily reported figures in the IRFA and regardless of what other post-employment provide additional information or data that could be the final estimates here. restrictions they have. used to update these estimates. VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00157 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38498 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations made at the firm, rather than competes at small businesses of association said most small businesses establishment, level, since sensitive 584,843,1265the overall cost of mailed do not have the organizational information is likely shared across notice provision is therefore estimated development required to issue the business establishments of a firm. to be $1.1 million. notice and would need to hire outside For each affected small business, the counsel. A group of industry
2. Administrative Costs for Notification of the direct compliance costs for existing agreements and contracts and Requirements employers, both for rescinding non- its contract negotiation practices, but To reduce compliance costs and competes for workers who are already the comment did not provide increase compliance certainty, employed as well as the costs of an information to support a different §910.2(b)(5) provides that an employer attorney to ensure contracts for estimate. Some commenters argued that complies with the notice requirement in incoming workers do not have non- small businesses lacking internal §910.2(b)(1) where it provides notice to competes.1266The IRFA also explained counsel or employment lawyers on a worker pursuant to §910.2(b)(4). the Commission’s assessment of the retainer would face substantial Furthermore, §910.2(b)(4) includes costs of updating contractual practices, unplanned expenses when seeking model language that constitutes notice if the employer seeks to do so, by outside counsel on whether other to the worker that the worker’s non- expanding the scope of other restrictive covenants violated the compete is no longer in effect. The contractual provisions to protect trade proposed de facto non-compete Commission estimates that composing secrets and other valuable provision. These commenters did not and sending this message in a digital investments.1267The Commission provide cost estimates. format to all of a firm’s workers and sought comment on all aspects of the First, in response to the proposed applicable former workers for whom IRFA.1268 rule’s Preliminary Regulatory Impact digital contact information is available In support of the proposed rule, one Analysis, commenters discussed that would take 20 minutes of a human employment law firm said there are no the estimated compliance costs and resources specialist’s time.1262 significant recurring compliance costs to costs of contractual updating may According to BLS, the median wage for the final rule that would create an underestimate true costs for the broader a human resources specialist was $31.85 undue burden for small employers business community and provided per hour in 2023.1263The cost of compared to larger employers. The alternative estimates of the time compliance for currently employed Commission agrees. The final rule is employers might spend complying with workers with digital contact information designed to require only a one-time the rule and updating contractual available is therefore ($31.85*2)/3 = action and no recurring compliance practices, as well as the charged rates of $21.23 per establishment. As estimated requirements in order to minimize outside counsel. These comments are in Part XI.E, there are 2.59 million small compliance costs for employers. A addressed in the sensitivity analyses firms, comprising 2.71 million small technology startup organization said the presented in Part X.F.7. The establishments, in the U.S. that use non- rule would save small businesses Commission has also updated the competes.1264Conservatively assuming significant legal costs from the complex estimated legal costs in this Part. that each establishment must engage in legal analysis currently necessary when Commenters also argued that small its own communication (i.e., that a trying to hire a worker subject to a non- businesses would face greater costs firm’s headquarters does not have the compete, particularly when trying to associated with the use of outside ability to send a company-wide email, assess the patchwork of State laws, counsel but did not quantify those costs for example), this means that the total ‘‘reasonableness’’ tests, and choice-of- for small businesses. Again, the direct compliance cost for workers who law issues, which startups have few Commission provides a sensitivity are already employed and for whom resources to pay. analysis reflecting the cost of digital contact information is available Some commenters raised concerns experienced outside counsel for all is $21.23*2.71 million = $57.5 million. about the preliminary assessment of firms in Part X.F.7.b.i. Moreover, as the Each small firm must additionally direct compliance costs, primarily Commission notes, the estimate reflects mail notice to workers with non- concerning unsubstantiated costs of significant heterogeneity, so that it is competes for whom a physical address consulting with counsel. Some likely that some firms will simply be is available, but digital contact commenters said small businesses able to remove the paper or electronic information is not. The cost per notice would need to consult with outside copy of the non-compete from their is estimated as 5 cents for one printed counsel to ensure they properly comply website or workplace manual— page plus mailing cost of 70 cents plus with the final rule, though they did not requiring no attorney time—while one minute of an HR professional’s explain why. Another business others, like the commenter, may spend time, at $63.70 per hour, for a total of more time consulting with counsel. $1.81 per notice. Given an estimated Second, in response to these and 1265Estimated as 80% * 18.1% * 66% * count of affected workers with non- (33,271,644–27,151,987), where 80% is the other comments and as explained in percentage of covered workers (see Part X.F.4.a), Part III.D, the definition of non-compete 1262See Part X.F.7. 18.1% is the estimated percentage of workers with clause has been revised to reduce 1263See BLS, Occupational Outlook Handbook, non-competes (see Starr, Prescott, & Bishara, supra confusion and give employers and Human Resources Specialists, https://www.bls.gov/ note 68), 67% is the assumed percent of workers ooh/business-and-financial/human-resources- without digital contact information, and 6,119,657 workers a clearer understanding of what specialists.htm (last modified Sept. 6, 2023) = 33,271,644–27,151,987 is the count of workers at is prohibited, which will in turn reduce (updated for inflation to 2023 dollars). small businesses (see https://advocacy.sba.gov/wp- compliance costs. Third, the FRFA 1264The dataset is available at Census Bureau, content/uploads/2023/11/2023-Small-Business- includes updated compliance costs to 2021 SUSB Annual Data Tables by Establishment Economic-Profile-US.pdf). reflect any remaining need to assess Industry, Industry (Feb. 2022) (last revised Sept. 15, 1266See NPRM at 3532. 2023), https://www.census.gov/data/tables/2021/ 1267See id. at 3532–33. contracts under §910.2(a). Fourth, the econ/susb/2021-susb-annual.html. 1268See id. at 3531. Commission has made the notice VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00158 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38499 requirement as simple as possible by businesses might see decreased or raised categories of indirect costs that providing model language for the notice eliminated direct and indirect may be implicated (and it is not clear in §910.2(b)(4) and a safe harbor compliance costs if they can maintain exactly what potential costs may fit into allowing employers to use a last known existing senior executive non-competes. those categories), commenters did not address and an exception for employers Many commenters also stated there provide any data or information that who do not have a workers’ contact are other indirect costs. SBA Advocacy could enable the Commission to information. Employers can provide the suggested that the IRFA did not account estimate any indirect costs. Some of notice by hand or through the mail, for additional potential costs, including these costs are also attenuated and email, or a text message,1269and the costs of services, including higher speculative. Many of these concerns are employers are not required to provide legal fees to protect information, also addressed in Parts IV.D and XI.C. notice if they have no method of potential increased training, hiring and The commenters also misunderstand the contacting a worker by paper or digital retention costs, and process changes.1271 calculations in the IRFA and RIA; the format.1270An employer is required Similarly, a business association argued estimates are an average across only to notify workers that existing non- small businesses could face additional employers using non-competes, and competes are no longer in effect and costs for finding alternatives to protect there is likely to be substantial refrain from including non-competes in assets and to alter hiring, training, and heterogeneity. The calculations account future contracts. This process is retention processes. Some business for the assumption that some firms may designed to be as easy as possible for associations argued that the cost of spend more than this amount. In employers. Employers should rarely updating contractual practices would be response to comments on hiring costs, need to seek outside legal assistance for higher because businesses would need some firms may save on hiring costs complying with the notice requirement, to consult counsel, and many small from easier hiring, while others might and commenters do not provide an businesses may be unable to afford to do have increased turnover costs.1273 explanation of why legal assistance so. A business organization stated that Businesses also have other options to would be a necessary part of this the Commission should consider the compete on the merits besides raising process, though the cost of any such costs from a small business diminishing wages, as many commenters indicated legal assistance (to identify senior in value to potential buyers because it they sought jobs with better hours, more executives for whom notice is not cannot record the value of its non- flexible schedules, shorter commutes, required) is accounted for in Part XI.F.1. competes. career opportunities, and other Finally, the Commission will provide Another business organization said benefits.1274Businesses will be better guidance materials for small entities to costs to small businesses are not limited able to hire workers experienced in their explain how to comply with the final to updating contractual agreements, field who require less training than rule. mentioning the use of non-competes to workers new to an industry.1275 The estimated compliance costs do protect assets and investments. A law Even if commenters’ unsupported not directly include any costs or savings firm suggested that trade secrets assertions that trade secret litigation and from the senior executive exception, litigation often costs unspecified NDA enforcement may be more costly because the number of workers the millions in attorney and expert fees and for businesses, including small exception might apply to is such a small investigations costs. A business businesses, are correct, such costs are portion of workers overall that any association commented that the rule justified by the benefits of the rule and effect is de minimis. At an individual would likely trigger additional litigation in any event pecuniary benefits to a firm firm level, small businesses might not costs for trade secret protection and from an anticompetitive practice are not be impacted by the exception (if no satisfying standards for injunctive relief, a cognizable justification.1276The workers earn above the total as well as unspecified additional costs Commission estimates that the final rule compensation threshold). Others might related to lost business relationships may increase or decrease overall face increased compliance costs if they and ideas. The business association litigation costs, and there is no evidence choose to use the exception and need to cited an article from the biotech in the literature to allow the evaluate whether a worker meets the industry as saying a ban will force Commission to quantify those costs or definition of senior executive (as biotech companies to find other ways to benefits.1277 accounted for in Part XI.F.1). However, protect themselves, likely through The comment citing an article on the the total compensation threshold increased trade secret litigation, and biotech industry overstates the article’s included in the final rule’s definition of recognizing that non-competes are statements. The article said the existing ‘‘senior executive’’ is designed to ensure critical to startups in the industry. increase in trade secrets litigation was that employers and workers do not need Two comments requested that the likely to continue if the rule were to conduct a job duties assessment for Commission publish a supplemental adopted, did not cite any evidence for every worker, only workers making IRFA to account for the rule’s potential this prediction other than that non- above the threshold. In addition, in impact. competes are often used to protect trade many cases it may be clear that a worker The Commission notes that agencies secrets, and noted that companies may does or does not meet the test for are generally not required to consider also use NDAs or restrict access to whether a worker is a ‘‘senior indirect costs, though it is considered a sensitive information.1278The article executive’’ without a detailed best practice.1272While commenters assessment. For example, CEOs and stratum of the national economy.’’); see also RFA Presidents are presumed to be in a Compliance Guide, supra note 1207 at 22–23, 64– policy-making position under §910.1 1271SBA Off. of Advocacy, FTC–2023–0007– 68.
and will not be otherwise subject to a 1273See Part X.F.9. 1272Mid-Tex Elec. Co-op., Inc. v. FERC, 773 F.2d job duties test, while highly paid 327, 342 (D.C. Cir. 1985) (‘‘[I]t is clear that Congress 1274See Part XI.C.2.b. workers in a non-executive role such as envisioned that the relevant ‘economic impact’ was 1275See Part X.F.7.a.
many physicians will not. Other small the impact of compliance with the proposed rule on 1276See Parts IV.D.3, X.F.5–6, II.F. regulated small entities[,]’’ and the court inferred 1277See Part X.F.7.c. that ‘‘Congress did not intend to require that every 1278Rosemary Scott, FTC’s Non-Compete Law 1269§910.2(b)(2). agency consider every indirect effect that any Could Propel Rise in Trade Secrets Lawsuits, 1270§910.2(b)(3). regulation might have on small businesses in any Continued VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00159 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38500 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations did not say that non-competes are in comments into the final rule, namely silo its intellectual property and critical to biotech startups.1279 the exception for existing senior implement safeguards to protect its The commenter asking the executive non-competes, simplifying information. In the Commission’s view, Commission to consider small business notice requirements, eliminating the rule’s effective date of September 4, valuation changes did not provide any rescission requirements, and 2024 will afford small entities a potential estimates of such a cost, nor eliminating the 25% threshold for the sufficient period of time to comply with did the commenter demonstrate that sale of business exception. In addition, the final rule, and commenters have not such costs exist. It is unclear whether the Commission’s analysis of benefits provided evidence that more time is this commenter was referring to the and costs in Part X includes an necessary.1285 value of non-competes for owners or for assessment of the benefits and costs of
H. Discussion of Significant Alternatives businesses. control number assigned by OMB.1288 After careful consideration, the The RFA requires that agencies Commission is not creating an exception A. The Proposed Rule include a description of the steps the for small entities or different regulatory In the NPRM, the Commission stated agency has taken to minimize the requirements for small entities. The that it believed the proposed rule would significant economic impact on small final rule provides that for workers contain a disclosure requirement that entities consistent with the stated other than senior executives, it is an would constitute a collection of objectives of applicable statutes, unfair method of competition for a information requiring OMB approval including a statement of the factual, person to enter into or attempt to enter under the PRA. The Commission stated policy, and legal reasons for selecting into a non-compete, enforce or attempt that this disclosure requirement was the alternative adopted in the final rule to enforce a non-compete, or represent proposed §910.2(b)(2), which would and why each one of the other that the worker is subject to a non- have required employers to provide significant alternatives to the rule compete.1283For senior executives, the notice to a worker with an existing non- considered by the agency which affect final rule provides that it is an unfair compete—i.e., a non-compete that was the impact on small entities was method of competition for a person to entered into prior to the effective date— rejected.1281Statutory examples of enter into or attempt to enter into a non- that the non-compete is no longer in ‘‘significant alternatives’’ include compete, enforce or attempt to enforce effect and may not be enforced against different requirements or timetables that a non-compete entered into after the the worker.1289Conservatively assuming take into account the resources available effective date, or represent that the that each establishment must engage in to small entities; the clarification, worker is subject to a non-compete, its own communication—i.e., a firm’s consolidation, or simplification of where the non-compete was entered headquarters does not have the ability to compliance and reporting requirements into after the effective date.1284Based send a company-wide email, for under the rule for small entities; the use on the available evidence, the example—the Commission estimated of performance rather than design Commission does not believe that the that covered employers would incur an standards; and an exemption from analysis in Parts IV.B and IV.C is estimated labor cost burden of 1,310,747 coverage of the rule, or any part thereof, fundamentally different for non- hours to comply with this requirement for I n s m Pa a r l t l I e X n , t i t t h ie e s C .1 o 28 m 2 mission discusses competes that are imposed by small (3,932,240 establishments × 20 entities. For this reason, the significant alternatives to the final rule. minutes). The Commission estimated Commission is not creating an exception Part IX also includes an assessment the associated labor cost for notifying for small entities or different regulatory determining that each of the significant affected workers who are already alternatives would not accomplish the req T u h i e re C m o e m n m ts i f s o s r io s n m i a s l l n e o n t t d it e i l e a s y . ing the employed is $9.98 × 7.96 million × objectives of the final rule. The effective date of the final for small 0.494 = $39,243,755.1290 Commission did incorporate some of the entities. Under §910.6, the final rule is The Commission stated that the alternatives proposed in the NPRM and effective 120 days after publication in proposed rule would impose only de minimis capital and non-labor costs.
(1) whether the proposed collection of current work email address or last establishment must engage in its own information is necessary for the proper known personal email address, or by communication—i.e., that a firm’s performance of the functions of the text message at a mobile telephone headquarters does not have the ability to agency, including whether the number belonging to the worker. send a company-wide email, for information would have practical Section 910.2(b)(3) provides an example. This yields an estimated utility; (2) the accuracy of the agency’s exception to the notice requirement in 3,397,545 covered establishments which estimate of the burden of the proposed §910.2(b)(1) where the person that would incur an estimated labor cost collection of information, including the would otherwise be required to provide burden of 1,132,515 hours to comply validity of the methodology and the notice has no record of a street with this requirement (3,397,545 assumptions used; (3) ways to enhance address, email address, or mobile establishments × 20 minutes). The the quality, utility, and clarity of the telephone number. Commission estimates the associated information to be collected; and (4) Section 910.2(b)(4) provides model labor cost for notifying affected workers ways to minimize the burden of these language that employers may use to who are already employed and for information collections on respondents. comply with the notice requirement. whom digital contact information is Section 910.2(b)(5) states that an available is $21.23 × 6.88 million × B. Comments Received employer presumptively complies with 0.494 = $72,141,201. No commenters specifically addressed the notice requirement in §910.2(b)(1) Businesses may not have digital the PRA analysis in the NPRM. where the employer provides a notice to contact information for workers. The However, the Commission received the worker pursuant to §910.2(b)(4). number of workers with non-competes extensive comments on its Preliminary And §910.2(b)(6) allows but does not who must therefore receive physical Regulatory Impact Analysis and Initial require employers, in addition to notice is the total number of covered Regulatory Flexibility Act Analysis, and providing the required notice in workers (101.1 million; see Part many of these commenters addressed English, to provide the notice in another X.F.7.a.i) times the percentage of the Commission’s estimates related to language (or languages). Section workers who have non-competes the cost of compliance. These comments 910.2(b)(6) also permits employers to (18.1%) times the percentage of workers are summarized in Parts X (the use any Commission-provided who require mailed notice (assumed to Commission’s Final Regulatory translation of the model language in be 66% of workers1296), for a total of Analysis) and XI (the Commission’s §910.2(b)(4). 12.1 million workers. The Commission Final Regulatory Flexibility Act The notice requirement has changed notes that the percentage of workers Analysis). The Commission also in two important respects from the who require mailed notice is likely a received comments on the proposed proposed rule. First, employers are no substantial overestimate, since it is notice requirement itself. These longer required to provide the notice to estimated based on the percentage of comments are summarized in Part IV.E. senior executives with existing non- individuals who receive health competes. Second, as long as employers C. Final PRA Analysis information digitally. The Commission provide the notice in English, they are believes that employers are more likely The Commission finalizes the permitted to provide the notice in a to have digital means of providing the proposed rule’s notice requirement language other than English. However, notice to their current workers largely as proposed, with some neither of these changes significantly adjustments to even further ease affects the burden of complying with the 1292BLS, Occupational Outlook Handbook:
compliance. In the final rule, notice. Senior executives are only Human Resources Specialists, https://www.bls.gov/ §910.2(a)(1)(ii) prohibits employers 0.75% of workers, so the cost savings to ooh/business-and-financial/human-resources- from enforcing existing non-competes— employers of not needing to provide the specialists.htm. The value in 2022 was $30.88, which was updated to 2023 dollars.
i.e., non-competes entered into prior to notice to senior executives are minimal. 1293The lost productivity of workers is assumed the effective date—with respect to No employer is required to provide the to be twice the median wage. See Part X.F.7.b.ii. workers other than senior executives. notice in a different language, so the 1294Census Bureau, 2021 SUSB Annual Data Section 910.2(b)(1) as finalized states rule does not require employers to incur Tables by Establishment Industry (December 2023), further that for each existing non- any compliance costs for doing so. https://www.census.gov/data/tables/2021/econ/ compete that it is an unfair method of The Commission estimates that susb/2021-susb-annual.html. 1295See Colvin & Shierholz, supra note 65 at 4.
competition to enforce or attempt to composing and sending the notice in a 1296See supra note 1165 (CMS Supporting digital format to workers for whom Statement assumes 66% of workers require mailed 1291Id. digital contact information is available notice from their health insurance companies). VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00161 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38502 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations especially, but also to their former PART 910—NON-COMPETE CLAUSES deemed to have a policy-making workers. The Commission position even if the person has policy- conservatively adopts this estimate as §910.1 Definitions. making authority over a subsidiary or an upper bound. The cost of mailed As used in this part: affiliate of a business entity that is part notice provision includes some capital Business entity means a partnership, of the common enterprise. costs (the cost of postage and mailing corporation, association, limited Preceding year means a person’s materials) and the cost of a human liability company, or other legal entity, choice among the following time resource professional’s time. The cost or a division or subsidiary thereof. periods: the most recent 52-week year, per worker is estimated as 5 cents for Employment means work for a person. the most recent calendar year, the most one printed page plus mailing cost of 70 Non-compete clause means: recent fiscal year, or the most recent
Sec. similar to an officer with policy-making 910.1. Definitions. authority. An officer of a subsidiary or §910.2 Unfair methods of competition. 910.2. Unfair methods of competition. affiliate of a business entity that is part (a) Unfair methods of competition— 910.3. Exceptions. of a common enterprise who has policy- (1) Workers other than senior 910.4. Relation to State laws and making authority for the common executives. With respect to a worker preservation of State authority and enterprise may be deemed to have a other than a senior executive, it is an private rights of action. policy-making position for purposes of unfair method of competition for a 910.5. Severability. this paragraph. A natural person who person: 910.6. Effective date. does not have policy-making authority (i) To enter into or attempt to enter Authority: 15 U.S.C. 45 and 46(g). over a common enterprise may not be into a non-compete clause; VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00162 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations 38503
non-compete clauses—(1) Notice by email at an email address belonging BILLING CODE 6750–01–P required. For each existing non-compete to the worker, including the worker’s clause that it is an unfair method of current work email address or last Figure 1 to Paragraph (b)(4)—Model competition to enforce or attempt to known personal email address, or by Language VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00163 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38504 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations BILLING CODE 6750–01–C Commission-provided translation of the compete clause accrued prior to the
notice to a worker pursuant to attempt to enforce a non-compete clause paragraph (b)(4) of this section. (a) Bona fide sales of business. The or to make representations about a non-
and only to the extent, that such laws This part is effective September 4, would otherwise permit or authorize a If any provision of this part is held to 2024. person to engage in conduct that is an be invalid or unenforceable by its terms, unfair method of competition under or as applied to any person or PART 912—[RESERVED] §910.2(a) or conflict with the notice circumstance, or stayed pending further requirement in §910.2(b). agency action, the provision shall be By direction of the Commission,
affecting the authority of a State provision to other persons or attorney general or any other regulatory circumstances or the validity or Note: The following appendix will not or enforcement agency or entity or the application of other provisions. If any appear in the Code of Federal rights of a person to bring a claim or provision or application of this part is Regulations. APPENDIX A—TABLE A.1 Estimated Estimated Estimated increase in total increase in State number of annual worker average annual covered workers earnings worker earnings Alabama ..................................................................................................................... 1,620,882 $822,829,396 $508 Alaska ........................................................................................................................ 251,167 145,317,588 579 Arizona ....................................................................................................................... 2,460,342 1,410,771,964 573 Arkansas .................................................................................................................... 999,178 478,239,544 479 California .................................................................................................................... .............................. .............................. .............................. Colorado .................................................................................................................... 2,251,980 1,484,772,427 659 Connecticut ................................................................................................................ 1,314,029 945,571,637 720 Delaware .................................................................................................................... 367,291 220,637,013 601 District of Columbia ................................................................................................... 598,990 604,415,889 1,009 Florida ........................................................................................................................ 7,486,582 4,229,047,004 565 Georgia ...................................................................................................................... 3,764,270 2,188,893,667 581 Hawaii ........................................................................................................................ 495,988 270,123,206 545 Idaho .......................................................................................................................... 656,688 315,487,683 480 Illinois ......................................................................................................................... 4,735,066 3,051,620,266 644 Indiana ....................................................................................................................... 2,490,735 1,280,797,352 514 Iowa ........................................................................................................................... 1,229,598 624,937,405 508 Kansas ....................................................................................................................... 1,112,654 553,683,941 498 Kentucky .................................................................................................................... 1,536,365 759,416,081 494 Louisiana.................................................................................................................... 1,492,474 747,953,455 501 Maine ......................................................................................................................... 501,216 258,101,666 515 Maryland .................................................................................................................... 2,112,817 1,378,702,305 653 Massachusetts ........................................................................................................... 2,876,506 2,288,111,777 795 Michigan..................................................................................................................... 3,440,754 1,946,978,052 566 Minnesota .................................................................................................................. .............................. .............................. .............................. Mississippi.................................................................................................................. 916,362 384,971,511 420 Missouri...................................................................................................................... 2,256,955 1,184,012,673 525 Montana ..................................................................................................................... 396,982 191,696,465 483 Nebraska.................................................................................................................... 787,174 399,373,568 507 Nevada....................................................................................................................... 1,177,510 646,371,090 549 New Hampshire ......................................................................................................... 536,516 343,360,391 640 New Jersey ................................................................................................................ 3,307,696 2,301,979,408 696 New Mexico ............................................................................................................... 666,290 326,156,344 490 New York ................................................................................................................... 7,411,689 5,879,334,118 793 North Carolina............................................................................................................ 3,759,643 2,105,343,963 560 North Dakota.............................................................................................................. .............................. .............................. .............................. Ohio ........................................................................................................................... 4,314,090 2,330,837,261 540 Oklahoma................................................................................................................... .............................. .............................. .............................. Oregon ....................................................................................................................... 1,560,619 916,694,759 587 Pennsylvania.............................................................................................................. 4,690,586 2,795,472,689 596 Rhode Island.............................................................................................................. 385,074 220,004,925 571 South Carolina ........................................................................................................... 1,745,274 858,798,497 492 South Dakota ............................................................................................................. 354,502 169,742,169 479 Tennessee ................................................................................................................. 2,526,310 1,389,744,066 550 Texas ......................................................................................................................... 10,599,295 6,535,957,999 617 Utah ........................................................................................................................... 1,320,994 715,807,809 542 Vermont ..................................................................................................................... 241,017 127,248,043 528 Virginia ....................................................................................................................... 3,166,902 1,995,480,948 630 VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4700 E:\FR\FM\07MYR3.SGM 07MYR3 38506 Federal Register/Vol. 89, No. 89/Tuesday, May 7, 2024/Rules and Regulations APPENDIX A—TABLE A.1—Continued Estimated Estimated Estimated increase in total increase in State number of annual worker average annual covered workers earnings worker earnings Washington ................................................................................................................ 2,809,814 2,090,953,114 744 West Virginia.............................................................................................................. 539,026 253,817,680 471 Wisconsin................................................................................................................... 2,301,874 1,207,149,373 524 Wyoming .................................................................................................................... 217,787 108,650,236 499 Full US, excluding CA, ND, OK, MN ......................................................................... 101,785,552 53,291,058,349 524 Note: The estimated number of covered workers is calculated as 80% * (total employed population in the state); the estimated increase in total earnings is calculated as 0.86% * (estimated total covered earnings), where estimated total covered earnings is calculated as (estimated number of covered workers) * (average annual earnings); and the estimated increase in average earnings is calculated as 0.86% * (average annual earn- ings). Total employed population and average annual earnings are taken from the U.S. Census Bureau Quarterly Census of Employment and Wages for 2022 (see https://www.bls.gov/cew/data.htm). National totals may not equal the sum of state-specific estimates due to rounding. [FR Doc. 2024–09171 Filed 4–30–24; 8:45 am] BILLING CODE 6750–01–P VerDate Sep<11>2014 16:27 May 06, 2024 Jkt 262001 PO 00000 Frm 00166 Fmt 4701 Sfmt 9990 E:\FR\FM\07MYR3.SGM 07MYR3 47028 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations FEDERAL TRADE COMMISSION (‘‘Recovery Act’’ or ‘‘the Act’’),1in part confirmed or reasonably believed to to advance the use of health information have been affected by a breach.7The 16 CFR Part 318 technology and, at the same time, Rule also requires third party service strengthen privacy and security providers (i.e., those companies that RIN 3084–AB56 protections for health information. provide services such as billing, data Recognizing that certain entities that storage, attribution, or analytics) to Health Breach Notification Rule hold or interact with consumers’ vendors of personal health records and personal health records were not subject PHR related entities to provide AGENCY: Federal Trade Commission.
SUPPLEMENTARYINFORMATION: The provisions in 2009.5FTC enforcement of 9Id. §318.4(a). amendments: (1) clarify the Rule’s the Rule began on February 22, 2010. 10Id. §318.5(c). scope, including its coverage of 11Fed. Trade Comm’n, Notice of Breach of Health The Rule the Commission issued in developers of many health applications Information, https://www.ftc.gov/system/files/ 2009 (‘‘2009 Rule’’) requires vendors of documents/rules/health-breach-notification-rule/ (‘‘apps’’); (2) clarify what it means for a personal health records and PHR related health_breach_form.pdf. vendor of personal health records to entities to provide: (1) notice to 12Fed. Trade Comm’n, Notices Received by the draw PHR identifiable health consumers whose unsecured PHR FTC Pursuant to the Health Breach Notification information from multiple sources; (3) Rule, https://www.ftc.gov/system/files/ftc_gov/pdf/ identifiable health information has been Health%20Breach%20Notices%20Received revise the definition of breach of breached; (2) notice to the Commission; %20by%20the%20FTC.pdf (last visited Dec. 2, security to clarify that a breach of and (3) notice to prominent media 2022). security includes data security breaches outlets6serving a State or jurisdiction, 13Per HHS guidance, electronic health and unauthorized disclosures; (4) revise information is ‘‘secured’’ if it has been encrypted in cases where 500 or more residents are according to certain specifications set forth by HHS, the definition of PHR related entity; (5)
I. Background jurisdiction get their news. This will be a fact- specifications and also stores the encryption and/ Congress enacted the American specific inquiry that will depend on what media or decryption tools on a device or at a location outlets are ‘‘prominent’’ in the relevant jurisdiction. separate from the data. Recovery and Reinvestment Act of 2009 74 FR 42974. 1445 CFR 164.400 through 164.414.
VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47029 Since the Rule’s issuance, apps and disclosing sensitive health information by HIPAA.25The Rule defines a other direct-to-consumer health without consent.20Several commenters ‘‘personal health record’’ as ‘‘an technologies, such as fitness trackers noted the urgency of this issue, as electronic record of PHR identifiable and wearable blood pressure monitors, consumers have further embraced health information on an individual that have become commonplace.15Further, digital health technologies during the can be drawn from multiple sources and as an outgrowth of the COVID–19 COVID–19 pandemic.21Commenters that is managed, shared, and controlled pandemic, consumer use of such health- argued the Commission should take by or primarily for the individual.’’26As related technologies has increased additional steps to protect unsecured the Commission explained in the Policy significantly.16 PHR identifiable health information that Statement, many makers and purveyors In May 2020, the Commission is not covered by HIPAA, both to of health apps and other connected announced its regular, ten-year review prevent harm to consumers22and to devices are vendors of personal health of the Rule and requested public level the competitive playing field records covered by the Rule because comment about potential Rule among companies dealing with the same their products are electronic records of changes.17The Commission requested health information.23To that end, PHR identifiable health information. comment on, among other things, The Commission explained that PHR commenters not only urged the whether changes should be made to the identifiable health information includes Commission to revise the Rule, but also Rule in light of technological changes, individually identifiable health to increase its enforcement efforts.24 such as the proliferation of apps and information created or received by a similar technologies. The Commission A. The Commission’s 2021 Policy health care provider,27and that ‘‘health received 26 public comments.18 Statement care providers’’ include any entities that Many of the commenters in 2020 ‘‘furnish[] health care services or encouraged the Commission to clarify On September 15, 2021, the supplies.’’28Because these health app that the Rule applies to apps and similar Commission issued a Policy Statement purveyors furnish health care services to technologies.19In fact, no commenter providing guidance on the scope of the their users through the mobile opposed this type of clarification Rule. The Policy Statement clarified that applications they provide, the regarding the Rule’s coverage of health the Rule covers most health apps and information held in the app is PHR apps. Several commenters pointed out similar technologies that are not covered identifiable health information, and examples of health apps that have therefore many health app purveyors abused users’ privacy, such as by 20Kaiser Permanente at 7; The Light Collective at likely qualify as vendors of personal 2; Am. Acad. of Ophthalmology at 2; PEHRC at 2– health records.29 15See, e.g., Kokou Adzo, App Development in 3. The Policy Statement further Healthcare: 12 Exciting Facts, TechnoChops (Jan. 3, 21Lisa McKeen at 2–3; Kaiser Permanente at 7– explained that the statute directing the 2023), https://www.technochops.com/ 8; AMA at 3; Off. of the Att’y Gen. for the State of FTC to promulgate the Rule requires programming/4329/app-development-in- Cal. (‘‘OAG–CA’’) at 3–4; Healthcare Info. and healthcare/; Emily Olsen, Digital health apps Mgmt. Sys. Soc’y (‘‘HIMSS’’) and Personal that a ‘‘personal health record’’ be an balloon to more than 350,000 available on the Connected Health All. (‘‘PCH Alliance’’) at 4–5. electronic record that can be drawn market, according to IQVIA report, 22Georgia Morgan; Am. Acad. of Ophthalmology from multiple sources.30Accordingly, MobiHealthNews (Aug. 4, 2021), https:// at 2–3 (arguing that consumers do not know all the health apps and similar technologies www.mobihealthnews.com/news/digital-health- ways their data is being used by third parties, and apps-balloon-more-350000-available-market- the downstream consequences of data being used in likely qualify as personal health records according-iqvia-report; Elad Natanson, Healthcare this way may ultimately erode a patient’s privacy covered by the Rule if they are capable Apps: A Boon, Today and Tomorrow, Forbes (July and willingness to disclose information to his or her of drawing information from multiple 21, 2020), https://www.forbes.com/sites/ physician); Coll. of Healthcare Info. Mgmt. Exec.’s sources. The Commission further eladnatanson/2020/07/21/healthcare-apps-a-boon- (‘‘CHIME’’) at 3 (arguing that apps’ privacy practices today-and-tomorrow/?sh=21df01ac1bb9. impact the patient-provider relationship because clarified that health apps and other 16See id. See also Lis Evenstad, Covid–19 has led providers do not know what technologies are products experience a ‘‘breach of to a 25% increase in health app downloads, sufficiently trustworthy for their patients); AMA at security’’ under the Rule when they research shows, ComputerWeekly.com (Jan. 12, 2–3 (expressing concern that patients share less disclose users’ sensitive health 2021), https://www.computerweekly.com/news/ health data with health care providers, perhaps information without authorization;31a 252494669/Covid-19-has-led-to-a-25-increase-in- because of ‘‘spillover from privacy and security health-app-downloads-research-shows (finding that breaches’’). breach is ‘‘not limited to cybersecurity COVID–19 has led to a 25% increase in health app 23Kaiser Permanente at 2, 4; Workgroup for Elec. intrusions or nefarious behavior.’’32 downloads); Jasmine Pennic, U.S. Telemedicine Data Interchange (‘‘WEDI’’) at 2; AHIP and BCBS at App Downloads Spikes During COVID–19 3 (‘‘[HIPAA] covered entities, such as health plans, Pandemic, HIT Consultant (Sept. 8, 2020), https:// that use or disclose protected health information 25Statement of the Commission on Breaches by hitconsultant.net/2020/09/08/u-s-telemedicine-app- should not be subject to stricter notification Health Apps and Other Connected Devices, Fed. d t d a e n o u l e w r 8 i m n , n 2 l e g 7 o d t 0 a h i % d c e i s n - C r s e i O p s a e i V p k Y I e p D s o d - – Y d o 1 . u w ’ 9 ’ r ) i p n . n a l g o n - a c d d o e s v m i s d i e c - e 1 , d 9 w - r i p a t m a h n a s d o ti e m c m i e n i c s c / e r e e (‘ i a ‘ n U s g e S s r p O p e e r t q o r h u s v e o i i r r d n w e i a m n i l s g e h e n , m e t t a h s a l t r e t h k h F e a r e t e n d a c t e d o h r r v o a d a l s s n e g t o o a i r m v g o e e p t r s h o n t e s m o e r p d e s n a u o r t c n t w h i c v i e u e l n l l n a t b d i r e t o i i e n rs s d . o u f s try T w s o c t o n r w a a n _ t w d e n b m e r . e f e c t C e a c t n o e c .g d m t h o s _ e / m v d s 1 / _ e 5 ’ s n b v y 9 y i s 6 ( c _ t S 3 e e h e 6 s m e p . 4 p a / t / l f . d s t i 1 t f h l a e 5 ( _ s t ‘ , a e ‘ / P 2 d m p o 0 o p e l 2 c s i n 1 u c _ t ) y a m _ , n o S h e d f t t n _ a _ t t t p t o h s e s t / e m h : p / _ e / u e c r n b o _ l m t i ’ c ’ m ) _ . ission_ 1785 FR 31085 (May 22, 2020). segments with the effect of dampening competition 2616 CFR 318.2.
19E.g., Am. Health Info. Mgmt. Ass’n (‘‘AHIMA’’) this document’s publication, the Commission has at 2; Kaiser Permanente at 3; Allscripts at 3; Am. brought two enforcement actions under the Rule; 28Id. §318.2; 42 U.S.C. 1320d(6), d(3). Acad. of Ophthalmology at 2; All. for Nursing the first against digital health company GoodRx 29See Policy Statement at 1. Informatics (‘‘ANI’’) at 2; Am. Med. Ass’n (‘‘AMA’’) Holdings, Inc., and the second against an ovulation- 30The Policy Statement provided this example: at 4; Am. Coll. of Surgeons at 6; Physicians’ Elec. tracking mobile app marketed under the name ‘‘[I]f a blood sugar monitoring app draws health Health Rec. Coal. (‘‘PEHRC’’) at 4 (‘‘Apps that ‘‘Premom’’ and developed by Easy Healthcare, Inc. information only from one source (e.g., a collect health information, regardless of whether or United States v. GoodRx Holdings, Inc., No. 23–cv– consumer’s inputted blood sugar levels), but also not they connect to an EHR, must be regulated by 460 (N.D. Cal. Feb. 17, 2023), https://www.ftc.gov/ takes non-health information from another source the FTC Health Breach Notification Rule to ensure legal-library/browse/cases-proceedings/2023090- (e.g., dates from your phone’s calendar), it is the safety and security of personal health goodrx-holdings-inc; United States v. Easy covered under the Rule.’’ Id. at 2. information.’’); Am.’s Health Ins. Plans (‘‘AHIP’’) Healthcare Corp., No. 1:23–cv–3107 (N.D. Ill. June 3116 CFR 318.2. and Blue Cross Blue Shield Ass’n (‘‘BCBS’’) at 2; 22, 2023), https://www.ftc.gov/legal-library/browse/ 32Policy Statement at 2. In the Statement of Basis The App Ass’n’s Connected Health Initiative cases-proceedings/202-3186-easy-healthcare- and Purpose to the 2009 Final Rule published in the (‘‘CHI’’) at 3. corporation-us-v. Continued VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47030 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations
B. Enforcement History enforcement action under the Rule Commission proposed revising the against Easy Healthcare Corporation definition of ‘‘PHR related entity’’ to In 2023, the Commission brought its (‘‘Easy Healthcare’’), a company that provide that entities that access or send first enforcement actions under the Rule publishes an ovulation and period unsecured PHR identifiable health against vendors of personal health records. In February 2023, the tracking mobile application called information to a personal health Commission brought an enforcement Premom, which allows its users to input record—rather than entities that access action alleging a violation of the Rule and track various types of health and or send any information to a personal against GoodRx Holdings, Inc. other sensitive data. Similar to the health record—are PHR related entities. conduct alleged against GoodRx, Easy • Fourth, the Commission proposed (‘‘GoodRx’’), a digital health company Healthcare disclosed PHR identifiable to clarify what it means for a personal that sells health-related products and health information to third party health record to draw PHR identifiable services directly to consumers, including prescription medication companies such as Google and health information from multiple discount products and telehealth AppsFlyer, contrary to its privacy sources. promises, and did not comply with the • Fifth, in response to public services through its website and mobile Rule’s notification requirements. The comments expressing concern that applications.33 In its complaint, the Commission Commission entered into a settlement mailed notice is costly and not alleged that between 2017 and 2020, that imposed injunctive relief and consistent with how consumers interact GoodRx, as a vendor of personal health required Easy Healthcare to pay a with online technologies like health records, disclosed more than 500 $100,000 civil penalty for its alleged apps, the Commission proposed to consumers’ unsecured PHR identifiable violation of the Rule.35 revise the Rule to authorize electronic health information to third party C. Notice of Proposed Rulemaking notice in additional circumstances. advertising platforms like Facebook and Specifically, the proposed Rule adjusted Google, without the authorization of Having considered the public the language in the ‘‘method of notice those consumers. As charged in the comments on the regulatory review section’’ and added a new definition of complaint, these disclosures violated notification and its Policy Statement, on the term ‘‘electronic mail.’’ The explicit privacy promises the company June 9, 2023, the Commission issued a proposed Rule also required that any made to its users about its data sharing notice of proposed rulemaking notice delivered by electronic mail be practices (including about its sharing of (‘‘NPRM’’)36proposing to revise the ‘‘clear and conspicuous,’’ a newly Rule, 16 CFR part 318, in seven ways:
PHR identifiable health information). • First, the Commission proposed to defined term, which aligns closely with The Commission alleged GoodRx broke the definition of ‘‘clear and revise several definitions in order to these promises and disclosed its users’ conspicuous’’ codified in the FTC’s clarify the Rule and better explain its prescription medications and personal Financial Privacy Rule.37 health conditions, personal contact application to health apps and similar • Sixth, the Commission proposed to technologies not covered by HIPAA.
information, and unique advertising and expand the required content of the Consistent with this objective, the persistent identifiers. The Commission notice to individuals, to require that NPRM modified the definition of ‘‘PHR charged GoodRx with violating the Rule consumers whose unsecured PHR identifiable health information’’ and by failing to provide the required identifiable health information has been added two new definitions (‘‘health care notifications, as prescribed by the Rule, breached receive additional important provider’’ and ‘‘health care services or to (1) individuals whose unsecured PHR information, including information supplies’’). These proposed changes identifiable health information was regarding the potential for harm from were consistent with a number of public acquired by an unauthorized person, (2) the breach and protections that the comments supporting the Rule’s the Federal Trade Commission, and (3) notifying entity is making available to coverage of these technologies.
media outlets. 16 CFR 318.3 through • Second, the Commission proposed affected consumers. In addition, the 318.6. The Commission entered into a proposed Rule included exemplar to revise the definition of ‘‘breach of settlement that imposed injunctive relief notices, which entities subject to the security’’ to clarify that a breach of and required GoodRx to pay a $1.5 Rule could use to notify consumers in security includes an unauthorized million civil penalty for its alleged terms that are easy to understand. violation of the Rule.34 acquisition of PHR identifiable health • Seventh, in response to public information in a personal health record Similarly, on May 17, 2023, the comments, the Commission proposed to that occurs as a result of a data security Commission brought its second make a number of changes to improve breach or an unauthorized disclosure.
II. Analysis of the Final Rule provider’’ found in 42 U.S.C. 1320d(3) supported the Rule’s application to The following discussion analyzes the (and referenced in 42 U.S.C. 1320d(6), health apps and similar technologies not amendments to the Rule. which is directly referenced in section covered by HIPAA as necessary in light 13407 of the Recovery Act), to mean a of the explosion of health apps and the A. Clarification of Entities Covered provider of services (as defined in 42 associated dangers to the privacy and 1. The Commission’s Proposal To U.S.C. 1395x(u)), a provider of medical security of consumers’ health Clarify the Entities Covered or other health services (as defined in 42 information.39Notably, support for the The Commission proposed changes to U.S.C. 1395x(s)), or any other entity several definitions in §318.2 to clarify furnishing health care services or 39See generally, Am. Acad. of Fam. Physicians the Rule’s application to health apps supplies. The Commission observed that (‘‘AAFP’’); AHIP; AHIMA; Ass’n of Health Info. Outsourcing Serv.’s (‘‘AHIOS’’); AMA; Am. Med.
and similar technologies not covered by this proposed definition, which is Informatics Ass’n (‘‘AMIA’’); ANI; Anonymous 1; HIPAA. First, the proposed Rule revised consistent with the statutory scheme, Anonymous 2; Anonymous 3; Anonymous 4; the definition of ‘‘PHR identifiable differs from, but does not contradict, the Anonymous 9; Anonymous 10; Anonymous 11 ; health information’’ to remove a cross- definitions or interpretations adopted by Anonymous 14; Am. Osteopathic Ass’n (‘‘AOA’’); Ella Balasa; Beth Barnett; Lauren Batchelor;
reference and instead import language HHS. The Commission sought comment Bipartisan Pol’y Ctr. (‘‘BPC’’); Alan Brewington; Ctr. from section 1171(6) of the Social on defining this term more broadly than for Democracy & Tech. (‘‘CDT’’); Ctr. for Digit. the term is used in other contexts. Democracy (‘‘CDD’’); Confidentiality Coal.; Security Act, 42 U.S.C. 1320d(6), which Third, the NPRM proposed to define Consumer Rep.’s; Elec. Frontier Found. (‘‘EFF’’); is also referenced directly in section Elec. Priv. Info. Ctr. (‘‘EPIC’’); Dave K.; Members of ‘‘health care services or supplies’’ (the 13407 of the Recovery Act. The the House of Representatives; MRO Corp. (‘‘MRO’’); final term in the definition of ‘‘health proposed Rule defined ‘‘PHR Omada Health; Pharmed Out; Planned Parenthood care provider’’) to include any online Federation of Amer. (‘‘Planned Parenthood’’); CB identifiable health information’’ as service, such as a website, mobile Sanders; Robb Streicher; SYNGAP1 Foundation and information (1) that is provided by or on application, or internet-connected SYNGAP1 Foundation 2; Devin Thompson; Janice behalf of the individual; (2) that Tufte; Michael Turner; U.S. Public Interest Research device that provides mechanisms to identifies the individual or with respect Group (‘‘U.S. PIRG’’); UL Sol.’s; Grace Vinton; track diseases, health conditions, WEDI; Anli Zhou. Some commenters elaborated on to which there is a reasonable basis to diagnoses or diagnostic testing, the nature of the risks to consumers’ health data believe that the information can be used treatment, medications, vital signs, and on the importance to consumers. Two to identify the individual; (3) relates to commenters, for example, described research they symptoms, bodily functions, fitness, the past, present, or future physical or had performed regarding mental health and/or fertility, sexual health, sleep, mental reproductive health apps’ disclosure of consumers’ mental health or condition of an health, genetic information, diet, or that health data to third parties. Mozilla at 3–4; provides other health-related services or Consumer Reports at 2. Another commenter, a 38Comments are available at https:// public interest group and advocacy organization, tools. The Commission explained that www.regulations.gov/document/FTC-2023-0037- attached a petition containing 9,659 signatures 0001/comment. this change clarified that the Rule Continued VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47032 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations Commission’s proposals came from a urged the Commission to take even accepting data from health apps, variety of commenters—industry broader measures in this Rule, such as partners such as advertising and associations,40businesses,41members of imposing breach prevention measures,50 analytics firms would risk being covered Congress,42consumer or patient banning health-based surveillance by the Rule.60According to some advocacy groups,43individual technologies or targeted advertising,51 commenters, placing such strictures on consumers,44and anonymous sources.45 banning selling or sharing of health data the advertising and service provider Many commenters argued that not necessary to provide patient care or ecosystem would raise prices (by, for safeguards for non-HIPAA covered mandating data retention limits and example, undermining ad-supported health data are essential,46particularly deletion,52or requiring adherence to services) and thereby harm because consumers generally are not standardized terms of service with competition.61One commenter argued aware of varying legal protections for strong privacy protections.53 that while robust protections for health data.47Indeed, according to some Although many commenters consumer health data are needed, the commenters, requiring notification to expressed support for the proposed Rule should not be a vehicle for such consumers of the breach of health changes, several business coalitions, protections, because it will result in information not protected by HIPAA is industry associations and individual over-notification of consumers (who precisely what Congress intended by firms opposed the changes, which, they have largely learned to disregard breach authorizing the FTC to issue this Rule; argued, are inconsistent with Congress’s notices) and be a barrier to legislative the Commission’s proposed changes are, intent in the Recovery Act to address a change on privacy and data security therefore, consistent with the goals of narrow subset of ‘‘personal health issues more generally.62Another the Recovery Act.48Some commenters records’’ and therefore exceed the FTC’s commenter argued against a breach argued that Federal privacy legislation statutory authority.54According to some notification rule altogether, asserting is needed to protect non-HIPAA covered comments, Congress should address any that the Commission should instead health data, but, in the interim, the privacy issues that exceed the narrow focus on requiring robust data security Commission should strengthen its Rule scope of the Recovery Act. These practices to prevent breaches in the first to protect consumer health data to the commenters also contend that if the instance.63 extent possible.49Other commenters Commission believes there has been a violation of section 5, then the Some commenters specifically asking for strong rules to protect digital health Commission needs to engage in an FTC addressed the proposed changes to the privacy. US PIRG at 5–230. Act section 18 rulemaking.55One definitions of ‘‘PHR identifiable health 40E.g., AAFP, AHIMA, AHIOS, AMA, AMIA, commenter argued further that information’’ and the new definitions of AOA; Network Advert. Initiative (‘‘NAI’’). consumers have different privacy ‘‘health care provider’’ and ‘‘health care 41E.g., Mozilla; MRO; Omada Health; UL Sol.’s.
46See, e.g., AAFP at 1–2; AHIMA at 2; AHIOS at innovation,58or create disincentives for individual.64Other commenters urged 2; Anonymous 5 at 1; AOA at 1; Am. Speech- advertising59because (1) firms would the Commission to state expressly that Language-Hearing Ass’n (‘‘ASHA’’) at 1; Am. risk initiating breaches by sharing user its definition encompasses particular Psychiatric Ass’n (‘‘APA’’) at 1; CDT at 3–4; CHIME data with their partners and (2) in types of information, such as unique at 2; EFF at 1; Generation Patient at 1; HIMSS at 2; HIMSS Elec. Health Rec. Ass’n (‘‘HIMSS EHR persistent identifiers65or information Ass’n’’) at 1; MRO at 1–2; Omada Health at 2; notwithstanding HIPAA’s limitations. See WEDI at about sexual health66or substance use PharmedOut at 1; Planned Parenthood at 2–3; 3. One commenter supported the proposed changes or treatment.67By contrast, some Michael Turner at 1; WEDI at 1–4. but argued the Commission should work with 47AHIMA at 2; Anonymous 5 at 1; ASHA at 1; Congress to update antiquated terms like ‘‘personal commenters urged the Commission to EFF at 1; WEDI at 2. One commenter, a software health record.’’ HIMSS at 3. narrow the definition or otherwise company that assists digital health companies with 50Ella Balasa at 2; PharmedOut at 1. clarify its limits, by, for example, legal compliance, argued that three factors, in 51Light Collective at 5. exempting data relating to clinical particular, support greater protection for digital 52EFF at 2. research or trials68or data that has been health data: (1) consumers mistakenly believe 53Texas Med. Ass’n (‘‘TMA’’) at 1–2. HIPAA covers all health data; (2) there is a culture de-identified.69 54See, e.g., Ass’n of Nat’l Advertisers, Inc.
within some digital health companies that favors (‘‘ANA’’) at 4–5; Comput. & Commc’n’s Indus. Ass’n Relatedly, some commenters urged rapid adoption of products to secure venture capital even when compliance infrastructure is lacking; (‘‘CCIA’’) at 2–3; Chamber of Com. (‘‘Chamber’’) at the Commission to create a definition of 1–3; CHI at 2; Consumer Tech. Ass’n (‘‘CTA’’) at 2;
and (3) digital health products deal with sensitive or standard for ‘‘identifiable data,’’ ‘‘de- Lab’y Access and Benefits Coal. (‘‘LAB’’) at 1; Priv.
data and inherently present a greater privacy risk for Am. at 1–2; TechNet at 2. identification’’ or ‘‘de-identified given their heavy reliance on data and data 55Priv. for Am. at 2–3; Chamber at 6–7; Health exchange compared to traditional medicine.
Tranquil Data at 1. Innovation All. (‘‘HIA’’) at 1. See also Advanced 60Priv. for Am. at 3.
49See, e.g., AAFP at 2. One commenter, an rulemaking (R111004) regarding commercial 63HIA at 2. industry coalition focused on health IT and health surveillance and data security (87 FR 51273, Aug. 64Consumer Rep.’s at 3. care information exchange, emphasized a 22, 2022)). 65Id.
significant privacy problem adjacent to the Rule:
whether HIPAA covered entities should warn patients about the privacy risks associated with 57Am. Telemedicine Ass’n (‘‘ATA Action’’) at 1. 67Legal Action Ctr. & Opioid Pol’y Inst. at 1–2. health apps and what the Federal government can 58TechNet at 1–2; CTA at 5. 68Soc’y for Clinical Rsch. Sites (‘‘SCRS’’) at 1. do to apply equal privacy protections to health data, 59ANA at 3. 69Future of Priv. F. (‘‘FPF’’) at 3. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47033 data,’’70such as by adopting HHS’s de- not what Congress intended.81A few excluding retailers.93Commenters identification standard,71or by stating commenters suggested reducing the requested further clarification of certain that information is identifiable if it is confusion with the traditional term by terms within the definition of ‘‘health ‘‘reasonably linkable to an identified or re-naming the definition. These care provider,’’ including the terms identifiable individual.’’72Commenters commenters suggested the Commission ‘‘furnishing’’94and ‘‘health care.’’95 argued that clarifying what constitutes instead use one of the following terms: And another commenter argued a better ‘‘identifiable’’ data is necessary both ‘‘non-HIPAA-regulated health care approach would be to jettison the because of the increasing ability for de- provider,’’82‘‘PHR provider,’’83 definitions of ‘‘health care provider’’ identified data to be re-identified73and ‘‘Health-related vendor,’’84‘‘HIPAA and ‘‘health care services and supplies’’ because the market needs clarity to covered entity,’’85or ‘‘health-related entirely and instead apply the Rule to enable uninhibited flow of de-identified service provider.’’86Another any entity that ‘‘promotes its offering as health data for research, public health, commenter recommended eliminating addressing, improving, tracking or and commercial activities.74Indeed, the confusion by stating within the informing matters about a consumer’s according to one commenter, failure to definition that it excludes HIPAA- health.’’96 clarify the standard could complicate or covered entities and their business Third, some commenters addressed chill public health research and other associates.87Another commenter urged the proposed definition of ‘‘health care innovation.75One commenter argued the Commission to affirm that its services or supplies.’’97Several that an objective standard of definition would have no impact on the commenters requested more clarity as to ‘‘reasonable linkability’’ is better than term ‘‘health care provider’’ as used in what constitutes an ‘‘online service,’’98 what the commenter described as the other regulations.88 as nearly all commercial activities have Rule’s knowledge-based standard (i.e., Several comments also expressed some online presence.99Several whether the company has a reasonable concern with the final phrase of the commenters recommended deleting the basis to believe it can be used to identify definition of ‘‘health care provider’’ final phrase of the definition (‘‘or that an individual).76One commenter urged (‘‘any other entity furnishing health care provides other health-related services or the Commission to issue a new notice of services or supplies’’), as overly broad tools’’) to limit the definition’s proposed rulemaking on the issue of de- and confusing. Commenters argued its breadth.100Conversely, some identification alone.77 breadth (and the breadth of the commenters urged the Commission to Second, many commenters accompanying definition of ‘‘health care reinforce its breadth, by expressly specifically addressed the Commission’s services or supplies’’) would have stating that ‘‘health care services or proposed new definition of ‘‘health care perverse results, turning retailers of supplies’’ include services related to provider.’’ One commenter applauded tennis shoes, shampoo, or vitamins into ‘‘wellness’’101or to specific health the Commission’s revised definition of entities covered by the Rule, which is conditions, such as substance abuse ‘‘health care provider,’’ arguing that not what Congress intended.89 disorder diagnosis, treatment, taking a crabbed view of that or related Moreover, it would result not only in medication, recurrence of use terms would lead to further compliance burdens for companies (‘‘relapse’’) and recovery.102 fragmentation of health data, which is (with the downstream effect of raising
L. and Texas A&M Univ. (‘‘Network’’) at 3.
73SCRS at 2. 82Planned Parenthood at 6. 93CTA at 8–9.
74FPF at 3; Network at 3–4. 83WPF at 7. 94EPIC at 2.
75Network at 3. 84AHIP at 2. 95AdvaMed at 3 (urging the Commission to 76FPF at 3. 85AMA at 3. define ‘‘health care’’ and ‘‘health care provider’’ as 77Chamber at 7. 86AHIP at 2. in 45 CFR 160.103).
78CDT at 11. 87Datavant at 2. 96WPF at 10.
79Confidentiality Coal. at 3–4. 88AAFP at 2–3. 97AdvaMed at 3; AAFP at 3; AHIP at 3; Priv. for 80AAFP at 2–3; AdvaMed at 3–4; AHIP at 2; AMA 89ANA at 7–8; CCIA at 4; CHI at 3–4; CTA at 7– Am. at 6–7. at 2–3; ATA Action at 1; CARIN Alliance at 2–3; 8; SIIA at 2. 98MRO at 2; WPF at 7–8. CCIA at 3; CTA at 4, 6–9; Datavant at 2; Invitae 90ANA at 3; SIIA at 1. 99WPF at 8. Corp. (‘‘Invitae’’) at 4; NAI at 3–4; Software & Info. 91AdvaMed at 4; CHI at 4; CTA at 9; TechNet at 100NAI at 4. Indus. Ass’n (‘‘SIIA’’) at 1–2; TechNet at 2; TMA at 2. 101EPIC at 4. 2–3; WPF at 7. 92AdvaMed at 4. 102Legal Action Ctr. & Opioid Pol’y Inst. at 3. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47034 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations commenters who argued that the definitions directly referenced by the conditions are met (i.e., the firm is an proposed changes to the Rule are Recovery Act in section 1171(6) of the entity covered by the Rule). consistent with the Recovery Act, which Social Security Act, 42 U.S.C. 1320d(6). The Commission declines to create a was intended to bolster breach As many commenters noted, while new definition of ‘‘de-identified data’’ notifications for consumer health data health apps did not exist when Congress or another similar term, because the that falls outside HIPAA. Although the passed the Recovery Act, they function definition of de-identification is already Commission agrees with commenters in a similar manner to the personal embedded in the second part of the who argue that consumer health data health records that existed at the time. definition of PHR identifiable health should enjoy substantial and For these reasons, the Commission is information (‘‘that identifies the unfragmented privacy protections, this adopting the proposed definitions, with individual or with respect to which Rule addresses breach notification, not minor clarifications. First, the there is a reasonable basis to believe that omnibus privacy protections. While this Commission has retained the definition the information can be used to identify rulemaking does not address omnibus of ‘‘PHR identifiable health the individual’’). Where there is no privacy protections, the Commission information’’ as set out in the NPRM, ‘‘reasonable basis to believe that the observes that companies collecting or with non-substantive organizational information can be used to identify the holding consumers’ sensitive health changes noted below. In response to individual,’’ the information is not data should engage in many of the comments that the definition of ‘‘PHR identifiable; rather, it is de-identified. If practices commenters described, such as identifiable health information’’ should data has been de-identified according to imposing data retention limits, enabling be broader, the Commission notes the standards set forth by HHS, then there deletion options, and preventing definition, which closely follows the is not a ‘‘reasonable basis to believe that breaches through robust privacy and statutory language, already encompasses the information can be used to identify data security practices.103 most of the categories of data that the individual,’’ as the definition of PHR The Commission is not persuaded commenters identified. For example, identifiable health information requires. that applying the Rule to health apps unique, persistent identifiers (such as Because the Commission’s standard is and similar technologies will have unique device and mobile advertising consistent with HHS’s, the deleterious consequences for individual identifiers), when combined with health Commission’s Rule poses no firms or competition or result in over- information, constitute ‘‘PHR impediment to health-related research notification of consumers. Importantly, identifiable health information,’’ if these or other flows of de-identified data. The the only obligation the Rule imposes is identifiers can be used to identify or re- Commission does not view the existing to notify the Commission, consumers, identify an individual. Moreover, ‘‘PHR language as a subjective standard that and, in some cases, the media of a identifiable health information’’ turns on a company’s knowledge, as one breach of unsecured PHR identifiable encompasses information about sexual commenter suggested; by requiring a health information. As noted in the health and substance abuse disorders, ‘‘reasonable basis to believe’’ that the NPRM, many State laws already impose because the information ‘‘relates to the information is not identifiable, the Rule similar, or significantly broader, data past, present, or future physical or creates an objective standard. Whether breach obligations.104Moreover, firms mental health or condition of an such reasonable basis exists will depend can avoid notification costs entirely by individual, the provision of health care on whether the data can reasonably be avoiding breaches—by reducing the to an individual, or the past, present, or linked to an individual consumer. There amount of unsecured PHR identifiable future payment for the provision of is no need for a supplemental notice of health information they access and health care to an individual.’’ The proposed rulemaking on this issue, as maintain (which can be achieved by Recovery Act states PHR identifiable the Commission is not changing this securing PHR identifiable health health information is information aspect of the Rule, which closely information), by de-identifying health provided ‘‘by or on behalf of the follows the statute.106 information, and by implementing other individual,’’ so the Commission Second, the Commission is modifying privacy and data security measures declines to change this phrase to the proposed definition of ‘‘health care appropriate to the sensitivity of the data. ‘‘about,’’ as one commenter provider’’ to ‘‘covered health care Congress intended for consumers to suggested.105The Commission notes, provider’’ to distinguish that term from learn of breaches of their unsecured however, that information provided ‘‘by interpretations of the term ‘‘health care PHR identifiable health information that or on behalf of the individual’’ will provider’’ in other contexts, which may fall outside HIPAA; the changes to the encompass much information ‘‘about’’ be more limited in scope. As Rule help ensure consumers will receive an individual, as the consumer is the commenters requested, the Commission the notification Congress intended. original source of most data; many affirms its definition of ‘‘covered health The Commission carefully considered inferences ‘‘about’’ the individual care provider’’ is unique to the Rule; it the arguments commenters raised that originate from information provided ‘‘by does not bear on the meaning of ‘‘health the definitional changes depart from the or on behalf of the individual.’’ care provider’’ as used in other language or spirit of the Recovery Act. The Commission does not agree with regulations enforced by other The Commission does not agree. The commenters who sought to narrow the government agencies. The Commission definitions hew closely to the language definition of PHR identifiable health adopts this change merely to dispel of the Recovery Act and to the information out of concern for the confusion in terminology; the Rule’s overall breadth. The Commission Commission is not making any 103In the 2009 Final Rule, the Commission notes that liability under the Rule does substantive change from the definition similarly underscored the importance of not arise from a single definition. While as proposed. The Commission does not maintaining protections for health information, data used for public health research, for need to state expressly, either in this stating: ‘‘In addition, as noted in the NPRM, the Commission expects entities that collect and store example, may, in some instances, meet definition or elsewhere, that the Rule’s unsecured PHR identifiable health information to the definition of ‘‘PHR identifiable notification requirements do not apply maintain reasonable security measures, including health information,’’ the firm using that to HIPAA-covered entities and their breach detection measures, which should assist data is subject to the Rule only if other business associates, as §318.1 of the them in discovering breaches in a timely manner.’’ 74 FR 42971 n.93 (2009).
10488 FR 37832 n.103. 105Consumer Rep.’s at 4. 10642 U.S.C. 17937(f)(2). VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47035 Rule already includes this proviso. The context of the preceding phrase health. The Commission notes, Commission declines to remove the (‘‘provides mechanisms to track however, there may be scenarios where phrase ‘‘any other entity furnishing diseases, health conditions, diagnoses or a general-purpose retailer described health care services or supplies’’ from diagnostic testing, treatment, above may become a vendor of personal the definition of ‘‘health care provider,’’ medications, vital signs, symptoms, health records under the Rule, such as because this phrase is nearly identical to bodily functions, fitness, fertility, sexual where the retailer offers an app with the language that appears in 42 U.S.C. health, sleep, mental health, genetic features or functionalities that are sold, 1320d(3), which is referenced in the information, diet’’). marketed, or promoted as more than definition of individually identifiable In response to some commenters’ tangentially relating to health. health information in 42 U.S.C. concerns that the proposed Rule’s In addition, the Commission reiterates 1320d(6), which is in turn referenced in definition of ‘‘health care provider’’ and a personal health record must be an the definition of PHR identifiable health ‘‘health care services or supplies’’ electronic record of PHR identifiable information in section 13407(f)(2) of the would impermissibly cause the Rule to health information on an individual, Recovery Act, 42 U.S.C. 17937.107The cover retailers of general-purpose items must have the technical capacity to Commission declines to define the like tennis shoes, shampoo, or vitamins, draw information from multiple terms ‘‘furnish’’ and ‘‘health care’’ as the the Commission disagrees this would sources, and must be managed, shared, Commission believes the plain meaning necessarily be the case. A threshold and controlled by or primarily for the of the term ‘‘furnish’’ (to supply inquiry under the Rule is whether an individual. The Commission also notes someone with something) is already entity is a ‘‘vendor of personal health that purchases of items at a brick and clear and adding a definition of ‘‘health records,’’ which the Recovery Act mortar retailer where there is no app, care’’ is unnecessary in light of the defines as ‘‘an entity . . . that offers or website, or online service to access or definition of ‘‘covered health care maintains a personal health record.’’108 track that purchase information provider’’ and ‘‘health care services and The Recovery Act usage of the term electronically is not a personal health supplies.’’ Differences from HHS’s ‘‘vendor of’’ in connection with record, because there is no electronic regulations pursuant to HIPAA are ‘‘personal health records’’ underscores record at issue. Contrary to the appropriate, as the Recovery Act differs that entities that are not in the business assertions of some commenters, these from HIPAA, and the Recovery Act’s of offering or maintaining (e.g., selling, definitions do not result in undue mandate is specifically to cover entities marketing, providing, or promoting) a breadth, because they do not function in not covered by HIPAA. health-related product or service are not isolation. The Commission provides the Third, the Commission is adopting following examples to illustrate the covered—in other words, they are not the proposed definition of ‘‘health care interplay of these definitions with the ‘‘vendors’’ of personal health records.
services or supplies,’’ with one minor definition of ‘‘personal health record’’: Thus, to be a vendor of personal health modification: the Commission has • Example 1: Health advice app or records under the Rule, an app, website, substituted the word ‘‘means’’ for website A, which is not covered by or online service must provide an ‘‘includes’’ to avoid implying greater HIPAA, provides information to offering that relates more than breadth than the Commission intends. consumers about various medical tangentially to health.109 The Commission adopts this change conditions. Its function is purely The Commission notes a general merely to dispel confusion about undue informational; it does not provide any retailer (one that sells food products, breadth; the Commission does not mechanism through which the children’s toys, garden supplies, intend any substantive change from the consumer may track or record healthcare products (such as pregnancy definition proposed. The Commission information. Health advice app or tests), or apparel (such as maternity otherwise affirms the proposed website A is not a personal health clothes)) offering consumers an app to definition without change. The record, because it is not an electronic purchase and access purchases of these Commission believes the term ‘‘online record of PHR identifiable health products—by itself—would not make service’’ in the definition of ‘‘health care information on an individual. services or supplies’’ is sufficiently clear the retailer a vendor of personal health • Example 2: Health advice app or records. In this scenario, purchase because of the examples of ‘‘online website B, which is not covered by information relating to certain items— services’’ given within the definition HIPAA, provides information to such as a pregnancy test or maternity itself: website, mobile application, or consumers about various medical internet-connected device. Providing an clothes from a retailer—may reveal conditions and provides a symptom exhaustive list of what constitutes an information about that person’s health. tracker, available to consumers who log online service would prevent the While this purchase information may be into the site with a username and definition from being sufficiently PHR identifiable health information, the password, in which consumers may flexible to account for future innovation retailer in this scenario is not a vendor input symptoms and receive potential in types of online services. The of personal health records because the diagnoses. Health advice app or website Commission also retains the catch-all app is only tangentially related to B is an electronic record of PHR ‘‘or that provides other health-related identifiable health information on an services or tools’’ for the same reason: 10842 U.S.C. 17921(18); see also 42 U.S.C. 17937. individual, because its information is to ensure the Rule’s language can sim 10 i 9 la A r t i n le t a e s r t p o re n t e a t c io o n m , m co e n n t t e e n r d u i r n g g e d th a a t s o a m re e l w ev h a a n t t provided by the individual, it identifies accommodate future changes in inquiry in determining whether a service offers a the individual (via username and technology. There is no undue breadth, personal health record is ‘‘the terms under which password), it relates to the individual’s because that phrase’s meaning is in the a product or service is offered to consumers. If an health conditions (the symptoms), and entity promotes its offering as addressing, is received by a health care provider improving, tracking, or informing matters about a (i.e., the entity providing the site itself, 107The definition of ‘‘covered health care consumer’s health, then that entity’s offering would provider’’ in §318.2 substitutes ‘‘entity’’ for be subject to the rule. Thus, any product or services as that entity is furnishing the health ‘‘person’’—i.e., ‘‘any other entity furnishing health that tracks or addresses physical activity, blood care service of an online service that care services or supplies’’—because the rest of the pressure, heart rate, digestion, strength, genetics, provides mechanisms to track Rule speaks in terms of ‘‘entities,’’ but the sleep, weight, allergies, pain, and similar symptoms). However, health advice app definition in §318.2 is otherwise identical to the characteristics would be subject to a PHR rule.’’ See statutory definition in 42 U.S.C. 1320d(3). WPF at 10. or website B is not a personal health VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47036 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations record to the extent the site does not the elements in the definition of ‘‘PHR Recovery Act, as explained in the Policy have the technical capacity to draw identifiable health information.’’ Statement.110 information from multiple sources (i.e.,
accurate diagnostic suggestions. For the consumer use, such as where no reasons stated in Example 2, it is an Changing the phrase ‘‘that can be consumers (or only a de minimis electronic record of PHR identifiable drawn from multiple sources’’ to ‘‘has number) use a feature, and about the health information on an individual. It the technical capacity to draw likelihood of such scenarios. For also has the technical capacity to draw information from multiple sources’’ example, the Commission offered an information from multiple sources (the serves several purposes. First, it clarifies example of an app that might have the consumer and the data broker) and is a product is a personal health record if technical capacity to draw information managed by or primarily for the it can draw information from multiple from multiple sources, but its API is individual. Therefore, health advice app sources, even if the consumer elects to entirely or mostly unused, either or website D is a personal health record. limit information to a single source because it remains a Beta feature, has Whether a health app or other only, in a particular instance. For not been publicized, or is not popular. electronic record constitutes a personal example, a depression management app health record (and is therefore subject to that accepts consumer inputs of mental 2. Public Comments Regarding What It the Rule) is a fact-intensive inquiry health states and has the technical Means for a Personal Health Record To whose outcome depends not only on the capacity to sync with a wearable sleep Draw Information From Multiple nature of the information contained in monitor is a personal health record, Sources that record, but also on numerous other even if some customers choose not to Many commenters supported the factors, such as its ‘‘technical capacity,’’ sync a sleep monitor with the app. Commission’s proposal amending the its source(s) of information, and its Thus, whether an app qualifies as a definition of a ‘‘personal health relationship to the individual.
behalf of the individual,’’ the one source. This change further clarifies 112AHIMA at 4–5. Commission revised slightly the order of the Commission’s interpretation of the 113AAFP at 3. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47037 the limitations of the statute.’’114Some expressed concern about lack of clarity, the term ‘‘personal health record,’’ the commenters noted without this change, such as in scenarios where a user is Commission reiterates examples from developers of personal health records required to pay for an upgrade to access the 2023 NPRM of two non-HIPAA (such as app developers) might have a feature or integration that draws covered diet and fitness apps available incentives to design their products in information from another source.123 for consumer download in an app store. ways that would intentionally skirt the Some commenters also expressed Under the amended Rule, each is a Rule’s requirements (such as by concern that apps and online services personal health record. restricting a consumer’s ability to that are subject to HIPAA (i.e., HIPAA- • Example 1: Diet and fitness app Y import data from other sources).115 covered entities or business associates) allows users to sync their app with Others noted the importance of the Rule should be carved out of the definition of third-party wearable fitness trackers. covering apps with the technical a personal health record.124Other Diet and fitness app Y has the technical capacity to draw information from commenters expressed broader concern capacity to draw identifiable health multiple sources even where such with the definition of ‘‘personal health information both from the user (e.g., capacity is not used by the consumer.116 record,’’ urging the Commission to, for name, weight, height, age) and the Other commenters opposed this example, abandon the purportedly fitness tracker (e.g., user’s name, miles proposal.117Some argued the proposed outdated term in favor of a more modern run, heart rate), even if some users elect clarification regarding what drawing one.125For instance, some commenters not to connect the fitness tracker. information from multiple sources urged that the Commission abandon or • Example 2: Diet and fitness app Y means runs counter to Congress’s tweak the requirement that the personal has the ability to pull information from statutory intent,118because virtually health record be ‘‘managed, shared, and the user’s phone calendar via the every app has some sort of integration controlled by or primarily for the calendar API to suggest personalized (e.g., for analytics) through which it individual.’’126 healthy eating options. Diet and fitness draws information other than from the Another commenter expressed app Y has the technical capacity to draw consumer.119One commenter asserted concern the proposed change could identifiable health information from the the change would broaden the scope of sweep in services that draw any user (e.g., name, weight, height, age) and the Rule to the point that it would information from multiple sources, non-health information (e.g., calendar sweep in online services that should not regardless of whether that information is entry info, location, and time zone) from be thought of as a personal health record identifiable health information.127 the user’s calendar. (such as email apps),120or otherwise 3. The Commission Adopts the As these examples make clear, and in create confusing standards for app Proposed Changes Clarifying What It response to one commenter’s concern developers or reduce innovation.121In Means for a Personal Health Record To that the changes would sweep in addition, commenters expressed Draw Information From Multiple services that do not draw any health concern this change would sweep in Sources information,128the Commission notes apps or online services that have the the Rule still requires drawing PHR technical capacity to draw from After considering the comments identifiable health information from at multiple sources during the received, the Commission adopts the least one source to count as a personal development or testing phase of the proposed amendment without change. health record. This amendment will help clarify the product, or would sweep in products The Commission declines to make types of entities covered by the Rule.
with unused, unavailable, or other requested changes to the The definition does not create undue unpublicized APIs or integrations that definition of personal health record. breadth or deviate from Congressional count as a source.122One commenter First, the Commission declines to intent; rather, the changes are consistent include an express exemption for with the language of the Recovery Act, 114Consumer Reports at 5–6. HIPAA-covered entities within the and only serve to give meaning to the 115AHIP at 2–3; CDT at 13 (arguing that changes definition of personal health record remove ‘‘incentives for companies to technically phrase ‘‘can be drawn’’ in the Recovery because §318.1 of the Rule already design products and services to not trigger the Act in a way that is consistent with the HBNR to avoid any need to provide consumer current state of technology. They are specifically exempts businesses or notice.’’). organizations covered by HIPAA.129 also necessary to keep pace with 116AHIOS at 4; CARIN Alliance at 4. Second, the Commission declines to technological change, which has 117NAI at 6 (urging that the Commission make exempt apps and services where there clear that a personal health record is one that ‘‘not enabled firms to offer consumers mobile are available but unused or only has the technical capacity to draw PHR electronic records of their health identifiable health information from multiple information that contain numerous unpublicized APIs or integrations. sources, but that it also has the functionality and Similarly, the Commission declines to integrations. To illustrate the intended actually does incorporate data from multiple exempt apps and services from the sources.’’); ANA at 7; ACLA at 1–2. meaning of the proposed revisions to definition just because they are drawing 118NAI at 6.
6. (arguing Rule should instead have bright-line test while undergoing product or beta 120CCIA at 6. that assesses whether the app actually draws health testing and are not yet in their final 121CTA at 11; AdvaMed at 5; CHI at 5. information from multiple sources); AdvaMed at 5 form.130The Commission notes a (arguing the Commission should decline to adopt 122CHI at 5 (asking the Commission to clarify that product feature or integration that exists multiple sources changes because it could cause an ‘‘app having the ability to draw from multiple confusion and potentially sweep in apps or services sources with some changes to the app’s coding/APIs is not within this definition’s threshold.’’); ACLA at with features that have not been made available to 128NAI at 6. 1 (arguing ‘‘[i]f a feature is unused by individuals consumers, such as APIs connected to the PHR that 129See, e.g., 16 CFR 318.1(a) (Rule ‘‘does not have not been publicized).
‘because it remains a Beta feature,’ then in fact it apply to HIPAA-covered entities, or to any other does not have the ‘technical capacity’ to draw an 123WPF at 9. entity to the extent that it engages in activities as individual’s information from other sources, unless 124Omada at 5; Datavant at 3. a business associate of a HIPAA-covered entity.’’); and until its functionality has been enabled by the 125HIMSS at 3 (urging the Commission to work see also 16 CFR 318.2 (exempting business vendor. The mere possibility that an application with Congress to craft a definition more consonant associates and HIPAA-covered entities from the vendor might sometime in the future enable that with technological realities). Rule’s definitions of ‘‘PHR related entity’’ and functionality should not bring the electronic record 126AHIOS at 4; MRO at 4. ‘‘vendor of personal health records.’’). within the scope of the definition of ‘personal 127NAI at 6. 130ACLA at 1–2; CTA at 11; AdvaMed at 5. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47038 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations and that is able to draw PHR identifiable In addition, the Commission declines following sentence to the end of the health information counts as a source to remove from the definition of existing definition: ‘‘[a] breach of under the Rule. Exempting such personal health record the requirement security includes an unauthorized instances would be contrary to the that it be ‘‘managed, shared, and acquisition of unsecured PHR purpose of the Rule and would controlled by or primarily for the identifiable health information in a impermissibly limit notification of individual.’’ This language mirrors the personal health record that occurs as a breaches just because a product feature Recovery Act’s statutory definition of result of a data breach or an is not widely disseminated, used, or in personal health record.133Further, this unauthorized disclosure.’’ The change its final form. The Commission notes language provides a boundary to the was intended to make clear to the under the Rule, a covered entity that definition. Even if a website or app has marketplace that a breach includes an experienced a breach of security of the technical capacity to draw unauthorized acquisition of identifiable unsecured PHR identifiable health information from multiple sources (for health information that occurs as a information triggering the Rule would example, because it has integrations for result of a data breach or an not be exempt because the breach advertising or analytics), it must still be unauthorized disclosure, such as a occurred in the context of such ‘‘managed, shared, and controlled by or voluntary disclosure made by the PHR scenarios. primarily for the individual’’ to be vendor or PHR related entity where Further, and importantly, the Rule is covered by the Rule. such disclosure was not authorized by triggered only by breaches of unsecured Generally, a personal health record is the consumer. an electronic record of an individual’s The NPRM, like the 2009 Rule, PHR identifiable health information and health information by which the continued to include a rebuttable does not apply to information that is individual maintains access to the presumption for unauthorized access to protected or ‘‘secured’’ through the use information and may have, for example, an individual’s data; it stated when of a technology or methodology the ability to manage, track, control, or there is unauthorized access to data, specified by the Secretary of Health and participate in his or her own health unauthorized acquisition will be Human Services in the guidance issued care. If these elements are not present, presumed unless the entity that under section 13402(h)(2) of the the website or app may not be experienced the breach ‘‘has reliable American Reinvestment and Recovery ‘‘managed, shared, and controlled by or evidence showing that there has not Act of 2009, 42 U.S.C. 17932(h)(2).131 primarily for the individual,’’ and been, or could not reasonably have The Rule, therefore, creates appropriate would not, therefore, constitute a been, unauthorized acquisition of such incentives for product testing with de- personal health record. information.’’ identified data or that secures information through certain C. Clarification Regarding Types of b. The Commission’s Related Proposal specifications, such as through specified Breaches Subject to the Rule To Not Define the Term encryption methods. ‘‘Authorization’’ in the Rule
from the individual by using a small, authorized access or use of PHR greyed-out, pre-selected checkbox 2. Public Comments identifiable health information, such as following a page of dense legalese. where a company collects data for one
(3) Commission settlements establish accountability, and regulatory oversight, Congress intended in the Recovery Act important guidelines involving regardless of the underlying cause of the and transform the Rule into an opt-in authorization (the Commission’s recent unauthorized acquisition.140 notice and consent privacy regime.148 settlement with GoodRx, alleging Commenters noted that breaches Commenters argued further the violations of the Rule, highlights that encompass more than just cybersecurity proposed changes would cause disclosures of PHR identifiable health intrusions.141Commenters also argued consumer notice fatigue,149consumer information inconsistent with a that a company’s voluntary panic,150or over-reporting by company’s privacy promises constitute unauthorized disclosure can be just as companies.151One commenter urged an unauthorized disclosure). damaging as data theft.142For instance, the Commission to limit the definition The Commission sought public a commenter noted that unauthorized of ‘‘acquisition’’ to actual acquisition, comment about: disclosures of health information may and exclude instances of access or • Whether the commentary above and cause embarrassment, perpetuate stigma disclosure where the information was about patients’ conditions, deter not actually acquired by a third party.152 FTC enforcement actions under the Rule patients from seeking care, interfere in Commenters argued the proposed provide sufficient guidance to put the patient-physician relationship, or definition would be burdensome and companies on notice about their impact patients’ employment.143 force companies to limit certain obligations for obtaining consumer Moreover, voluntary, unauthorized beneficial disclosures to certain third authorization for disclosures, or disclosures increase the risk of parties, such as disclosures to support whether defining the term additional unauthorized acquisition and internal operations, detect security ‘‘authorization’’ would better inform vulnerabilities or fraud, for law companies of their compliance 137For example, the Commission sought enforcement, and other purposes.153 obligations.
135See, e.g., 74 FR 42967. 138See, e.g., TMA at 3; U.S. PIRG at 2–3; AAFP 149SIIA at 3; CTA at 13–14. 23 1 – 3 c 6 v U – n 46 it 0 e d (N S . t D a . t e C s a v l. . 2 G 0 o 2 o 3 d ) R , h x t H tp o s l : d // i w ng w s w , I .f n t c c . . , g o N v o / . a a t t 3 2 ; – A 3; H A IM HI A O S at a 3 t ; 3 A ; M CD A T a a t t 3 1 – 1 4 – ; 1 A 2 M ; C IA H I a M t E 3; a A t O 4; A E PIC no 1 t 5 if 0 i C ca C t I i A on a f t o 4 r – u 5 n , a 7 u ( t a h r o g r u i i z n e g d t d h i a s t c r lo eq su u r i e ri s n c g o uld legal-library/browse/cases-proceedings/2023090- at 5–6. cause consumers to worry in the absence of harm, goodrx-holdings-inc; United States v. Easy 139Consumer Rep.’s at 4. such as where it is ‘‘typical’’ to disclose such Healthcare Corp., No. 1:23–cv–3107 (N.D. Ill. 2023), 140CDT at 11–12; U.S. PIRG at 2–3. information.) https://www.ftc.gov/legal-library/browse/cases- 141AMA at 4; CDT at 11–12; EPIC at 5. 151CTA at 13–14. proceedings/202-3186-easy-healthcare-corporation- 142AAFP at 3; CDT at 11–12. 152Id. at 14–16. us-v. 143AOA at 2. 153TechNet at 3; Chamber at 7; CCIA at 5–6. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47040 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations under State breach notification laws, confusing or coercive.158To further PHR identifiable health information, such as exemptions for disclosures to regulatory consistency, some such as to service providers, data certain types of entities or for certain commenters supported adding a processors, and entities that assist with purposes, or where there is inadvertent definition of ‘‘authorization’’ that is combatting fraud and promoting or unintentional access, use, or consistent with how that term is defined safety.167Some commenters urged a disclosure.154Commenters also in other health-related laws, such as disclosure be deemed authorized if the proposed safe harbors for companies under HIPAA159or State health privacy disclosure is consistent with a that implement recognized security or laws that define consent or company’s privacy notices or policies or privacy safeguards;155and one authorization (such as the California where applicable State privacy laws commenter proposed safe harbors that Consumer Privacy Rights Act160or the require affirmative consent or provide would apply where data is shared with Washington My Health, My Data for the right to opt-out, without the need ‘‘affiliated businesses,’’ where there is Act).161 to define affirmative express consent inadvertent but ‘‘good-faith’’ access by a By contrast, some commenters under the Rule.168One commenter company employee, where a company opposed defining the term—or opposed argued that authorization should be met makes good faith efforts to inform a requirement under the Rule that when a consumer agrees to opt-in to consumers of disclosures to third entities be required to get authorization certain data sharing, such as by clicking parties, and where companies take steps before disclosing PHR identifiable a box proximate to a disclosure of to contractually limit downstream uses health information.162Commenters material terms.169 of the data.156Other commenters argued that Congress had not granted expressed support for exempting the Commission the authority to define 3. The Commission Adopts the disclosures of PHR identifiable health ‘‘authorization’’ in the Recovery Act,163 Proposed Changes to the Definition of information to public health authorities or that doing so would import a ‘‘Breach of Security’’ for public health purposes, noting the substantive consent requirement that is After carefully considering the public amended definition could discourage outside the scope of the Rule, comments, the Commission adopts the such disclosures.157 converting a breach notice Rule into an proposed amendment without change. opt-in privacy regime.164Other The final rule definition is consistent
b. Public Comments Regarding Defining commenters noted that requiring a with the statutory definition in the ‘‘Authorization’’ specifically defined authorization Recovery Act, the Policy Statement,170 Commenters were divided as to would create an inflexible standard that and recent Commission enforcement whether the Commission should define would not evolve with changes in actions under the Rule. The ‘‘authorization.’’ Some commenters technology.165Other commenters Commission notes the statutory supported defining ‘‘authorization’’ to opposed a requirement that consumers definition in the Recovery Act is provide greater guidance to companies, should be required to review terms sufficiently broad to cover both to promote transparency, and to before agreeing to use a service, cybersecurity intrusions as well as a contending that this would not increase discourage buried or inconspicuous company’s intentional but unauthorized consumer understanding of terms.166 disclosures relating to health disclosures of consumers’ PHR Some commenters endorsed other information, or approaches to consent identifiable health information to third approaches that would exempt from any that are not meaningful because they are party companies. In addition, the requirement of affirmative express Commission finds persuasive the consent certain types of disclosures of 154CHI at 4 (stating the FTC ‘‘should explicitly comment noting the Recovery Act’s except the same situations from disclosure that are definition of ‘‘breach of security’’ refers excepted from HIPAA disclosures, and/or try to 158AHIP at 4; Light Collective at 4; MRO at 2– to the acquisition PHR identifiable align exceptions with those found in State privacy 3; Mozilla at 4; CARIN Alliance at 10; Consumer statutes.’’); CTA at 16; HIA at 2; TechNet at 3 Rep.’s at 9; see also PharmedOut at 3 (arguing that health information without the (arguing the Rule should adopt exemptions that defining ‘‘authorization’’ is crucial but urging the authorization of an individual, rather encompass ‘‘actions taken to prevent and detect Commission go further and place substantive than the authorization of the entity security incidents, to comply with a civil, criminal, restrictions on what companies can do with holding the data.171The definition is or regulatory inquiry or investigation, to cooperate consumer health data.). with law enforcement agencies concerning conduct 159AdvaMed at 7 (arguing that any definition of or activity that the data controller reasonably and ‘‘authorization’’ or ‘‘affirmative express consent’’ 167FPF at 10 (arguing that ‘‘an organization may in good faith believes may be illegal, to perform should take into account the necessity for medical share information with a service provider operating internal operations consistent with a consumer’s technologies and medical technology companies to on their behalf to provide storage; may share expectations, and to provide a product or service be able to operate and communicate under information to protect the safety or vital interests that a consumer requested.’’); CCIA at 5–6 (arguing standards consistent with those governing HIPAA of an individual or react to a public health the Rule should exempt disclosures relating to a covered entities and others in the health care emergency; or to protect themselves against security host of purposes, including: preventing and ecosystem. These standards permit certain uses and incidents and fraud. In each of these situations, data detecting security incidents and fraud, complying disclosures of individually identifiable health protection laws typically invoke a variety of non- with legal process, cooperating with law information without express consent where consent measures, including data minimization, enforcement, performing internal operations necessary for the provision of timely and effective transparency, notice to the end-user or the consistent with consumer expectations, providing a health care); MRO at 3; AHIMA at 7–8. regulator, and opportunities to object.’’); Chamber at service requested by the consumer, protecting ‘‘the 160AHIOS at 3. 7. vital interests of the consumer,’’ or processing data 161Consumer Rep.’s at 9. 168Confidentiality Coal. at 4–5; SIIA at 4; CHI at relating to public health); Chamber at 7 (arguing if 162HIA at 2 (arguing that ‘‘[r]outine disclosures of 7. the Commission does amend the definition of data should be allowed in certain contexts without 169CTA at 17. breach of security, it ‘‘should provide exceptions for additional need for authorizations’’); CTA at 16–17; 170The Commission’s Policy Statement makes legitimate and societally beneficial uses of data that AdvaMed at 7–8; ACLA at 6; Confidentiality Coal. clear that ‘‘[i]ncidents of unauthorized access, other privacy laws have for failure to honor opt-in at 4–5. including sharing of covered information without including but not limited to network security, 163Confidentiality Coal. at 4–5. an individual’s authorization, triggers notification prevention and detection of fraud, protection of 164CTA at 16–17 (arguing that the Rule does not obligations under the Rule,’’ and that a breach ‘‘is health, network maintenance, and service/product allow the Commission to impose ‘‘substantive not limited to cybersecurity intrusions or nefarious improvement.’’); LAB at 2. consent requirements’’ that would be burdensome behavior.’’ Policy Statement at 2. 155DirectTrust at 1–2. and ‘‘likely not administrable for many 171Consumer Rep.’s at 5 (noting ‘‘the Recovery 156ATA Action at 2. companies.’’). Act frames breaches of security in relation to 157Network for Pub. Health L. and Texas A&M 165SIIA at 4. individuals, rather than to vendors of personal Univ. at 1–2. 166CHI at 7. health records or PHR related entities,’’ and defines VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47041 also consistent with public comments any specific, enumerated exemptions for 4. The Commission Affirms Its Proposal received by the Commission in 2020 breaches under the Commission’s Rule. Not To Define ‘‘Authorization’’ (when the Commission announced its Moreover, the Commission’s Rule After carefully considering the public regular, ten-year review of the Rule and provides for a rebuttable presumption comments, the Commission declines to requested public comments about for certain types of access: when there define ‘‘authorization,’’ as that term potential Rule changes172), which urged is unauthorized access to data, appears in §318.2’s definition of the Commission to clarify what unauthorized acquisition will be ‘‘breach of security.’’ The Commission constitutes an unauthorized acquisition presumed unless the entity that finds persuasive the public comments under the Rule.173Importantly, the experienced the breach ‘‘has reliable suggesting that imposing an affirmative amendment to the definition of ‘‘breach evidence showing that there has not express consent requirement would not of security’’ in §318.2 does not depart been, or could not reasonably have be appropriate or warranted in all cases.
from the 2009 Rule Commentary or the been, unauthorized acquisition of such The Commission believes whether a Commission’s enforcement policy under information.’’ That is, companies can disclosure is authorized under the Rule the Rule. Instead, it further underscores rebut the presumption of acquisition in is a fact-specific inquiry that will the 2009 Rule Commentary and instances of unauthorized access by subsequent Commission enforcement providing reliable evidence disproving depend on the context of the actions that unauthorized disclosures acquisition. The Commission has interactions between the consumer and (i.e., sharing inconsistent with previously offered guidance on what the company; the nature, recipients, and consumer expectations) can be a counts as unauthorized access and purposes of those disclosures; the ‘‘breach of security’’ that triggers the reiterates that guidance here.176 company’s representations to Rule.174 consumers; and other applicable laws.
(2) the service providers are uses. There may be a ‘‘breach of information (e.g., GoodRx and Easy contractually prohibited from using, security’’ where an entity exceeds Healthcare), and those relating to the sharing, or disclosing the PHR authorized access to use PHR sharing of other types of sensitive identifiable health information for any identifiable health information, such as information.180 purpose beyond providing services to • Example 3—Authorized Disclosure where it obtains the data for one the medication app; and (3) the legitimate purpose, but later uses that (Public Health Reporting): A COVID–19 medication app’s privacy notice clearly data for a secondary purpose that was contact tracing app not covered by and conspicuously discloses the specific not originally authorized by the HIPAA allows users to self-report their purposes for which it shares users’ PHR individual.
D. Clarification of What Constitutes a identifiable health information in a would avoid a breach). ‘‘PHR Related Entity’’ personal health record or send The Commission observed in most 1. The Commission’s Proposal unsecured PHR identifiable health cases, third party service providers are Regarding ‘‘PHR Related Entity’’ information to a personal health record. likely to be non-consumer facing. The The NPRM proposed to revise the The proposed Rule also revised Commission noted examples of PHR definition of ‘‘PHR related entity’’ in §318.3(b) by adding language related entities would include, as noted two ways. Consistent with its establishing that a third party service above, makers of fitness trackers and clarification that the Rule applies to provider is not rendered a PHR related health monitors when consumers sync health apps, the Commission proposed entity when it accesses unsecured PHR their devices with a mobile health app. amending the definition of ‘‘PHR related identifiable health information in the The Commission noted further examples of third party service entity’’ to make clear the Rule covers course of providing services. The providers would include entities that entities that offer products and services Commission explained it did not intend provide support or administrative through the online services, including for any entity (such as a firm performing functions to vendors of personal health mobile applications, of vendors of attribution and analytics services for a records and PHR related entities.
personal health records. In addition, the health app) to be considered both a PHR Commission proposed revising the related entity (to the extent it accesses 2. Public Comments Regarding ‘‘PHR definition of ‘‘PHR related entity’’ to unsecured PHR identifiable health Related Entity’’ provide that entities that access or send information in a personal health record) The Commission received numerous unsecured PHR identifiable health and a third party service provider, public comments about the changes to information to a personal health which could create competing notice the definition of PHR related entity. record—rather than entities that access obligations and confuse consumers with Most commenters supported the or send any information to a personal notice from an unfamiliar company. The Commission’s approach.185One health record—are PHR related entities. Commission explained it considers such commenter, an industry association for The Commission explained the first firms to be third party service providers advertisers, noted that addition of the change (to cover online services) was that must notify the health app term ‘‘unsecured’’ in the definition of necessary as websites are no longer the developers for whom they provide ‘‘PHR related entity’’ created a only means through which consumers services, who in turn would notify limitation on the definition’s scope that access health information online. The affected individuals. counterbalances the breadth of Commission explained the second The Commission explained that including ‘‘any online service’’ in the change—narrowing the scope of ‘‘PHR distinguishing between third party definition.186Moreover, this commenter related entities’’ to entities that access or service providers and PHR related noted, the addition of ‘‘unsecured’’ send unsecured PHR identifiable health entities would create incentives for creates appropriate incentives for firms information—was intended to eliminate responsible data stewardship and for de- to secure PHR identifiable health potential confusion about the Rule’s identification because a firm would only information and to choose partners who breadth and promote compliance by will be good data stewards.187This narrowing the scope of entities that identifiable health information to a personal health commenter noted that limiting the record—rather than entities that access or send any qualify as PHR related entities.183The information to a personal health record—are PHR definition to ‘‘unsecured’’ PHR related entities. Otherwise, many entities could be identifiable health information was 18288 FR 37823. a PHR related entity under the definition’s third consistent with the original intent of the 183The proposed definition stated that a PHR prong and such entities would then, in the event Rule, to cover only the most sensitive related entity is an entity, other than a HIPAA- of a breach, need to analyze whether they covered entity or an entity to the extent that it experienced a reportable breach under the Rule. If types of data not covered by HIPAA.188 engages in activities as a business associate of a an entity, per the proposed revision, does not A few commenters proposed changes HIPAA-covered entity, that (1) offers products or qualify as a PHR related entity in the first place, to the definition of ‘‘third party service services through the website, including any online there would be no need to consider whether it provider’’ to further distinguish the term service, of a vendor of personal health records; (2) experienced a reportable breach. 88 FR 37825 n.54. from ‘‘PHR related entity.’’ One offers products or services through the websites, 184The Commission explained, for example, the including any online services, of HIPAA-covered maker of a wearable fitness tracker may be both a commenter recommended defining entities that offer individuals personal health vendor of personal health records (to the extent that ‘‘third party service provider’’ as an records; or (3) accesses unsecured PHR identifiable its tracker interfaces with its own app, which also health information in a personal health record or accepts consumer inputs) and a PHR related entity sends unsecured PHR identifiable health (to the extent that it sends information to another 185ANI at 1; AAFP at 3; AHIMA at 3; AHIOS at 4; AOA at 3; CARIN Alliance at 3; CDT at 12; information to a personal health record. Although company’s health app). The Commission noted that CHIME at 3; Confidentiality Coal. at 6; Consumer the Rule is only triggered when there is a breach regardless of whether the maker of the fitness Rep.’s at 6; CHI at 5; DirectTrust at 4; EFF at 2; EPIC of security involving unsecured PHR identifiable tracker is a vendor of personal health records or a at 7.
health information, the Commission explained it PHR related entity, its notice obligations are the believed there is a benefit to revising the third same: it must notify individuals, the FTC, and in 186NAI at 4–5. prong of PHR related entity to make clear that only some case, the media, of a breach. 16 CFR 318.3(a), 187Id. at 5. entities that access or send unsecured PHR 318.5(b). 88 FR 37825 n.55. 188Id. at 4. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47044 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations entity that only processes data.189This the PHR knows what their data sensitivity of the data. For example, a commenter argued the Commission transmissions contain.199One large advertising platform that has could then impose liability on service commenter urged the Commission to routinely received unsecured PHR providers for further use, sale, address the data recipient’s identifiable health information, disclosure for incompatible purposes.190 unawareness of the content of the data notwithstanding partners’ promises not Another commenter recommended by creating a safe harbor that exempts to send this information, may have aligning the definition of ‘‘third party advertising, analytics and cloud different obligations to monitor the data service provider’’ with the definition of providers that contractually limit their it receives than small firms that do not ‘‘business associate’’ under HIPAA.191 customers, vendors, or partners from engage in high-risk activities where the Some commenters raised concerns sharing health information with contract precludes sending such data that the Commission’s approach did not them.200 and there is no history of such provide sufficient clarity for companies transmissions.
provider rather than the firm with which states: ‘‘For purposes of ensuring In response to comments that whom the consumer has the implementation of this requirement, requested examples of the types of firms relationship, and categorizing analytics vendors of personal health records and that fall into the category of ‘‘third party firms (and firms that provide other PHR related entities shall notify third service provider’’ or ‘‘PHR related services) as service providers will create party service providers of their status as entity,’’ the Commission provides the incentives for PHR vendors and PHR vendors of personal health records or following examples. The Commission related entities to choose their service PHR related entities subject to this believes these examples, in conjunction providers with care. A few commenters, Part.’’ This requirement puts data with the language in §318.3(b), will however, expressed concern about recipients on notice about the potential provide sufficient clarity about the covering advertising, analytics, and content of the data transmissions they obligations of third party service cloud firms—and health information receive.
determine whether the data they receive transmissions of data will contain contains unsecured PHR identifiable unsecured PHR identifiable health health information; only the vendor of information. Both the sender and 201Compl. at ¶21, In the Matter of Flo Health, Inc., FTC File No. 1923133 (Jan. 13, 2021), https:// recipient of the data can monitor for www.ftc.gov/legal-library/browse/cases- 189FPF at 10. compliance with those contractual proceedings/192-3133-flo-health-inc; Compl. at 190Id. agreements through the use of ¶14(d), In the Matter of UPromise, Inc., FTC File 191AdvaMed at 8. No. 1023116 (Mar. 27, 2012), https://www.ftc.gov/ automated tools, internal auditing, 192SIIA at 3; CARIN Alliance at 4. legal-library/browse/cases-proceedings/102-3116-c- 193AHIMA at 3–4; AMIA at 3–4; CHI at 5; Direct external auditing, or other mechanisms, 4351-upromise-inc; Cf. Compl. at ¶40, U.S. v. Easy Trust at 1; Light Collective at 4–5. as appropriate to the size and Healthcare Corporation, No. 1:23–cv–3107 (N.D. Ill. 194SCRS at 1. sophistication of the firms and the 2023), https://www.ftc.gov/legal-library/browse/ cases-proceedings/202-3186-easy-healthcare- 195NAI at 5.
it is then providing services to a vendor preferred a single notice, arguing that of a PHR in connection with the offering E. Facilitating Greater Opportunity for multiple forms of notice is burdensome of the PHR and accessing unsecured Electronic Notice PHR identifiable health information as a 202This model notice was attached as appendix
must fulfill its notification obligations personal health records or PHR related
under the Rule according to which entities that discover a breach of 204AdvaMed at 5.
function it was performing in security must provide written notice at 205AAFP at 3; AHIMA at 5; Anonymous 3 at 1; connection with the breach. If the the last known contact information of CARIN Alliance at 7; CHIME at 4; CCIA at 7; EPIC functions are indistinguishable, then, the individual. Such written notice may at 10; NAI at 7. pursuant to §318.3(b), the Commission be sent by electronic mail, if an 206ACLA at 5; Mass. Health Data Forum (‘‘MHDF’’) at 9.
will consider the firm a third party individual has specified electronic mail 207Consumer Rep.’s at 7–8; CTA at 22. Consumer service provider for policy reasons: a as the primary contact method, or by Reports further suggested the Commission clarify firm that functions, at least in part, as first-class mail. The Commission that substitute notice may be effectuated under the a service provider may not be consumer- proposed defining ‘‘electronic mail’’ in Rule via text message, in-app messaging, or electronic banners for consumers that do not wish facing, such that the consumer may be §318.2 to mean email in combination to share a mailing or email address. Consumer surprised by a breach notification from with one or more of the following: text Rep.’s at 8. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47046 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations and could result in over-notification, the Rule.216One commenter stated that In response to concerns raised about confusion, and notice fatigue among consistent with FTC’s desire for entities the two-part electronic notice, the consumers.208One commenter stated to provide a clear and conspicuous Commission agrees with commenters the Commission should revise the notice, the Commission should consider who stated it increases the likelihood definition of ‘‘electronic mail’’ to mean requiring an email subject line that that individuals will encounter such ‘‘one or more of the following that is starts with ‘‘Breach of Your Health notices.222The Commission does not reasonable and appropriate based on the Information’’ so that attention is agree that it is burdensome for entities relationship between the individual and appropriately drawn to the importance to comply with this requirement. For the relevant vendor of personal health of the message content.217One example, an entity who complies with records or PHR related entity: email, commenter disagreed with the new the notice requirement by notifying text message, within-application definition, arguing that the definition is consumers via email plus posting a messaging, or electronic banner.’’209 unnecessary and confusing, and urged website notice likely would not need to Another commenter encouraged the the Commission to insert the ‘‘clear and expend significant additional time and FTC to clarify the in-app messaging conspicuous’’ definition directly into resources by issuing the second part of method must include push notifications §318.5 of the Rule.218 the notice (i.e., the website notice), and in the event of a breach so consumers Regarding the model notice, nearly all any ‘‘cost’’ of posting such a notice is are made aware of a breach as soon as who commented on this topic urged the outweighed by the benefit to consumers possible.210One commenter urged the Commission to make the model notice of learning of a breach involving their Commission to specify in §318.5(i) that voluntary.219One commenter suggested health information. The Commission a banner notice in the affected app or a that using the model should be a safe also is not persuaded that consumers website home page notice must be harbor that shields entities from who, for example, receive an email posted for a period of 90 days.211 enforcement.220 about a breach coupled with an in-app Another commenter noted that the notice about the same breach will be different mechanisms listed in the 3. The Commission Adopts the confused. The Commission believes proposed rule are not equivalent—this Proposed Changes Regarding Electronic consumers will understand that such commenter noted that some are push Notice notices relate to the same incident, notifications that a consumer is likely to especially given the Rule’s requirement The Commission adopts without see without directly interacting with the that the notices be ‘‘clear and change the modifications regarding application, website, or device and conspicuous.’’ The Commission also §318.5 involving electronic notice and some require consumer interaction with does not find it problematic that the adopts without change the definition of the application, website, or device in Rule requires notice effectuated via ‘‘electronic mail’’ in §318.2. The order to see the notification.212This ‘‘electronic mail’’ to occur via two Commission declines to make the other commenter recommended that the methods while other breach notice laws changes commenters requested. First, requirement be selection of one push require one method. The Commission the Commission believes it is critical, notification but that additional options also notes while these amendments are especially given how consumers are like in-app notifications and website intended to facilitate greater electronic accessing information today, to banners be supported as additional, notice, the Rule still permits notice via modernize the methods of notice to secondary notice options.213One first-class mail. Accordingly, the facilitate greater opportunities for commenter stated the FTC may want to contention that this Rule requires two electronic notice. The Commission consider adding a provision allowing an methods of electronic notice is believes the changes to §318.5 and the individual to request a copy of the incorrect.
as for hearing- or vision-impaired response to public comments,223to people, or in a non-English language.214 mandate how notifications are Another commenter argued the 216AMA at 5; CHIME at 5; EPIC at 9. effectuated when sent via ‘‘electronic Commission should take into 217TMA at 4. mail,’’ as the Commission believes it is 218NAI at 7.
consideration TCPA and CAN–SPAM important to not be overly prescriptive 219AdvaMed at 6; AHIP at 6; AMA at 6; CCIA at compliance regarding the delivery of 7; CHI at 6; Consumer Rep.’s at 8–9; NAI at 7–8. given rapidly changing technologies. electronic notification. Another One commenter stated that making the model commenter stated the Commission’s notice mandatory can lead to industry consistency 222AAFP at 3–4 (noting AAFP appreciates ‘‘the and it may be easier for consumers to understand proposed structure of providing notice in two proposal to require two contact methods the message and the contents if they are familiar different electronic formats to increase the imposes a higher requirement than with a uniform, standardized notice. AHIMA at 5. likelihood individuals will see them’’); CHIME at 5 HIPAA and State breach notification While the Commission generally agrees that (‘‘CHIME is supportive of the FTC’s approach to laws.215 uniform, consistent notices assist with consumer revise the ‘‘method of notice section’’ and to comprehension, the Commission declines to make structure the breach notification in two parts in Many commenters endorsed the the model notice compulsory because the facts and order to increase the likelihood that consumers Commission’s proposal that any circumstances of each breach will vary. Plus, encounter the notice.’’); EPIC at 10 (‘‘By requiring notification delivered via electronic §318.6 sets forth certain required elements of the email and an in-app or website notice option, the mail should be ‘‘clear and content of the notice, so the presence of these expanded definition enables entities to have the elements in all breach notices achieves some degree best chance at notifying consumers regardless of conspicuous,’’ a newly defined term in of consistency across notices. whether they reliably check their email or continue 220AHIP at 6. to use the entity’s app or website.’’). The 208AdvaMed at 6; ACLA at 5; AHIP at 5; CTA at 221The Commission disagrees with the Commission also disagrees with the commenter 21–22; commenters who urged the Commission to avoid who recommended that the Commission abandon 209AdvaMed at 6. defining ‘‘electronic mail’’ to mean anything more the two-part notice and create a new definition of 210AHIMA at 5. than ‘‘email.’’ ACLA at 5; MHDF at 9. The ‘‘electronic mail’’ where, for example, only a definition in §318.2 is clear and unambiguous. website notice alone would satisfy the notice 211TechNet at 5.
225See supra note 214. such as health diagnosis or condition, 235Id. 22674 FR 42972. 236AdvaMed at 6–7; AHIP at 6; ACLA at 4–5; 227AMA at 5. 229The model notice is found in appendix A. Confidentiality Coal. at 7; CTA at 23–24; MHDF at 228See supra note 217. 23088 FR 37827. 10; NAI at 9.
VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47048 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations commenters argued this proposal will frustrate investigative efforts or have a making purchase decisions for fraud result in notifying entities having to chilling effect on an inadvertent detection or credit monitoring.252One speculate about potential harms that recipient from reporting a wrongful commenter stated that requiring may never occur or providing a list of disclosure.246 notifying entities to share this harms that may be incomplete.237 c. Proposal That Notice Include information will incentivize them to Others pointed out that notifying Description of Types of Unsecured PHR take proactive measures to mitigate individuals about potential harms could Identifiable Health Information Involved harms to consumers.253 cause consumer anxiety, consumer in a Breach Some commenters, however, raised confusion, and detract from actions the individuals should take.238One Third, the Commission proposed concerns about this proposal. For commenter noted the Commission’s modifications to §318.6(b), which instance, one commenter believed the proposal might lead consumers to requires the notice to individuals Rule already encompasses this believe the harms listed in the notice are include a description of the types of requirement and therefore the the only possible harms from a breach, unsecured PHR identifiable health Commission’s proposal could result in when in fact consumers may suffer information that were involved in the duplicative information being provided other harms not disclosed in the breach. The Commission proposed this in the notice.254Another commenter notice.239This same commenter also exemplar list be expanded to include stated the FTC needs to go further in noted it is opposed to entities stating additional types of PHR identifiable ensuring that notification requirements there are no known harms that may health information, such as health help consumers understand what result from a breach solely because a diagnosis or condition, lab results, remedies are available when their health notifying entity is unaware of any medications, other treatment information is breached.255 specific bad outcomes.240 information, the individual’s use of a health-related mobile application, and e. Proposal That Notice Include Two or b. Proposal That Notice Include Full device identifier. Several commenters More Contact Procedures Name, Website and Contact Information supported this proposal.247One of Third Parties That Acquired Fifth, the Commission proposed commenter noted it is important for Unsecured PHR Identifiable Health amendments to §318.6(e) so the contact consumers to receive notice of the Information specific types of PHR identifiable health procedures specified by the notifying Next, the Commission proposed to information involved in a breach, given entity in its breach notification must amend the requirements for the notice that the exposure of health information include two or more of the following: under §318.6(a) to include the full can lead to a wide spectrum of toll-free telephone number; email name, website, and contact information harms.248Another commenter stated address; website; within-application; or (such as a public email address or providing individuals with a more postal address. Many commenters phone number) of any third parties that expansive list of exposed data points expressed support for this proposal.256 acquired unsecured PHR identifiable will also give them a more complete One commenter noted multiple contact health information as a result of a picture of the risks they face.249 options ensures that victims of all breach of security. Although several backgrounds and technical capabilities commenters supported this proposal,241 d. Proposal That Notice Include are able to contact the notifying entity many others pointed out it is Description of What Entity Is Doing To to learn more about how to protect problematic in certain circumstances.242 Protect Affected Individuals themselves after a breach.257Another A few commenters noted the proposal is Fourth, the Commission proposed commenter noted that providing ill-suited for security breaches, such as revising §318.6(d) of the Rule to require multiple contact options encourages and a hacking, where providing consumers that the notice to individuals include facilitates communication between the with the name and contact information additional information providing a brief of an actor who committed a security description of what the entity that individual and the notifying entity.258 breach (e.g., a hacker) could result in experienced the breach is doing to One commenter, however, expressed further malicious action against the protect affected individuals, such as concern the proposal is burdensome, the target entity.243One commenter noted offering credit monitoring or other HIPAA breach notice rule requires only for security breaches, the malicious services. This proposal attracted support one method of contact, and HHS has not actor or hacker would not be responsive from multiple commenters.250One identified any concerns with to consumers.244Further, one commenter stated that informing individuals having difficulty obtaining commenter noted this requirement individuals about these steps is information from covered entities using could hamper law enforcement important so that they know what one contact method under HIPAA’s efforts.245One commenter also additional actions they should take to breach notice rule.259 indicated this requirement could protect themselves from potential harm.251Another similarly stated that 237AdvaMed at 6–7; AHIP at 6; MHDF at 10; NAI knowing what the notifying entity is at 9.
239MHDF at 10. help consumers who are considering 252AHIMA at 5–6. 240Id. at 10–11. 253Consumer Rep.’s at 9–10.
241AAFP at 4; AHIMA at 5–6; AMA at 6; AMIA 246AHIP at 6. 254Confidentiality Coal. at 7. at 5; AOA at 5; CARIN Alliance at 7; Consumer 247AAFP at 4; AHIMA at 6; AMA at 6; AOA at 255Light Collective at 6–7. Rep.’s at 9–10; EFF at 2; EPIC at 10–11; HIMSS at 5; CARIN Alliance at 7; Consumer Rep.’s at 9–10; 256AAFP at 4; AHIMA at 6; AHIP at 5;
3–4; ITRC at 2; Members of the House of Ella Balasa at 2; HIMSS at 3–4; ITRC at 2; NAI at Anonymous 3 at 1; AOA at 5; CARIN Alliance at Representatives at 1–2. 9.
VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47049 3. The Commission Changes Regarding PHR identifiable health information as a Commission concurs with the Content of Notice result of a breach. At the same time, the commenter who stated that informing Commission acknowledges in some affected individuals about the steps a. The Commission Declines To Adopt scenarios it could be problematic to notifying entities are taking to protect Proposal That Notice Include require notifying entities to provide the them is important so that affected Description of Potential Harm That May contact information of those who individuals know what additional Result From a Breach acquired PHR identifiable health actions they should take to protect The Commission believes, in light of information. themselves from potential harm.267The the public comments, that the Accordingly, this revised provision is Commission similarly agrees with the downsides of requiring in the notice a intended to still provide individuals commenter who stated that knowing description of the potential harms that with information about who acquired what the notifying entity is doing to may result from a breach outweigh the their health information. Under protect affected individuals can help upsides. The Commission is concerned §318.6(a), notifying entities are required consumers who are considering making about requiring a consumer notice to to provide the full name or identity of purchase decisions like fraud detection include possible harms that may never the third parties that acquired the PHR or credit monitoring.268The materialize. In such cases, consumers identifiable health information as a Commission also agrees with the may experience needless anxiety and result of a breach of security, except commenter who stated that requiring take actions that are not necessary, where providing the full name or notifying entities to share information leading to consumer frustration. The identity of the third parties would pose about what they are doing to protect Commission also is concerned this a risk to affected individuals or the affected individuals will incentivize proposal may result in entities entity providing notice. In cases where notifying entities to take proactive describing potential harms so providing the name or identity of the measures to mitigate harms to generically that the description provides third parties that acquired the PHR consumers.269 minimal value to consumers, or, identifiable health information as a In response to the one commenter alternatively, that entities will provide a result of a breach of security would pose who noted the 2009 Rule already laundry list of potential harms, making a risk to affected individuals or the includes this proposed requirement,270 such a list meaningless to consumers.
elements of the content of the notice Types of Unsecured PHR Identifiable Given this, the Commission does not will supply individuals with sufficient Health Information Involved in a Breach believe individuals will receive information about a breach, especially The Commission agrees with the duplicative information. given the other modifications to §318.6.
b. The Commission Modifies Proposal in a breach,264and the commenter who requires notifying entities to include in That Notice Include Full Name, stated that providing affected the notice steps individuals should take Website, and Contact Information of individuals with a more expansive list to protect themselves from potential Third Parties That Acquired Unsecured of health data points implicated in a harm resulting from the breach, and PHR Identifiable Health Information breach will help them better understand §318.6(d), which requires notifying In light of the public comments, the the risks they face.265The Commission entities to include in the notice the Commission is modifying §318.6(a) to adopts this proposal without steps the notifying entity is taking to require notifying entities to provide the modification. protect affected individuals following full name or identity (or where d. The Commission Adopts Proposal the breach. providing name or identity would pose The Commission adopts proposed That Notice Include Description of What a risk to individuals or the entity §318.6(d) without modification. Entity Is Doing To Protect Affected providing notice, a description) of the Individuals e. The Commission Adopts Proposal third parties that acquired the PHR Several commenters supported the That Notice Include Two or More identifiable health information as a Commission proposal that the notice to Contact Procedures result of a breach of security.262The Commission believes it is important for individuals include a description of In response to the comment that consumers to know who acquired their what the notifying entity is doing to providing two or more contact protect affected individuals.266The 260MHDF at 10. 267See supra note 251.
G. Timing of Notice to the FTC give entities up to 60 days to investigate emphasizes, however, that notice to the 1. The Commission’s Proposal a breach and provide notification to the FTC should occur ‘‘without Regarding Timing of Notice Commission.282One commenter unreasonable delay,’’ with 60 days recommended the FTC adopt a ‘‘risk- serving as the outer limit.284The Although the Commission did not based’’ notification approach whereby Commission believes, consistent with propose any timing changes in the the agency could create a shorter public comments, this change NPRM, the Commission requested notification timeline for high-risk effectively harmonizes the notification comments on several issues related to incidents and a longer notification timeline to the FTC with the notification timing, including the timing of the timeline or even no notification for low- timeline to the Secretary of HHS under notification to the FTC. Regarding the risk incidents.283 the HIPAA Breach Notification Rule. notification timeline to the FTC, the Commission sought comment on 3. The Commission Adopts Changes to 284As the Commission stated in the 2009 Rule whether it should extend the timeline to the Timing of Notice Commentary, in some cases, it may be an give entities more time to investigate Having considered the public ‘‘unreasonable delay’’ to wait until the 60th day to provide notification. For example, if a vendor of breaches and better ascertain the comments, the Commission agrees with personal health records or PHR related entity learns number of affected individuals or of a breach, gathers all necessary information, and whether an extension would simply 277AdvaMed at 9; AHIP at 7; ACLA at 3–4; ATA has systems in place to provide notification within facilitate dilatory action and minimize Action at 2; CCIA at 8; CHI at 6; CTA at 20–21; 30 days, it would be unreasonable to wait until the the opportunity for an important TechNet at 5. 60th day to send the notice. Similarly, the dialogue with Commission staff during Te 2 c 7 h 8 N A e d t v a a t M 5– ed 6. at 9; ACLA at 3–4; AHIP at 7; C w o h m er m e i a s s v i e o n n d n o o r t o e f d p t e h r e s r o e n m al a h y e b a e lt h ci r r c e u co m rd st s a n d c is e c s o vers that its third party service provider has suffered a 279ACLA at 3–4; CTA at 19–21.
H. Proposed Changes To Improve Rule’s regarding the Rule. E.g., Fed. Trade Comm’n, Commission is resubmitting its Readability Collecting, Using, or Sharing Consumer Health clearance request to OMB. FTC staff has Information? Look to HIPAA, the FTC Act, and the estimated the burdens associated with 1. The Commission Proposed Changes Health Breach Notification Rule (Sept. 2023), the amendments as set forth below.
To Promote Readability https://www.ftc.gov/business-guidance/resources/ FTC staff estimates the amendments collecting-using-or-sharing-consumer-health- The Commission proposed several information-look-hipaa-ftc-act-health-breach (last to 16 CFR part 318 will likely result in changes to improve the Rule’s visited Jan. 11, 2023); Fed. Trade Comm’n, Health more reportable breaches by covered readability. Specifically, the Breach Notification Rule: The Basics for Business entities to the FTC. In the event of a
2. Public Comments Regarding commenter urged the Commission to modify §318.8 may be required to notify consumers, Readability so that the Rule would only apply to breaches of the Commission, and, in some cases, the security discovered at least 30 days after the Commenters supported the effective date of this final rule. TechNet at 5–6. The media. While there are approximately Commission’s proposed changes to 2023 NPRM set out the entire part for the 1.8 million apps in the Apple App improve the Rule’s readability and convenience of commenters but did not propose Store294and 2.4 million apps in the promote comprehension by including any changes to §318.8. The Commission notes this Google Play Store,295as of March 2024, effective date section was codified in 2009 when explanatory parentheticals and statutory part 318 was added to the CFR and has been in it appears that roughly 193,000 of the citations.287Commenters also expressed effect since September 24, 2009. As explained in apps offered in either store are support for the proposed changes to the 2009 Rule Commentary, ‘‘the Commission does categorized as ‘‘Health and Fitness.’’296 improve the Rule’s readability and not have discretion to change the effective date of the rule because the Recovery Act establishes the promote compliance by consolidating effective date.’’ See 74 FR 42976; see also 42 U.S.C. 29144 U.S.C. 3502(3)(A)(i). into single sections, respectively, the 17937(g)(1) (‘‘The provisions of this section shall 292See 44 U.S.C. 3502(3)(A)(i). Rule’s breach notification and timing apply to breaches of security that are discovered on 293Third party service providers who experience requirements.288Commenters also or after the date that is 30 days after the date of a breach are required to notify the vendor of favored the proposal to modify §318.7 publication of such interim final regulations.’’). The personal health records or PHR related entity, Commission emphasizes that this final rule does which in turn is then required to notify consumers. to make plain that a violation of the not apply retroactively. The Commission expects the cost of notification to Rule constitutes a violation of a rule 290Relatedly, the Commission also is making a third party service providers would be small, promulgated under section 18 of the non-substantive grammatical change to relative to the entities that have to notify FTC Act and is subject to civil penalties, §318.5(a)(2)(ii), which involves substitute notice. consumers. As part of the NPRM, the Commission This provision currently states: ‘‘Such a notice in solicited public comment on this issue and data media or web posting shall include a toll-free phone that may be used to quantify the costs to third party 28542 U.S.C. 17932(e)(3). Like the Department of number, which shall remain active for at least 90 service providers. The Commission did not receive Health and Human Services previously concluded days, where an individual can learn whether or not any responsive submissions pertaining to this issue. with respect to notification to the Secretary under the individual’s unsecured PHR identifiable health 294See App Store—Apple, https:// the HIPAA Breach Notification Rule (74 FR 42753 information may be included in the breach.’’ The www.apple.com/app-store/. (2009)), the Commission concludes this Commission is revising §318.5(a)(2)(ii) so it reads: 295See AppBrain: Number of Android Apps on interpretation satisfies the statutory requirement ‘‘Such a notice in media or web posting shall Google Play (Mar 2024), https:// that notifications of larger breaches be provided to include a toll-free phone number, which shall www.appbrain.com/stats/number-of-android-apps. the FTC immediately as compared to the remain active for at least 90 days, where an 296See Business of Apps, ‘‘App Data Report: App notifications of smaller breaches (i.e., those individual can learn if the individual’s unsecured Store Stats, Downloads, Revenues and App involving less than 500 individuals), which the PHR identifiable health information may have been Rankings,’’ https://www.businessofapps.com/data/ statute allows to be reported annually to the FTC. included in the breach.’’ The Commission made report-app-data/ (reporting 90,913 apps in the 28674 FR 17918 (2009); 74 FR 42971 (2009). this grammatical change to improve the rule’s Apple iOS App Store and 102,402 apps in the 287AMA at 6; CARIN Alliance at 9. readability; the change does not alter the Google Play Store were categorized as ‘‘Health and 288AHIMA at 7; AMA at 6–7. provision’s substantive meaning. Continued VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47052 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations The Commission received three Additionally, as the number of breaches Costs comments in response to the NPRM per year has grown significantly in the To determine the costs for purposes of arguing the Rule’s scope is broader than recent years,302and FTC staff expects this analysis, FTC staff has developed apps categorized as ‘‘Health and this trend to continue, FTC staff relied estimates for two categories of potential Fitness’’ and the NPRM’s PRA analysis on the average number of breaches from costs: (1) the estimated annual burden therefore underestimated the number of 2021 through 2023 to estimate the hours and labor cost of determining covered entities and the resulting annual breach incidence rate for what information has been breached, number of reportable breaches.297As HIPAA-covered entities. identifying the affected customers, discussed above,298the Commission is Specifically, HHS’s OCR reported 715 preparing the breach notice, and making adopting these amendments to clarify breaches in 2021, 719 breaches in 2022, the required report to the Commission;
that the Rule applies to mobile health and 733 breaches in 2023,303which and (2) the estimated capital and other applications and similar technologies. results in an average of 722 breaches non-labor costs associated with The Commission also highlighted between 2021 and 2023. Based on the notifying consumers.
several key limitations to the Rule’s 1.7 million entities that are covered by Estimated Annual Burden Hours: scope.299Thus, the 193,000 covered the HIPAA Breach Notification Rule304 12,300. entities is a rough proxy for all covered and the average number of breaches for Estimated Annual Labor Cost: PHRs, because it encompasses mobile 2021–2023, FTC staff determined an $883,140. health applications categorized as annual breach incidence rate of First, to determine what information ‘‘Health and Fitness.’’ Similar health 0.000425 (722/1.7 million). has been breached, identify the affected technologies are included in the roughly Accordingly, multiplying the breach customers, prepare the breach notice, 193,000 covered entities because most incidence rate (0.000425) by the and make the required report to the websites and connected health devices estimated number of entities covered by Commission, FTC staff estimates that will be covered by the amendments the amendments (193,000) results in an covered firms will require per breach, act in conjunction with an app.300 estimated 82 breaches per year.305 on average, 150 hours of employee labor FTC staff estimates these entities will, at a cost of $10,770.306This estimate cumulatively, experience 82 breaches For instance, HIPAA-covered entities are generally does not include the cost of equipment per year for which notification may be subject to stronger data security requirements under or other tangible assets of the breached required. With the proviso that there is HIPAA, but also may be more likely targets for firms because they likely will use the security incidents (e.g., ransomware attacks on insufficient data at this time about the hospitals and other medical treatment centers equipment and other assets they have number and incidence rate of breaches covered by HIPAA have increased dramatically in for ordinary business purposes. Based at entities covered by the amendments recent years); thus, this number could be an under- on the estimate that there will be 82 (due to underreporting prior to issuance or overestimate of the number of potential breaches breaches per year the annual hours of per year.
of the Policy Statement), FTC staff 302According to HHS’s Office for Civil Rights burden for affected entities will be determined the number of estimated (‘‘OCR’’), the number of breaches per year grew 12,300 hours (150 hours × 82 breaches) breaches by calculating the breach from 276 in 2013 to 739 breaches in 2023. See with an associated labor cost of incidence rate for HIPAA-covered Breach Portal, U.S. Dep’t of Health & Human Servs., $883,140 (82 breaches × $10,770). Office for Civil Rights, https://ocrportal.hhs.gov/ entities, and then applied this rate to the ocr/breach/breach_report.jsf (last visited March 1, Estimated Capital and Other Non- estimated total number of entities that 2024). The data was downloaded on March 1, 2024, Labor Costs: $91,984,370. will be subject to the amendments.301 resulting in limited data for 2024. Thus, breaches The capital and non-labor costs from 2024 were excluded from the calculations. associated with breach notifications However, breach investigations that remain open Fitness’’). Together, this suggests there are (under investigation) from years prior to 2024 are depend upon the number of consumers approximately 193,000 Health and Fitness apps. included in the count of yearly breaches. contacted and whether covered firms This figure is likely both under- and over-inclusive 303See Breach Portal, U.S. Dep’t of Health & are likely to retain the services of a as a proxy for covered entities. For example, this figure does not include apps categorized elsewhere H oc u r m po a r n ta S l. e h r h v s s . . g , o O v f / f o ic c e r / f b o r r e C ac iv h i / l b R re ig a h c t h s _ , r h e t p tp or s t : . / j / sf (last forensic expert. For breaches affecting (i.e., outside ‘‘Health and Fitness’’) that may be large numbers of consumers, covered visited March 1, 2024).
PHRs. However, at the same time, this figure also firms are likely to retain the services of 304In a Federal Register publication titled overestimates the number of covered entities, since ‘‘Proposed Modifications to the HIPAA Privacy a forensic expert. FTC staff estimates, many developers make more than one app and may Rule to Support, and Remove Barriers to, for each breach requiring the services of specialize in the Health and Fitness category.
$11.87 per breached record.309This economic impact upon small entities. estimate includes the costs of electronic In this document, the Commission B. Significant Issues Raised in Public notice, letters, outbound calls or general largely adopts the amendments Comments notice to data subjects; and engagement proposed in its NPRM. The Commission of outside experts.310Applied to the believes the amendments will not have Although the Commission received above-stated estimate of 7,666,754 a significant economic impact upon several comments that argued that the consumers per year receiving breach small entities, although they may affect amendments would be burdensome for notification yields an estimated total a substantial number of small businesses, none argued specifically annual cost for all forms of notice to businesses. Among other things, the that smaller businesses in particular consumers of $91,004,370 (7,666,754 amendments clarify certain definitions, would be subject to special burdens. consumers × $11.87 per record). revise the disclosures that must The Commission did not receive any Accordingly, the estimated capital and accompany notice of a breach under the comments filed by the Chief Counsel for non-labor costs total $91,984,370 Rule, and modernize the methods of Advocacy of the SBA. ($980,000 + $91,004,370). notice to allow additional use of FTC staff notes these estimates likely electronic notice such as email by C. Small Entities to Which the overstate the costs imposed by the entities affected by a breach. In Amendments Will Apply amendments because FTC staff made addition, the amendments improve the The amendments, like the current conservative assumptions in developing Rule’s readability by clarifying cross- many of the underlying estimates. references and adding statutory Rule, will apply to vendors of personal Moreover, many entities covered by the citations. The Commission does not health records, PHR related entities, and amendments already have similar anticipate that these changes will add third party service providers, including notification obligations under State data significant additional costs for entities developers and purveyors of health covered by the Rule, and by authorizing apps, connected health devices, and which yields a total cost of $20,000 (40 hours × electronic notice in additional similar technologies. As discussed in $500/hour). circumstances, the amendments may the Commission’s PRA estimates above, 308HHS Breach Data, supra note 303. This reduce costs for many entities covered FTC staff estimates the amendments analysis uses the last six years of HHS breach data by the Rule. Therefore, the Commission will apply to approximately 193,000 to generate the average, in order to account for the variation in number of individuals affected by certifies that the amendments will not covered entities. The Commission breaches observed in the HHS data over time. estimates that a substantial number of 309See IBM Security, Costs of a Data Breach 311Many State data breach notification statutes these entities likely qualify as small Report 2023 (2023), https://www.ibm.com/reports/ require notification when a breach occurs involving data-breach (‘‘2023 IBM Security Report’’). The certain health or medical information of individuals businesses. According to the Statistics research for the 2023 IBM Security Report is in that State. See, e.g., Ala. Code 8–38–1 et seq.; on Small Businesses Census data, conducted independently by the Ponemon Institute, Alaska Stat. 45.48.010 et seq.; Ariz. Rev. Stat. 18– approximately 94% of ‘‘Software and the results are reported and published by IBM 551 et seq.; Ark. Code 4–110–101 et seq.; Cal. Civ. Publishers’’ (the category to which Security. Figure 2 of the 2023 IBM Security Report Code 1798.80 et seq.; Cal. Health & Safety Code shows that cost per record of a breach was $165 per 1280.15; Colo. Rev. Stat. 6–1–716; Del. Code Ann. health and fitness apps belong) are record in 2023, $164 in 2022, and $161 in 2021, tit. 6 12B–101 et seq.; D.C. Code 28–3851 et seq.; small businesses.313 resulting in an average cost of $163.33. Figure 5 of Fla. Stat. 501.171; 815 Ill. Comp. Stat. 530/5 et seq.; the 2023 IBM Security Report shows that 8.3% Md. Code Com. Law 14–3501 et seq; Mo. Rev. Stat. ($0.37m/$4.45m) of the average cost of a data 407.1500; Nev. Rev. Stat. 603A.010 et seq.; N.H. 3132017 SUSB Annual Data Tables by breach are due to ‘‘Notification’’ costs. The fraction Rev. Stat. 359–C:19–C:21; N.H. Rev. Stat. 332–I:5; Establishment Industry, U.S. Census Bureau (May of average breach costs due to ‘‘Notification’’ were N.D. Cent. Code 51–30–01–07; Or. Rev. Stat. 2021), https://www.census.gov/data/tables/2017/ 7.1% in 2022 and 6.4% in 2021 (IBM Security, 646A.600–646A.628; R.I. Gen. Laws 11–49.3–1— econ/susb/2017-susb-annual.html, using ‘‘Data by Costs of a Data Breach Reports 2022 and 2021). 11–49.3–6; SDCL 22–40–19—22–40–26; Tex. Bus. & Using the average of these numbers (7.27%), FTC Com. Code 521.002, 521.053, 521.151–152; 9 V.S.A. Enterprise Receipts Size.’’ The U.S. Small Business staff estimates that notification costs per record 2430, 2435; Va. Code 18.2–186.6; Va. Code 32.1– Administration (‘‘SBA’’) categorizes Software across the three years are 7.27% × $163.33 = $11.87 127.1:05; Va. Code 58.1–341.2; Wash. Rev. Code Publishers as a small business if the annual receipts per record. 19.255.010 et seq. are less than $41.5 million; the 2017 data is the 310See 2023 IBM Security Report at 72. 3125 U.S.C. 601–612. most recent data available reporting receipts size. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47054 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations D. Projected Reporting, Recordkeeping, E. Significant Alternatives to the This part does not apply to HIPAA- and Other Compliance Requirements, Amendments covered entities, or to any other entity Including Classes of Covered Small to the extent that it engages in activities In drafting the Rule, the Commission Entities and Professional Skills Needed as a business associate of a HIPAA- has made every effort to avoid unduly To Comply covered entity.
list of consumers to whom a breach List of Subjects in 16 CFR Part 318 Business associate means a business notice must be sent, and sending a associate under the Health Insurance breach notice. Such entities may incur Breach, Consumer protection, Health, Portability and Accountability Act, additional costs in locating consumers Privacy, Reporting and recordkeeping Public Law 104–191, 110 Stat. 1936, as who cannot be reached, and in certain requirements, Trade practices. defined in 45 CFR 160.103. cases, posting a breach notice on a ■Accordingly, the Federal Trade Clear and conspicuous means that a website, notifying consumers through Commission revises and republishes 16 notice is reasonably understandable and media advertisements, or sending CFR part 318 to read as follows: designed to call attention to the nature breach notices through press releases to and significance of the information in media outlets. PART 318—HEALTH BREACH the notice.
information; administrative costs of 318.3 Breach notification requirement. notice in clear, concise sentences, compiling address lists; professional/ 318.4 Timeliness of notification. paragraphs, and sections;
legal costs of drafting the notice; and
potentially, costs for postage, web
posting, and/or advertising. Costs may
also include the purchase of services of 318.9 Sunset. possible; a forensic expert. As discussed in the Authority: 42 U.S.C. 17937 and 17953. (iv) Avoid multiple negatives; context of the PRA, FTC staff estimates
notice to call attention to the nature and (ii) With respect to which there is a significance of the information in it if reasonable basis to believe that the (a) In general. In accordance with you use text or visual cues to encourage information can be used to identify the §§318.4 (regarding timeliness of scrolling down the page if necessary to individual; and notification), 318.5 (regarding methods
relevance of the notice. service, of a vendor of personal health (2) Notify the Federal Trade Covered health care provider means a records; Commission; and provider of services (as defined in 42 (2) Offers products or services through (3) Notify prominent media outlets U.S.C. 1395x(u)), a provider of medical the websites, including any online serving a State or jurisdiction, following or other health services (as defined in 42 service, of HIPAA-covered entities that the discovery of a breach of security, if U.S.C. 1395x(s)), or any other entity offer individuals personal health the unsecured PHR identifiable health furnishing health care services or records; or information of 500 or more residents of supplies. (3) Accesses unsecured PHR such State or jurisdiction is, or is Electronic mail means email in identifiable health information in a reasonably believed to have been, combination with one or more of the personal health record or sends acquired during such breach. following: text message, within- unsecured PHR identifiable health (b) Third party service providers. A application messaging, or electronic information to a personal health record. third party service provider shall, banner. State means any of the several States, following the discovery of a breach of Health care services or supplies the District of Columbia, Puerto Rico, security, provide notice of the breach to means any online service such as a the Virgin Islands, Guam, American an official designated in a written website, mobile application, or internet- Samoa, and the Northern Mariana contract by the vendor of personal connected device that provides Islands. health records or the PHR related entity mechanisms to track diseases, health Third party service provider means an to receive such notices or, if such a conditions, diagnoses or diagnostic entity that: designation is not made, to a senior testing, treatment, medications, vital (1) Provides services to a vendor of official at the vendor of personal health signs, symptoms, bodily functions, personal health records in connection records or PHR related entity to which fitness, fertility, sexual health, sleep, with the offering or maintenance of a it provides services, and obtain mental health, genetic information, diet, personal health record or to a PHR acknowledgment from such official that or that provides other health-related related entity in connection with a such notice was received. Such services or tools. product or service offered by that entity; notification shall include the HIPAA-covered entity means a and identification of each customer of the covered entity under the Health (2) Accesses, maintains, retains, vendor of personal health records or Insurance Portability and modifies, records, stores, destroys, or PHR related entity whose unsecured Accountability Act (HIPAA), Public Law otherwise holds, uses, or discloses PHR identifiable health information has 104–191, 110 Stat. 1936, as defined in unsecured PHR identifiable health been, or is reasonably believed to have 45 CFR 160.103. information as a result of such services. been, acquired during such breach. For VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47056 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations purposes of ensuring implementation of a notification, notice, or posting remain active for at least 90 days, where this paragraph (b), vendors of personal required under this part would impede an individual can learn if the health records and PHR related entities a criminal investigation or cause individual’s unsecured PHR identifiable shall notify third party service providers damage to national security, such health information may have been of their status as vendors of personal notification, notice, or posting shall be included in the breach. health records or PHR related entities delayed. This paragraph (d) shall be (3) In any case deemed by the vendor subject to this part. While some third implemented in the same manner as of personal health records or PHR party service providers may access provided under 45 CFR 164.528(a)(2), in related entity to require urgency because unsecured PHR identifiable health the case of a disclosure covered under of possible imminent misuse of information in the course of providing §164.528(a)(2). unsecured PHR identifiable health services, this does not render the third information, that entity may provide §318.5 Methods of notice.
party service provider a PHR related information to individuals by telephone entity. (a) Individual notice. A vendor of or other means, as appropriate, in
(a) of this section. All logged vendor of personal health records or notifications required under §318.5(c) PHR related entity finds that contact Regardless of the method by which (regarding notice to FTC) involving the information for ten or more individuals notice is provided to individuals under unsecured PHR identifiable health is insufficient or out-of-date, the vendor §318.5 (regarding methods of notice), information of fewer than 500 of personal health records or PHR notice of a breach of security shall be in individuals may be sent annually to the related entity shall provide substitute plain language and include, to the Federal Trade Commission no later than notice, which shall be reasonably extent possible, the following: 60 calendar days following the end of calculated to reach the individuals (a) A brief description of what the calendar year. affected by the breach, in the following happened, including: the date of the
individuals, such as offering credit You shared health information with us monitoring or other services; and Appendix A—Health Breach when you used [product name]. We
Exemplar Email Notice 1 your name. It tells creditors to contact you We gave [insert Company name, identity, Email Sender: [Company] <company email> before they open any new accounts in your or where providing full name or identity Email Subject Line: [Company] Breach of name or change your accounts. A fraud alert would pose a risk to individuals or the entity Your Health Information lasts for one year. After a year, you can renew providing notice, a description of type of Dear [Name], it. company] this information so they could use We are contacting you because an attacker To freeze your credit report, contact each it for advertising and marketing purposes. recently gained unauthorized access to our of the three credit bureaus, Equifax, For example, to target you for ads for cancer system and stole health information about Experian, and TransUnion. drugs. our customers, including you. To place a fraud alert, contact any one of What we are doing in response What happened and what it means for you the three credit bureaus, Equifax, Experian, We will stop selling or sharing your health On [March 1, 2024], we learned that an and TransUnion. As soon as one credit information with other companies. We will attacker had accessed a file containing our bureau confirms your fraud alert, the others stop using your health information for customers’ health information on [February are notified to place fraud alerts on your advertising or marketing purposes. We have 28, 2024]. The file included your name, the credit report. asked Company XYZ to delete your health name of your health insurance company, Credit bureau contact information information, but it’s possible they could your date of birth, and your group or policy Equifax, www.equifax.com/personal/credit- continue to use it for advertising and marketing.
number. report-services, 1–800–685–1111 What you can do What you can do to protect yourself Experian, www.experian.com/help, 1–888– We made important changes to our app to You can take steps now to reduce the risk 397–3742 fix this problem. Download the latest updates of identity theft. TransUnion, www.transunion.com/credit- to our app then review your privacy settings.
www.IdentityTheft.gov/steps to see what system. We are working with law other steps you can take to limit the damage. Sincerely, enforcement to find the attacker. And we are Also review the Explanation of Benefits First name Last Name investigating whether we made mistakes that statement your insurer sends you when it [Role], [Company] made it possible for the attackers to get in.
pays for medical care.
You can get your free credit reports from the Dear [Name], If you have questions or concerns, call us three credit bureaus at at [telephone number], email us at [address], We are contacting you about a breach of www.annualcreditreport.com or call 1–877– or go to [URL]. your health information collected through 322–8228. Look for medical billing errors, the [product], a device sold by our company, Sincerely, like medical debt collection notices that you [Company]. First name Last Name don’t recognize. Report any medical billing What happened? [Role], [Company] errors to all three credit bureaus by following On [March 1, 2024], we discovered that our the ‘‘What To Do Next’’ steps on Exemplar Email Notice 2 employee had accidentally posted a database www.IdentityTheft.gov. online on [February 28, 2024]. That database Email Sender: [Company] <company email>
it. subject to the privacy and security provisions created by HIPAA, defines ‘‘health care To freeze your credit report, contact each of HIPAA,316gave state attorneys general provider’’ as, first, ‘‘a provider of services’’ as of the three credit bureaus, Equifax, enforcement powers,317and—most relevant defined in section 1395x(u);326second, ‘‘a Experian, and TransUnion. here—directed the Commission to issue a provider of medical or other health services’’ To place a fraud alert, contact any one of rule requiring entities not covered by HIPAA as defined in section 1395x(s);327and, third, the three credit bureaus, Equifax, Experian, to provide notification of any breach of ‘‘any other person furnishing health care and TransUnion. As soon as one credit unsecured health records.318The services or supplies.’’328 bureau confirms your fraud alert, the others Commission issued the original rule in The term ‘‘health care services or are notified to place fraud alerts on your 2009.319In 2020, the Commission initiated supplies,’’ undefined in the statute, is credit report. its regular decennial rule review and, in defined in the Final Rule as follows: Credit bureau contact information 2021, the Commission issued a policy Health care services or supplies means any Equifax, www.equifax.com/personal/credit- statement clarifying how the rule applies to online service such as a website, mobile report-services, 1–800–685–1111 health apps and other connected devices.320 application, or internet-connected device that Experian, www.experian.com/help, 1–888– In the years since, the Commission has provides mechanisms to track diseases, 397–3742 brought enforcement actions against health health conditions, diagnoses or diagnostic TransUnion, www.transunion.com/credit- apps alleging violations of the Health Breach testing, treatment, medications, vital signs, help, 1–888–909–8872 Notification Rule.321Today’s issuance of the symptoms, bodily functions, fitness, fertility, Final Rule codifies this approach, honoring sexual health, sleep, mental health, genetic Learn more about how credit report freezes the statutory directive that people must be information, diet, or that provides other and fraud alerts can protect you from identity notified when their health records are health-related services or tools.329 theft or prevent further misuse of your breached. The dissent argues that this definition personal information at The dissent argues that the Commission’s violates certain canons of statutory www.consumer.ftc.gov/articles/what-know- action ‘‘exceeds the Commission’s statutory construction.330But its effort to cabin the about-credit-freezes-and-fraud-alerts.
online and it should have been encrypted.
narrowed the definition originally proposed in the their ‘business associates,’—i.e., to traditional 349The dissent’s argument anachronistically NPRM, by eliminating ‘‘includes’’ from the health care providers, that do not include the broad assumes that Congress intended for the Rule to definition. SBP at 27 (‘‘[T]he Commission has swath of app developers the Final Rule will cover some health apps, but not other health apps. substituted the word ‘means’ for ‘includes’ to avoid encompass.’’ Dissent at 4 n.24 (internal citations But, in fact, the Apple and Google app stores were implying greater breadth than the Commission omitted). It is not clear how this qualifies as a in their infancy when Congress drafted this intends.’’). mischaracterization. Indeed, this is precisely the legislation in 2009, and so there is no indication 337Dissent at 3. This rejection of the text of the stated purpose of the Health Breach Notification that Congress was thinking about specific health statute, in favor of vague speculation about what Rule: To cover entities that HIPAA does not. The apps at all. To the extent the dissent’s argument is Congress intended, mirrors the argument advanced dissent also notes that we fail to recognize that HHS that Congress simply did not anticipate the vast by the Chamber of Commerce (‘‘the Chamber’’). The provides two examples of ‘‘health care.’’ But, HHS number of products that would end up covered by Chamber purports to rely on a ‘‘plain text reading’’ expressly states that the definition ‘‘includes, but is the broad category of ‘‘supplies and services,’’ it is of the statute but immediately switches—in the very not limited to’’ these categories. 45 CFR 160.103. In not within the Commission’s authority to re-write same sentence—to vague notions of Congressional any case, the breadth of these categories further the statute based on the Commission’s belief of intent: ‘‘It is clear from a plain text reading of both underscores the expansive scope of HHS’s what Congress would have wanted. MCI the HITECH Act and HIPPA [sic] that Congress definition of health care. Id. Telecomms. Corp. v. Am. Telephone & Telegraph intended for the HBNR to cover health records more 341Dissent at 2. Co., 512 U.S. 218, 229 (1994) (holding that FCC’s aligned with the provision of health services authority to ‘‘modify’’ does not extend to provided by traditional health providers at a time 342Proposed Rule, Standards for Privacy of eliminating altogether a statutory requirement).
Individually Identifiable Health Information, 64 FR when it was attempting to digitize traditional health 59918, 60049 (Nov. 3, 1999) (emphasis added).
(Feb. 1, 2023), https://www.ftc.gov/news-events/ to Stop Harris Jewelry from Cheating Military I am encouraged that today the n ac e t w io s n /p -b re a s r s -g -r o e o le d a rx se -s s h /2 a 0 ri 2 n 3 g / - 0 c 2 o / n ft s c u - m en e f r o s r - c s e e m ns e i n ti t v - e- F (J a u m l. i 2 li 0 e , s 2 w 02 it 2 h ) , I l h l t e t g p a s l : / F / i w n w an w c . i f n tc g . g a o n v d /n S e a w le s s -e T v a e c n t t i s c / s Commission is acting by rulemaking, as health-info-advertising; See also, Concurring news/press-releases/2022/07/ftc-18-states-sue-stop- authorized by statute and following a period Statement of Comm’r Christine S. Wilson, GoodRx harris-jewelry-cheating-military-families-illegal- of notice and comment that elicited a range Holdings, Inc. (Feb. 1, 2023), https://www.ftc.gov/ financing-sales-tactics (the Commission’s first of views, rather than acting by fiat in a policy system/files/ftc_gov/pdf/2023090_goodrx_final_ action brought under the Military Lending Act); statement, as the Commission did in 2021.11 concurring_statement_wilson.pdf (‘‘Today’s Press Release, Fed. Trade Comm’n, Smart Home I cannot endorse any policy statement that settlement marks the first enforcement matter in Monitoring Company Vivint Will Pay $20 Million either displaces Congress’s authority to make which the FTC has invoked the HBNR. I to Settle FTC Charges That It Misused Consumer law or subverts the rulemaking process. The congratulate staff on this important step—the Credit Reports (Apr. 29, 2021), https://www.ftc.gov/ 2021 Policy Statement did both. The majority agency rightly is focused on protecting the privacy news-events/news/press-releases/2021/04/smart- clearly recognizes this overreach. After all, if of sensitive health data and empowering consumers home-monitoring-company-vivint-will-pay-20- to make informed choices about the goods and million-settle-ftc-charges-it-misused-consumer (the the 2021 Policy Statement had any force, services they use.’’); see also id. at 5 (describing the Commission’s first action brought under the Red today’s rulemaking would be unnecessary. GoodRx case as ‘‘an important milestone in the Flags Rule, brought under Acting Chair Slaughter); Setting aside this troubling history, I turn Commission’s privacy work.’’). The dissent suggests Press Release, Fed. Trade Comm’n, FTC Sues to the Final Rule itself, which, unfortunately, that Commissioners Holyoak and Ferguson would Burger Franchise Company That Targets Veterans I find equally troubling in its extension have supported the application of HBNR to and Others With False Promises and Misleading beyond the parameters established by GoodRx. Documents (Feb. 8, 2022), https://www.ftc.gov/ Congress. 352See GoodRx, GoodRx Response to FTC news-events/news/press-releases/2022/02/ftc-sues- Settlement (Feb. 1, 2023) (‘‘We believe this is a burger-franchise-company-targets-veterans-others- look forward to continuing the Commission’s novel application of the Health Breach Notification false-promises-misleading-documents (the important work in this area.
Rule by the FTC. . . . We don ot agree with the Commission’s first action under the Franchise Rule assertion that this was a violation of the HBNR.’’). since 2007); Press Release, Fed. Trade Comm’n, 2See, e.g., Children’s Online Privacy Protection Rule, 16 CFR part 312, as authorized by the 353The dissent concedes that it does support an FTC Issues Rule to Deter Rampant Made in USA Children’s Online Privacy Protection Act of 1998, update to the rule that provides more clarity—and Fraud (Jul. 1, 2021), https://www.ftc.gov/news- 15 U.S.C. 6501 et seq.
specifically an update that provides clarity to show events/news/press-releases/2021/07/ftc-issues-rule- 3Joint Statement of Chair Lina M. Khan, Comm’r that the rule covers GoodRx. Dissent at 7 (‘‘I would deter-rampant-made-usa-fraud (issuance of the Rebecca Kelly Slaughter, and Comm’r Alvaro M.
support changes to the Rule that clarify the Rule’s Made in the USA Rule, more than 25 years after Bedoya at 2 (Apr. 24, 2024) (‘‘Majority Statement’’).
application to companies like GoodRx.’’). That is Congress authorized the Commission to promulgate precisely what today’s Final Rule does. Previously, a rule). 4Am. Recovery and Reinvestment Act of 2009, Public Law 111–5, 123 Stat. 115 (2009).
the rule did not define ‘‘health care services or 1Like the majority, and other Commissioners supplies,’’ and today’s Final Rule does. Previously, before me, I support federal privacy legislation, 542 U.S.C. 17937(a), (g). health apps like GoodRx stated that it was unclear particularly where such legislation could address 674 FR 42962 (Aug. 25, 2009). whether the rule applies to them, and today’s Final gaps in sector-specific laws and level the playing 785 FR 31085 (May 22, 2020). Rule makes clear that it does. This concession from field for companies navigating a patchwork of laws. 8See Statement of the Comm’n on Breaches by the dissent suggests a more modest disagreement And like the majority, and other Commissioners Health Apps and Other Connected Devices (Sept. with the contours of how the Rule defines ‘‘health before me, I care deeply about protecting the 15, 2021), https://www.ftc.gov/system/files/ care services or supplies,’’ though—notably—the privacy and security of consumers’ health documents/public_statements/1596364/statement_ dissent does not provide an alternative definition. information, particularly where it falls outside the of_the_commission_on_breaches_by_health_apps_ 354See, e.g., Press Release, Fed. Trade Comm’n, bounds of the Health Insurance Portability and and_other_connected_devices.pdf (‘‘2021 Policy FTC Hits R360 and its Owner With $3.8 Million Accountability Act (‘‘HIPAA’’). For more than two Statement’’). Civil Penalty Judgment for Preying on People decades, the FTC has been in a leader in protecting 988 FR 37819 (June 9, 2023). Seeking Treatment for Addiction (May 17, 2022), consumers’ health information. See, e.g., Eli Lilly, 10See Statement of Basis and Purpose (‘‘SBP’’) https://www.ftc.gov/news-events/news/press- FTC File No. 0123214 (May 10, 2002), https:// accompanying the Final Rule, Section I releases/2022/05/ftc-hits-r360-its-owner-38-million- www.ftc.gov/legal-library/browse/cases- (summarizing procedural history). civil-penalty-judgment-preying-people-seeking- proceedings/012-3214-eli-lilly-company-matter. I 11See 2021 Policy Statement, supra note 8. VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47062 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations Some background first. Under the Recovery facility, home health agency, hospice where the health app developer is itself the Act, PHR identifiable health information program, or . . . a fund.’’19The second health care provider that creates or receives means ‘‘individually identifiable health category of provider includes an extensive that health information by virtue of offering information,’’ as defined by the Social list (section 1395x(s) includes 17 paragraphs the app. Security Act, 42 U.S.C. 1320d(6).12The and over 35 subparagraphs) of medical Notably, even though the Department of Social Security Act defines ‘‘individually professionals including physicians, Health and Human Services (‘‘HHS’’) identifiable health information’’ as physician assistants, nurse practitioners, interprets this same provision of the Social information that is ‘‘created or received by a clinical psychologists, clinical social Security Act, HHS has—notwithstanding the health care provider, health plan, employer, workers, and others, and the specific services majority’s assertion to the contrary25—never or health care clearinghouse.’’13The Social administered by medical professionals.20 interpreted the term ‘‘health care provider’’ Security Act then defines ‘‘health care These two categories comprise traditional to reach the expansive, creative conclusion provider’’ to include three categories: ‘‘[1] a forms of health care providers. that the Commission does today.26The provider of services (as defined in section The final category, addressing ‘‘any other 1395x(u) of this title), [2] a provider of person furnishing health care services or majority’s argument misstates the scope and medical or other health services (as defined supplies,’’ must therefore only include language of the HIPAA Privacy Rule, which in section 1395x(s) of this title), and [3] any persons that are ‘‘similar in nature’’ to these only applies to HIPAA ‘‘covered entities’’ other person furnishing health care services first two categories.21The majority argues and their ‘‘business associates,’’27—i.e., to or supplies.’’14 that my ‘‘effort to cabin the third category traditional health care providers that do not The Commission takes liberties with the . . . reads it out of existence, violating the include the broad swath of app developers final category in that definition (‘‘any other canon that holds interpretations giving effect the Final Rule will encompass. Significantly, person furnishing health care services or to every clause of a statute are superior to the majority omits from its characterization supplies’’) to adopt a new, capacious those that render distinct clauses of the term ‘‘health care’’ HHS’s own definition of ‘‘covered health care provider’’ superfluous.’’22This application of the illustrations of that term, which highlight the and a new, similarly capacious definition of canon is incorrect. Requiring similarity proximity to traditional forms of health care ‘‘health care services and supplies,’’ whose among categories does not result in by different kinds of medical professionals: joint effect is to sweep a large swath of apps superfluity; it merely prevents interpretations (1) Preventive, diagnostic, therapeutic, and app developers under the purview of the that extend beyond what the text permits. A rehabilitative, maintenance, or palliative Final Rule. These expansive definitions are catch-all’s limited application due to its care, and counseling, service, assessment, or not consistent with the statute. Under context is not a reason to expand that phrase procedure with respect to the physical or longstanding principles of statutory to encompass dissimilar applications. mental condition, or functional status, of an interpretation, the final category of provider The Final Rule’s definition of ‘‘covered (‘‘any other person . . .’’) must be health care provider’’ is not remotely similar, individual or that affects the structure or understood in relation to the first two because it incorporates a new, astonishingly function of the body; and categories (‘‘provider of services’’ and broad definition of ‘‘health care services or (2) Sale or dispensing of a drug, device, ‘‘provider of medical or other health supplies,’’ which means ‘‘any online service equipment, or other item in accordance with services’’).15When a statute contains a list, such as a website, mobile application, or a prescription.28 ‘‘each word in that list presumptively has a internet-connected device that provides The Majority Statement repeatedly says ‘similar’ meaning’’ under the canon of mechanisms to track diseases, health that HHS defines ‘‘health care’’ broadly,29but noscitur a sociis.16And when a general term conditions, diagnoses or diagnostic testing, the language it cites provides no such follows a list of specific terms, the ejusdem treatment, medications, vital signs, support. generis canon teaches that the general term symptoms, bodily functions, fitness, fertility, Aware of this incongruency, the ‘‘should usually be read in light of those sexual health, sleep, mental health, genetic Commission seeks to differentiate its use of specific words to mean something information, diet, or that provides other ‘‘health care provider’’ from that of ‘‘other ‘similar.’’’17Together, these canons instruct health-related services or tools.’’23Thus, the government agencies.’’30Yet the that the final category of health care provider Commission transforms ‘‘health care Commission provides no explanation why its that includes the general term ‘‘other person’’ provider,’’ which both under common usage definition should differ, particularly where it must be similar to the more specific terms and in context of the statutory provision is unclear whether the Commission has that precede it. means entities such as physicians and interpretative authority over the Social The first two categories of health care hospitals, to now include any company Security Act’s definition of health care provider incorporate the definitions of ‘‘furnishing’’ a health-related app.24As a provider and where other agencies are sections 1395x(u) and 1395x(s) of the Social result, the Final Rule creates a tautology: delegated such interpretative authority.31 Security Act, respectively.18The first Health app developers may be ‘‘vendors of category of provider includes ‘‘a hospital, personal health records’’ by offering an app critical access hospital, rural emergency containing health information that has been 25Majority Statement at 3. hospital, skilled nursing facility, created or received by a health care provider, 26See NPRM at 37823. comprehensive outpatient rehabilitation 2745 CFR 160.102 through 103. 28Id. §160.103.
1242 U.S.C. 17937(f)(2). 20Id. 1395x(s). 29Majority Statement at 3–4. 1342 U.S.C. 1320d(6). 21Yates, 574 U.S. at 545 (internal quotation marks 30SBP at 26. 14Id. 1320d(3). omitted). 31Id. at 13 (noting that HHS interprets these 15See Yates v. United States, 574 U.S. 528, 549– 22Majority Statement at 2. provisions of the Social Security Act). Cf. City of 51 (2015) (Alito, J., concurring); Antonin Scalia & 23Final Rule at 98. Arlington, Tex. v. F.C.C., 569 U.S. 290, 323 (2013) Bryan A. Garner, Reading Law: The Interpretation 24The SBP explains that an app developer (or any (Roberts, C.J., dissenting) (‘‘When presented with an of Legal Texts 195–196,199–200 (2012). company ‘‘furnishing’’ a health app) would be agency’s interpretation of such a statute, a court 16Yates, 574 U.S. at 549. covered as a health care provider because its health cannot simply ask whether the statute is one that 17Id. at 550. app is a health care service or supply. SBP at 7, 22– the agency administers; the question is whether 1842 U.S.C. 1320d(3). 28. authority over the particular ambiguity at issue has been delegated to the particular agency.’’).
VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations 47063 The Commission also takes troubling from a side-by-side comparison of the statute liberties with the statute’s definition of and the Final Rule: ‘‘personal health record,’’ which are evident Recovery act Final rule ‘‘an electronic record of PHR identifiable health information . . . on an ‘‘an electronic record of PHR identifiable health information on an indi- individual that can be drawn from multiple sources and is managed, vidual that has the technical capacity to draw information from mul- shared, and controlled by or primarily for the individual.’’32. tiple sources and that is managed, shared, and controlled by or pri- marily for the individual.’’33 Under the Final Rule, a PHR need not regulatory limit has several significant but impactful limitation in a Notice of actually draw health information from problems. Proposed Rulemaking—likely because there multiple sources, as the statute contemplates First, if the majority were correct, from is no statutory basis for this newly-created (because the statutory phrase ‘‘that can be where would it draw the authority to impose language. Rather, it introduces this crucial drawn’’ modifies its immediate antecedent, this ‘‘more than tangentially relating to concept for the first time in a Statement of ‘‘health information’’). Rather, under the health’’ limitation? If Congress in fact Basis and Purpose (a purely interpretive Final Rule, a single source of health commanded us to cover all the apps the document) as a post hoc fix to the problem information will render an app a PHR as long majority claims, this extra-textual limitation the Commission itself created with its as the ‘‘PHR’’ has the ‘‘technical capacity’’ to would be beyond our power to impose.38 expansive definitions. As a result, the draw some other information elsewhere.34 Why, then, does the majority blink in the face Commission did not provide notice or The implications of this change, in of what it understands Congress to have receive public comment on the efficacy or conjunction with the expansion of ‘‘health required? There may be good policy reasons propriety of this limitation, depriving the care provider,’’ are significant. Any retailer not to follow Congress’s language—as the public of its opportunity to meaningfully that offers an app that tracks health-related majority understands it—wherever it leads, participate in the rulemaking process and purchases (e.g., bandages, vitamins, dandruff but we do not have power to shortchange depriving itself of potentially valuable input shampoo) may be a vendor of a PHR covered Congress’s commands. That even the from commenters. by the Rule if the app draws health majority feels compelled to adopt this extra- The final problem is that this post hoc, information (e.g., purchasing information) textual limitation—again, as the majority extra-regulatory limitation renders the from the consumer and the app has the understands the text—on the statute’s reach Commission’s burden analysis inadequate. ‘‘technical capacity’’ to draw any information suggests that the language probably does not The Paperwork Reduction Act (‘‘PRA’’) from any other source. As the Statement of mean what the majority says. requires the Commission to estimate the Basis and Purpose notes, commenters warned The second problem is substantive: What reportable breaches by entities covered by the that virtually every app has the technical does this language mean? When does an app Rule and compliance costs.40The Regulatory capacity to draw some information from cross the line between tangentially related to Flexibility Act (‘‘RFA’’) requires the more than one source.35That expansive health and more than tangentially related? If Commission to assess the economic impact scope could be appropriate if Congress’s a gas station with a loyalty app sells Advil, on small businesses.41Apparently relying on language permitted it. But the Commission’s is the app only tangentially related to health the SBP’s ‘‘more than tangentially related to interpretation, which effectively renders the and outside the Final Rule’s purview? If the health’’ limitation, the PRA and RFA Recovery Act’s ‘‘multiple sources’’ gas station adds Robitussin and pregnancy analyses only address breaches by apps requirement meaningless, ignores tests to its inventory, does it cross the line categorized as ‘‘Health and Fitness.’’42 longstanding principles of statutory to more than tangentially related to health? Because the Rule itself contains no such interpretation that require each provision of If a clothing store with an e-commerce app limitation, general retailers with e-commerce a statute to be given effect.36 sells a handful of maternity shirts, is the app apps, gas stations with loyalty apps, and The Commission’s expansive definitions of only tangentially related to health? If the other similar generalists that sell any health- ‘‘covered health care provider,’’ ‘‘health care store adds more maternity clothes, nursing related items do not factor into these services and supplies,’’ and ‘‘personal health bras, and some anti-nausea ginger tea to its analyses. As a result, they likely dramatically record’’ have a profound effect on the scope in-app offerings, is the app more than underestimate the numbers of regulated of the Rule: Most companies that offer or tangentially related to health? If vitamins, entities, number of breaches, and costs to disseminate health-related apps or similar over-the-counter medicines, acne creams, businesses.
products would be treated as ‘‘covered health bandages, and similar items comprise 0.1% Perhaps the breath of the Final Rule would care providers’’ that therefore hold ‘‘PHR or 1% or 10% of a superstore’s inventory, be more of a theoretical than practical identifiable health information’’ in their apps when is the retailer’s e-commerce app more concern to businesses, if they could adopt (i.e., PHRs), such that they are vendors of than tangentially related to health? I see no practices sufficient to avoid any breach that PHRs—even if their app is merely health- clear answers to any of these hypotheticals in would trigger notice obligations under the adjacent.
VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 47064 Federal Register/Vol. 89, No. 105/Thursday, May 30, 2024/Rules and Regulations perpetual violation of the Final Rule and, managers and pharmacies, among other is, rather than legislating in the guise of therefore, perpetually at the mercy of the sources, so that consumers could manage applying the law. Commission’s enforcement discretion. The their information.45The majority argues that The FTC is a venerable institution that Commission, at this moment, may not intend today’s changes are necessary to provide does vital work to protect consumers and to pursue such technical violations. But any clarity to the market about the Rule’s scope,46 promote competition, thanks to its expression of intended restraint will be cold but GoodRx has already done that—and I hardworking and devoted career staff. I comfort to companies that have seen the would support changes to the Rule that are commend the staff attorneys, economists, and Commission’s self-imposed restraint wax and consistent with the statute. In short, I agree technologists who worked on the rule for wane in other areas.44 with the majority’s goals—safeguarding their careful and thoughtful consideration of I find the majority’s liberties with the consumers’ sensitive health information and difficult issues. Ultimately, while I am statute particularly troubling because they implementing a Congressional mandate to sympathetic to the majority’s goal, I fear that are unnecessary to reach health apps. Indeed, put consumers on notice of the breach of that the Commission’s own recent enforcement data—but I believe that we must effectuate adopting a Final Rule that is irreconcilable action against digital healthcare platform those goals within the scope of the law as it with the statute and that puts companies in GoodRx makes that clear. Only last year, a an untenable position puts the Commission bipartisan Commission applied the 2009 Rule at risk. Legal challenges may undermine the to GoodRx’s online platform and app because 45See Concurring Statement of Commissioner Commission’s institutional integrity, and Christine S. Wilson, GoodRx, Matter No. 2023090 1 the company received identifiable health Congress may be reluctant to trust the n.2 (Feb. 1, 2023) (‘‘GoodRx has violated the HBNR information on prescription medications based on a plain reading of the text, setting aside Commission with other authority—even the (among other things) from pharmacy benefit any gloss the Commission sought to add in its much-needed authority to protect the privacy September 2021 Statement on Breaches by Health of consumers’ sensitive personal information. 44Significantly, the Majority Statement is silent Apps and Other Connected Devices.’’), https:// I therefore respectfully dissent. as to the propriety and consequences of its www.ftc.gov/system/files/ftc_gov/pdf/2023090_ ‘‘tangentially related’’ limiting principle, likely goodrx_final_concurring_statement_wilson.pdf. [FR Doc. 2024–10855 Filed 5–29–24; 8:45 am] because this approach is indefensible. 46Majority Statement at 5. BILLING CODE 6750–01–P VerDate Sep<11>2014 20:09 May 29, 2024 Jkt 262001 PO 00000 Frm 00038 Fmt 4701 Sfmt 9990 E:\FR\FM\30MYR2.SGM 30MYR2 DORP32NR021KSD rellehmurdd 60742 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations FEDERAL TRADE COMMISSION A. Separation of Examination and 1. Final Rule Determination To Amend the Dispensing Rule To Require Confirmation of 16 CFR Part 456 1. Comments and Evidence Regarding the Prescription Release Automatic-Prescription-Release a. Alternatives to Confirmation of RIN 3084–AB37 Provision Prescription Release Not Adopted
Obtaining Patient’s Verifiable To Withhold the Prescription, Where Alysa S. Bernstein, Attorney, (202) 326– Affirmative Consent for Digital Delivery Appropriate 3289; Sarah Botha, Attorney, (202) 326– to a New Section and Out of Definitions 3. Comments About the Permissibility To 2036; or Paul Spelman, Attorney, (202) 3. Final Rule Adds Explicit Recognition of Charge for the Refraction, as Opposed To 326–2487, Division of Advertising the Ability To Obtain Affirmative Charging for the Prescription Release Practices, Bureau of Consumer Consent on Paper or in a Digital Format C. Additional Discussion and Commission Protection, Federal Trade Commission, 4. Final Rule Clarifies That Digital Delivery Determination Regarding the ‘‘Refractive Methods Identified in Affirmative Eye Examination’’ Proposal 600 Pennsylvania Avenue NW, Consent Request Must in Fact Be Used VII. Miscellaneous Issues Raised in Washington, DC 20580.
I. Background at the Workshop Regarding Confirmation VIII. Paperwork Reduction Act
II. Final Rule Pertaining to the Automatic- Confirmation-of-Prescription-Release Prescribers’ Offices To Scan and Store Prescription-Release Provision Proposal Such Confirmations) VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60743
IX. Final Regulatory Analysis and Regulatory entitled ‘‘Separation of Examination and release-upon-request,15due to what staff Flexibility Act Analysis Dispensing.’’6Keeping the exam perceived to be altered market
X. Congressional Review Act However, the Guides were not binding, vacated, but not the automatic-release I. Background the FTC never sought to enforce them, component, which remained lawful and and prescribers did not comply with in effect.21 A. Overview of the Eyeglass Rule them.8In light of such non-compliance, In 1997, the Commission again sought The Eyeglass Rule (16 CFR part 456) on June 2, 1978, the Commission issued input on the Rule’s prescription-release declares it an unfair practice for an the Advertising of Ophthalmic Goods requirement but withheld taking action optometrist or ophthalmologist to fail to and Services Rule (the ‘‘Eyeglass I while it evaluated whether contact provide a patient with a copy of the Rule’’), which, among other things, lenses should be covered by the Rule.22 patient’s eyeglass prescription contained the provision ‘‘Separation of That question was resolved by Congress, immediately after an eye examination is Examination and Dispensing’’ requiring which passed the Fairness to Contact completed.1The prescriber may not prescribers to automatically release Lens Consumers Act (‘‘FCLCA’’),23 charge the patient any fee in addition to prescriptions—regardless of whether or directing the FTC to issue a separate the prescriber’s examination fee as a not patients requested them—so as to rule with automatic prescription-release condition of releasing the prescription draw a line between exams and eyeglass requirements for contact lenses that to the patient.2The Rule defines a sales, and ensure consumers had were similar to those required by the prescription as the written unconditional access to prescriptions.9 Eyeglass Rule.24 specifications for lenses for eyeglasses The Commission found that consumers When the Commission looked again at which are derived from an eye suffered substantial economic loss and the Eyeglass Rule in 2004, it determined examination, including all of the lost opportunity costs due to an that prescribers continued to withhold information specified by State law, if inability to comparison-shop for prescriptions, and consumers were still any, necessary to obtain lenses for glasses,10and that such practices not sufficiently aware of their rights.25 eyeglasses.3 offended public policy and inhibited The Commission felt that were it to The Rule prohibits an optometrist or competition by denying consumers the eliminate the automatic-release remedy, ophthalmologist from conditioning the ability to use available information.11 even more prescribers might fail to availability of an eye examination on a The Commission explained that while it release prescriptions. Due to this, and requirement that the patient agree to considered requiring prescriptions be because the Commission found that purchase ophthalmic goods from the released only upon request, it chose prescription-release enhanced consumer ophthalmologist or optometrist.4The ‘‘automatic release’’ due to consumers’ choice at minimal cost, the Commission Rule also prohibits the prescriber from lack of awareness of their prescription opted to again retain the automatic- placing on the prescription, or requiring rights, and to immunize such rights release remedy.26By retaining the the patient to sign, or deliver to the from an ‘‘evidentiary squabble’’ over requirement, the Commission also patient, a waiver or disclaimer of whether a consumer did or did not ensured that prescription-release prescriber liability or responsibility for request their prescription.12 requirements for eyeglasses and contact the accuracy of the exam or the Upon issuance of the Eyeglass I Rule, lenses would be largely aligned.27 ophthalmic goods and services the American Optometric Association
fashioning a remedy, and need only and Eyeglass Rule Workshop During its CLR review, the Commission show a ‘‘reasonable relationship’’ considered over 8,000 comments and After the amended CLR final rule took between the unfair act or practice and issued both a notice of proposed effect, the Commission resumed its the remedy.37 rulemaking44and a supplemental review of the Eyeglass Rule. Based on a D. The Current Eyeglass Rule Review notice of proposed rulemaking45 review of comments received in (‘‘SNPRM’’) before issuing a final rule response to the ANPR, a regulatory 1. Advance Notice of Proposed on August 17, 2020.46While the CLR review of the CLR, and the Rulemaking differs from the Eyeglass Rule in some Commission’s enforcement experience, In 2015, as part of a periodic review respects, many of the issues and the Commission issued a notice of of its rules and regulations, the concerns regarding prescription release proposed rulemaking (‘‘NPRM’’) on Commission simultaneously published and portability are the same, and January 3, 2023.54In the NPRM, the notices in the Federal Register initiating therefore, some of the comments and Commission proposed to: (1) require reviews of both the Eyeglass Rule and data submitted during the CLR review that prescribers obtain a signed the Contact Lens Rule. The Commission are pertinent to the Commission’s confirmation after releasing an eyeglass published a request for comment review of the Eyeglass Rule. prescription to a patient, and maintain (‘‘RFC’’) seeking public input on the In its CLR final rule, the Commission each such confirmation for a period of efficiency, costs, benefits, and determined that the evidentiary record, not less than three years; (2) permit regulatory impact of the Contact Lens as well as the Commission’s prescribers to comply with automatic Rule, including its prescription release enforcement and oversight experience, prescription release via electronic requirement.38The Commission demonstrated that prescriber delivery if the prescription is provided published an advance notice of compliance with the automatic- in a digital format that can be accessed, proposed rulemaking (‘‘ANPR’’) for the prescription-release requirement was downloaded, and printed by the patient, VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60745 and if the prescriber obtains the practices. Further, the Commission benefit to consumers and prevent patient’s verifiable affirmative consent remains cognizant of the lengthy consumer harm. This amendment is to the electronic delivery method; (3) regulatory history and evidentiary necessary due to demonstrated failures clarify that the presentation of proof of record pertaining to prescribers’ failure of prescribers to comply with the insurance coverage shall be deemed to to release prescriptions, and eyewear- automatic-release remedy, and to ensure be a payment for the purpose of specific market incentives (such as that the separation of eye examination and determining when a prescription must many eye doctors sell the same items eyeglass dispensing, which engenders a be provided; and (4) amend the term that they prescribe) that provided the competitive marketplace for eyeglasses. ‘‘eye examination’’ to ‘‘refractive eye initial impetus for both the Eyeglass The Commission is sensitive to any examination’’ throughout the Rule. Rule and the CLR. additional burden that this rule change In response to the NPRM, the Based on the entirety of the record, imposes. However, it finds that this Commission received 27 comments the Commission finds that prescribers’ amendment maximizes the benefits of from various individuals and entities, failure to provide consumers with comparison-shopping while imposing a including consumers, optometrists, prescriptions at the completion of an relatively small cost. The potential ophthalmologists, opticians, trade eye exam—held to be an unfair act or benefit of increasing the number of associations, consumer advocates, and practice when the Eyeglass Rule was patients in possession of their eyeglass sellers.55The Commission also enacted61—remains prevalent, and tens prescriptions is substantial: namely, announced it would hold a public of millions of Americans every year are increased flexibility and choice for workshop to consider: the proposed not receiving their eyeglass consumers; increased competition confirmation-of-prescription-release prescriptions as required.62The among eyeglass sellers; a reduced requirement for eyeglass prescriptions; Commission also finds that significant likelihood of errors associated with consumers’ and prescribers’ experiences harm to consumers continues to exist incorrect, invalid, and expired with the implementation of the similar and that, without the Rule’s prescriptions, and consequently, requirement for contact lens requirements, consumers could not improved patient safety; and an prescriptions; other proposed changes to reasonably avoid the injury resulting improved ability for the Commission to the Rule; and other issues raised in from the unfair acts and practices enforce and monitor prescriber response to the NPRM.56The workshop prohibited by the Rule. The Commission compliance. notice invited interested parties to further determines that the Rule’s The confirmation requirement also request to participate as a panelist or to automatic-release requirement remains brings the prescription-release-related file a comment.57Staff convened the the best remedy for failure to release provisions of the Rule into congruence workshop, titled ‘‘A Clear Look at the prescriptions, and that documentation with those of the CLR, thereby reducing Eyeglass Rule,’’ with three panels and a of prescription release is necessary to the confusion and complexity that arise total of 13 panelists in Washington, DC, better effectuate and enforce this for both consumers and prescribers from on May 18, 2023, and the discussion remedy. Consequently, the Commission having inconsistent requirements for was transcribed.58At the conclusion of is amending the Rule to implement a eyeglass and contact lens prescriptions. the workshop, panelists, audience confirmation-of-prescription-release In addition, because the CLR already members, and the general public were requirement similar to that already in obligates ophthalmologists and invited to share additional views, data, place under the amended CLR, albeit a optometrists to obtain a confirmation and other information related to the simpler version.63Pursuant to these and maintain a record, their marginal NPRM and the subjects discussed, after amendments, prescribers will be cost associated with the confirmation which the Commission received an required to do one of the following: requirement in the Eyeglass Rule should additional 20 comments, providing (i) If a paper copy of the prescription be extremely low. Prescribers in further perspectives from consumers, was provided to the patient, request that compliance with the CLR should prescribers, opticians, trade the patient acknowledge receipt of the already have in place forms, systems, associations, and retailers, as well as a prescription by signing a separate and staff training for prescription U.S. Congressman.59 statement on paper or in a digital format release, and should only need to make confirming receipt of the prescription; minor adjustments for eyeglass 4. Overview of the Final Rule or prescriptions.
5. The Eyeglass Marketplace prescriptions issued by optometrists and have an eye exam and proceed to ophthalmologists. Opticians typically purchase eyeglasses, the vast majority The retail vision care industry in the are not authorized to examine eyes to purchase from their prescriber on the United States consists of several types of determine prescriptions, but may day of the exam.79This is often referred participants, namely ophthalmologists, conduct pupillary distance to as a prescriber’s ‘‘capture rate,’’80and optometrists, opticians, and eyewear examinations in order to fit a pair of remains relatively high for a variety of retailers. The services provided by these eyeglasses to an individual. According reasons, even though the average unit different participants often overlap, and to one source, twenty-one States price for frames and lenses in 2022 was different participants often have currently require opticians to obtain $360 from independent optical retailers business affiliations with each other. licenses,70usually through a State- and prescribers compared to just $183 Ophthalmologists are medical doctors approved course of study and from online eyewear sellers.81For many who specialize in treating diseases of completion of an exam. The remaining consumers, the convenience of being the eye. They are the only eye care States have no formal requirements for able to shop at the same location that professionals who can treat all eye and practice, but many opticians in these they have their exam makes it vision-system diseases, perform eye States complete some form of worthwhile to buy glasses from their surgery, prescribe nearly all manner of apprenticeship or training. A 2020 prescriber, even if they are more drugs, and use any treatment available estimate put the number of active expensive. Many consumers also find it to licensed physicians. opticians in the United States at advantageous to try on glasses in person Ophthalmologists can prescribe and sell approximately 73,000.71Opticians and have an expert tell them, based on eyeglasses and contact lenses, and their sometimes co-locate their optical their prescription and physical offices may be attached to an associated dispensaries with examination offices of characteristics, the pros and cons of optical dispensary. Ophthalmologists optometrists or ophthalmologists and, particular eyewear.82In-person optical have typically completed four years of sometimes, although not always, share dispensaries can also perform precise college, four years of medical school, a revenue from the sale of eyeglasses and facial measurements to provide a more year of general internship, and three contact lenses.
1. Comments and Evidence Regarding prescription-release provision is routine or unavailability of their prescription the Automatic-Prescription-Release and common practice. Workshop (such as ‘‘Because my prescriber didn’t Provision panelist Dr. Jeffrey Michaels, a Virginia give me my prescription.’’). The only optometrist, commented, ‘‘I think that way for survey respondents to reference In response to the Commission’s the automatic compliance with this prescription availability or NPRM, and during and after the [prescription release] is so ingrained in unavailability was when asked open- Eyeglass Rule workshop, numerous optometrists and ophthalmologists that ended questions such as ‘‘In your own commenters addressed the Rule’s it’s just a normal part of their day.’’95 words, why did you purchase glasses automatic-prescription-release He noted that in his optometric office, from [the location that you did]?’’ and provision, weighing in on whether (a) 100% of prescriptions are automatically ‘‘Why did you ONLY consider prescribers comply with the uploaded to a patient portal ‘‘the very purchasing glasses from [the location requirement and consumers receive second the prescription is finalized.’’96 that you did]?’’ In response to these their prescriptions, and (b) compliance The American Academy of questions, three consumers volunteered is still necessary and beneficial for Ophthalmology (‘‘AAO’’) volunteered that they either thought they were consumers. that ophthalmology practices ‘‘have a required to buy from their doctor, or VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60748 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations that they bought from their doctor that, of consumers who had purchased dissimilarity, AOA has pointed to the because the prescriber would not eyeglasses within the last three years, NERA survey finding that eyeglass users provide them with a copy of their 47% of those who saw optometrists and are more likely than contact lens users prescription.105Since only three 31% of those who visited to buy their corrective eyewear from consumers mentioned the lack of ophthalmologists were not someone other than their prescriber.117 prescription release, the American automatically provided with a physical AOA also noted that because contact Optometric Association contends that copy of their eyeglass prescription.110 lens fittings are not always complete in noncompliance must not be an issue.106 The survey also found that 14% of office due to patients taking home trial Though the NERA survey provides consumers had to pay their prescriber lenses to test, surveys of contact lens some insights discussed later in this for a copy of their prescription when users may produce imperfect results in document, the Commission does not they requested a copy at a later time.111 that consumers may report that they find the survey to be probative as to Another survey—conducted on behalf didn’t receive their prescriptions at the whether prescribers are releasing of 1–800 CONTACTS by the polling end of their exam when, in fact, their prescriptions (either automatically or on firm Survey Sampling International contact lens fittings hadn’t been request). The fact that only three (‘‘SSI’’)—found that only 34% of finalized and so they weren’t actually consumers107proactively mentioned eyeglass wearers automatically received entitled to receive their prescriptions at that prescribers had not provided them their prescriptions on the day of their that point.118 with their prescriptions could, perhaps, office visit, with another 19% receiving With respect to AOA’s first argument, suggest that prescribers typically it during their visit, but only after asking the Commission acknowledges that both comply, but cannot be accorded for it.112According to the SSI survey, Warby Parker and 1–800 CONTACTS significant evidentiary weight since some consumers were able to obtain have a financial interest in the outcome consumers were not actually asked their prescription at a later point by of the Rulemaking. The Commission whether they received their returning to their prescriber’s office, but recognizes, however, that nearly all prescriptions. 39% of consumers never received their commenters have some form of interest The Commission also notes, as it has prescription at all.113 in the outcome. And thus, as a general repeatedly in the past, that the raw It is important to note that these practice, the Commission does not number of consumer complaints about surveys reveal more than simply that simply disregard data or opinions prescriber non-compliance is an many prescribers fail to always comply submitted by interested parties. Rather, unreliable barometer of prescriber with the automatic-release requirement. the Commission takes into account the compliance. As discussed in some detail The surveys reveal that, even if financial interests of submitting parties, during the Contact Lens Rule review, prescribers will provide prescriptions but also, when possible, examines the the Commission’s experience has shown when asked, a significant percentage of underlying data and methodology that the vast majority of injured or consumers leave their prescriber’s office submitted to gauge a survey’s impacted consumers do not typically without their prescriptions. Which usefulness, and considers factors such register complaints with the means that, for the next year or two as how many people are queried, how government, and even fewer are likely (until their next eye exam), those the questions are phrased, and whether to submit a complaint about an FTC rule consumers might be unable to shop for the surveys are conducted in-house (by violation such as a prescriber’s failure to eyeglasses at an alternative location the interested parties themselves) or by release their prescription.108This is without having to contact their independent and established third-party especially true when—as will be prescriber and ask for their prescription polling firms. Lastly, the Commission discussed later in this final rule— (and possibly have to pay for it). recognizes that all surveys are likely to evidence shows that many consumers Although it is possible for other eyeglass have some methodological limitations, remain unaware that they have an sellers to call prescribers’ offices and and thus the Commission will often unconditional right to their prescription request patient prescriptions, this can decide not to treat any single survey as and should be receiving them lead to delays, and—in sharp contrast to controlling or dispositive. The automatically after each refractive exam. the Contact Lens Rule—there is no legal Commission is also aware, however, As workshop panelist Neilly requirement under the Eyeglass Rule that multiple surveys conducted by commented, the lack of consumer that prescribers comply with requests to different sources at different times with complaints may correlate to the lack of verify patient eyeglass prescriptions to similar results tend to bolster the knowledge about the prescription- third-party sellers. credibility of each individual survey.119 release requirement ‘‘because people The two surveys cited herein have In this case, the surveys submitted by don’t even know there’s an Eyeglass been criticized by optometrists and the Warby Parker and 1–800 CONTACTS Rule.’’109And even if consumers are American Optometric Association, are not flawless or immune to criticism, aware that they have a right to their which contend the Commission should but were performed by reputable third- prescription and should have received disregard their results because the party polling firms and appear it, they might not know to whom to surveys were submitted by retail sufficiently reliable based on an complain in instances when it wasn’t competitors with a financial stake in the examination of their questions and given to them. outcome of the rulemaking,114and were methodology. Apart from the NERA survey, none of submitted as part of the FTC’s Contact As for AOA’s assertion that the two the commenters to the NPRM or Lens Rule review, and the markets and surveys were submitted during the Eyeglass Rule workshop supplied new patient experiences for eyeglasses and Contact Lens Rule review and thus are or updated empirical evidence. The contact lenses are not the same.115The not relevant to this Eyeglass Rule extensive evidentiary record, however, American Optometric Association cited review, the Commission cannot concur. includes two previously submitted to NERA’s survey and comment for the The contention that the SurveyMonkey surveys that shed light on the premise that ‘‘Commission conclusions survey was submitted during the percentage of patients that do or do not and decisions regarding regulation in Contact Lens Rule review is incorrect. receive their prescriptions. A survey the contact lenses market cannot be While the Survey Monkey data was conducted on behalf of Warby Parker by presumed to apply to the eyeglasses referenced during the Contact Lens Rule the polling firm SurveyMonkey reported market.’’116As evidence of this review, it was submitted in response to VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60749 the Commission’s Eyeglass Rule Commission has yet to locate or receive that the automatic release seems to Advance Notice of Proposed any reliable consumer-survey data make the most sense.’’130 Rulemaking in 2015 and was a survey rebutting or contradicting the Some other commenters endorsed this of eyeglass wearers.120As for the SSI prescription-release data in the record view. 1–800 CONTACTS, for example, survey, that was indeed included as part for either contact lens users or eyeglass stated, ‘‘automatic prescription release of a submission during the Contact Lens wearers, or establishing, other than is critical to promoting consumer choice Rule review, but that particular survey anecdotally, that consumers and competition in the market for polled both contact lens users and consistently receive their prescriptions prescription eyewear,’’ and ‘‘prescribers eyeglass users about their experiences from prescribers as they are supposed to are unlikely to comply with their with prescription release, and under the applicable FTC rule.125Based automatic release obligations absent a distinguished between the two in its on the evidence in the record, it is thus credible threat of enforcement and fines. results. The SSI results cited above— the conclusion of the Commission that Prescribers have a strong financial showing that approximately only 34% tens of millions of American consumers incentive to withhold a prescription to of eyeglass wearers automatically in need of corrective vision wear are not discourage comparison shopping and received their prescriptions following receiving their eyeglass prescriptions pressure patients to purchase lenses their refractive eye exam, and 39% did after visiting their prescriber each inhouse.’’131One anonymous not receive their prescription at all—are year.126 commenter submitted, ‘‘Being able to results solely of eyeglass users’ have a prescription in your hands as experiences.121Any impact or effect b. Whether the Automatic-Release soon as your examination is done would caused by a dissimilarity in eyeglass Provision is Still Necessary and be very beneficial to a lot of people for and contact lens markets or experiences Beneficial for Consumers many reasons. This would allow people would not apply.122Thus, criticism that to shop for different resources for their Having determined that prescriber these surveys do not reflect the lenses and find the best price for them. compliance with the Rule’s automatic- appropriate target group or take into It shouldn’t be a hassle for someone to release provision is deficient, and that account differences between eyeglass get their prescription . . .’’132Likewise, many eyeglass consumers do not receive and contact lens users is misdirected, Sara Brown, from the advocacy their prescriptions, the Commission and these surveys merit the organization Prevent Blindness, stated next considers the impact of this Commission’s full consideration. during the workshop, ‘‘I think not deficiency, and whether such failure Moreover, the Commission cannot having [automatic release] would make remains an unfair act or practice in need agree that other surveys detailing how a major impact on patient access.’’133 of remedial action, as originally contact lens users have not received She noted that millions of Americans determined by the FTC when it their prescriptions do not have have difficulty affording eyewear, and formulated the Rule.127Again, opinions relevance in the context of the Eyeglass not having information that makes it on the need for, and benefit from, Rule. As noted above, there are, easier for them to comparison-shop automatic prescription release, varied admittedly, differences in the would be detrimental.134 significantly in the comments received examination and prescription processes On the other hand, some commenters by the Commission. NAROC, for for eyeglasses and contact lenses,123but felt that, irrespective of whether the mandatory prescription-release instance, opined that the automatic- prescribers automatically release requirements are similar, and there is release requirement—when complied prescriptions, prescribers no longer little evidence to indicate that with—provides a substantial benefit to withhold prescriptions if directly asked prescribers release eyeglass consumers as it enables comparative for them. Dr. Arlan Aceto, a Connecticut prescriptions in dramatically different shopping, and added there is ‘‘no Professor of Ophthalmic Design and numbers than they release contact lens evidence to support a conclusion that Dispensing, for example, said during the prescriptions. And while the NERA the automatic release provision is no workshop that he and his optician survey indicates that contact lens users longer needed; to the contrary, the colleagues have not had a problem are less likely than eyeglass wearers to substantial expansion of consumer obtaining prescriptions from prescribers purchase from someone other than their choice in recent years is strong evidence in instances where the patients failed to prescriber, this has little or no bearing that this requirement has helped bring them,135and panelist Dr. Artis on whether consumers are receiving consumers and that it is more necessary Beatty, a North Carolina optometrist, their prescriptions from their prescriber than ever.’’128In a subsequent commented that oftentimes patients are (although it may have some bearing on comment, the organization added, issued a prescription but fail to have it whether automatic release is necessary ‘‘There is widespread agreement that the on hand when they need it.136These or beneficial, as discussed below). Commission should continue the comments suggest there may be less The Commission therefore views the ‘automatic-prescription-release need for, and consequently less benefit five additional consumer surveys requirement’ for eyeglasses,’’ but from, the automatic-release requirement. submitted and considered during the evidence demonstrates that not all The most extensive criticism of the CLR review—which found that between consumers are aware they should automatic-release requirement came 21 and 34% of contact lens users did receive their prescription automatically, from workshop panelist and NERA not receive their prescriptions when and some prescribers are not providing consultant Dr. Andrew Stivers,137who they were supposed to—as additional it.129Wallace Lovejoy from NAROC submitted a survey and lengthy indications that prescriber compliance opined during the workshop that, while comment that challenged the underlying with prescription release, and overall some people have their mind made up basis for the requirement, noting, ‘‘It’s consumer receipt of their prescriptions before they go to the eye doctor, and not just how much compliance, it’s how (whether contact lens prescription or want to get an exam and buy glasses at impactful that compliance or lack of eyeglass prescription), is sub-optimal.124 the same time and place, ‘‘there’s a compliance is on consumers.’’138 Furthermore, the Commission notes, significant number of people who get an According to Dr. Stivers, the relevant as it did in the CLR final rule, that eye exam and wait to shop and go issue is whether, and how much, despite multiple opportunities and somewhere else. It’s useful to have the consumers have their eyeglass-shopping requests for comment since 2015, the prescription released and I would agree options curtailed by failure of VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60750 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations prescribers to automatically provide than contact lens users to know about the same as it was when the Rule was patients with their prescriptions, since and consider alternative purchasing created in that a consumer still has to some consumers would not have channels.146According to the American be examined by an optometrist or shopped elsewhere even if they had Optometric Association, these results ophthalmologist in order to obtain a received their prescriptions, and some demonstrate that consumers are aware prescription with which to buy consumers might have been offered of, and utilize, their eyeglass-purchasing eyeglasses. While Dr. Stivers has their prescription and declined.139 options, and that there is a ‘‘well- suggested that consumer emphasis on
unfairness from 40 years ago cannot be prescriptions in order to capture Furthermore, even if consumers decide presumed to apply today and thus there consumer eyewear purchases in- pre-examination that they want to buy is no rationale or basis for new house—in context of the intent, glasses from their prescriber, and thus regulation in the prescription eyeglass purpose, and history of the Eyeglass do not need a copy of their prescription, market.’’143Furthermore, Dr. Stivers Rule, the Commission finds that, they could still be harmed by a explained, ‘‘Today, consumers can regardless of the increased information prescriber’s failure to release their choose to shop before getting an exam, and availability of purchasing prescription if, at a later date, those which increases incentives to provide alternatives in today’s eyeglass consumers want to purchase additional information and increases competition marketplace, it remains an unfair act or or replacement eyeglasses, and lack a in ways that the Commission of 1978 practice for prescribers to fail to release copy of their prescription. In addition, could not imagine,’’144and this change a prescription to consumers. The as Dr. Michaels noted during the has made automatic release less likely to practice denies consumers the ability to workshop, many consumers go in for an generate substantial benefit. And absent effectively use the information eye exam every year without any such benefits, per Dr. Stivers, lack of available, and continues to result in intention of buying glasses,153only to compliance with automatic release substantial economic loss and lost learn during their exam that they now cannot be the basis for a determination opportunity costs due to an impaired need vision correction, or that their of unfairness, or the proposed changes ability to comparison-shop for vision correction has changed.
to the Rule.145 eyeglasses. The Commission finds that As evidence of the altered market and such conduct remains pervasive, is Dr. Stivers is correct in that not all changed consumer behavior, both Dr. likely to cause consumers substantial consumers necessarily benefit from Stivers and the American Optometric injury, is not outweighed by receiving a copy of their prescription. Association pointed to the NERA countervailing benefits that flow from Some consumers prefer buying glasses survey, which found, among other such conduct, and cannot reasonably be from their prescriber for convenience, or things: that consumers have numerous avoided by a substantial number of trust the expertise of their prescriber’s options for eyeglass purchases; that one consumers. staff to help fit them with the most in three eyeglass purchasers consider The Commission does not dispute appropriate eyewear. Some consumers alternatives to where they ultimately that mass merchandisers, wholesale simply favor the prescriber’s frame purchase; that consumers purchase clubs, and internet search and shopping options. But in trying to calculate how glasses from alternative channels such have dramatically altered the overall much consumer eyeglass-shopping as retail chains and online stores more retail landscape for eyeglass shopping. options are, or are not, curtailed by the than 50% of the time; that consumers But these changes relate primarily to failure to receive their prescriptions, the choose purchasing locations for a aspects of eyeglass shopping that occur Commission faces a dilemma in that variety of reasons (including price, once a consumer already has a consumer decisions and preferences service, familiarity, location), with prescription in hand. The initial with respect to buying eyeglasses are convenience valued over all others; and experience of having an eye exam and impacted by the fact that so many that eyeglass purchasers are more likely obtaining a prescription remains much consumers are not given a copy of their VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60751 prescription. Widespread lack of evidencing that some consumers do not and have concerns about their ability to automatic prescription-release renders it even realize they are entitled to their afford eyewear at the price charged by difficult, if not impossible, to determine prescriptions.159As workshop panelist their prescriber.166 what percentage of consumers opted to Brown noted, ‘‘there was a question that After considering all of the evidence, buy glasses from their prescriber was [asked] earlier about why don’t the Commission concludes that when because they favored the prescriber’s patients ask for this information? prescribers do not release prescriptions, convenience, selection, and expertise, Because they don’t know.’’160 it still harms consumers and puts them and what percentage opted to buy from Indeed, some surveys have found that at a disadvantage in the marketplace, their prescriber because they did not consumer awareness of prescription and thus continues to require remedial have a copy of their prescription, did rights remains less than ideal. regulation. not feel comfortable asking for one, or According to a 2015 survey—performed
C. Commission Determination To eyeglasses, and when a prescriber offers free to buy eyeglasses from their Update the Rule To Clarify to sell consumers glasses before prescriber. Many consumers prefer to do Requirements for Prescription Release releasing their prescriptions, it blurs so,180and the Commission has no One prescription-release issue that is that distinction even further. interest in preventing this. But to fully periodically brought to the attention of Additionally, as noted at the time the realize the intent and purpose of the the Commission relates to the timing of Commission first created the Rule, the Rule, consumers must have the the Rule’s required automatic prescription itself is ‘‘the means by unfettered option to buy from wherever prescription release—i.e., at what point which consumers can comparison they choose, and must not be confused that release must occur during a shop.’’176Absent a prescription in or misled about their unconditional patient’s office visit to their prescriber. hand, (whether that be physically in prescription rights, and whether their The Rule, as presently written, states hand, or digitally uploaded to a patient examination is connected to the that it must occur ‘‘immediately after’’ portal and readily accessible to the purchase of glasses. To achieve this, the eye examination is completed, but consumer), consumers might not even consumers must have the prescription that a prescriber may withhold the realize they have an option to in their possession—whether physically prescription until the patient has paid comparison-shop for their glasses. They or digitally—as soon as the prescription for the examination if the prescriber also may be confused, or misled, into is finalized and before they are offered requires immediate payment from thinking that the examination and eyeglasses for sale. patients for whom the examination purchase of eyeglasses are part of a For this reason, the Commission is revealed that no ophthalmic goods were unitary, or ‘‘total vision care’’ process, a revising §456.2 to clarify that the required.168The words ‘‘immediately once-common practice in the prescription must be provided after the after,’’ however, have not previously ophthalmic community in which the refractive eye examination is completed been discussed or clarified in detail, and sale of eyeglasses was tied to the ‘‘and before offering to sell the patient some non-prescribing eyewear sellers examination, and by scheduling an eye ophthalmic goods.’’ This does not mean have raised concerns that prescribers exam, a patient was essentially that a patient is not permitted to walk who also sell eyewear have a tendency committing to purchase eyewear (if they through a prescriber’s eyeglass to lead patients into the prescriber- needed it) from the same location at dispensary, or browse available eyeglass owned optical dispensaries and offer to which they were examined.177 frames, before receiving a copy of their sell them eyeglasses immediately While there is nothing inherently prescription. Nor does it cancel the Rule following an examination and before wrong with consumers buying eyewear provision that a prescriber may make providing their patients with their from the prescriber who conducted their consumers pay for their exam before prescriptions.169Some prescribers and refractive examination, and there may releasing their prescriptions, so long as optometric consultants even be benefits to it,178the Eyeglass Rule that prescriber would have required recommend such an approach as a way was created because the Commission immediate payment from the patient of increasing customer ‘‘capture determined it was an unfair practice had the examination revealed that no rate.’’170When this occurs, the when consumers did not at least have ophthalmic goods were required.181But prescription copy is only released to the the option to buy glasses from someone it does mean that if a prescriber (or the patient after they have already shopped other than their prescriber. The prescriber’s staff) is ready and willing to for eyeglasses, when they are checking Commission believes it is problematic if sell that patient eyeglasses, the out and paying their total bill (a bill that patients are confused about whether prescriber must release a copy of the would include the cost of the they have, or do not have, the option to prescription to the patient before examination, as well as the cost for new separate the examination process from moving forward with any aspect of the glasses). the commercial purchase of eyeglasses. sale. If the prescription is released As noted during the Eyeglass Rule And even if patients recognize that by electronically (with the patient’s workshop, the Commission believes that coming for an examination they are not consent), it must be uploaded to a prescribers holding onto a prescription committing to buy glasses from their patient portal or transmitted to the until after they have already made an prescriber, they may feel pressure to do patient via email or text, and thus fully eyeglass sale runs contrary to both the so, a pressure heightened by the fact accessible to the patient before that letter and purpose of the Rule.171The that until they possess a copy of their patient is offered an opportunity to letter of the Rule is clear. The prescriber prescription, they cannot shop at any purchase eyewear. It also means that if must provide the prescription other locations. the prescriber makes a medical ‘‘immediately after the eye examination Lastly, the practice of not providing determination to not write and release a is completed.’’172The policy of the prescriptions until after the patient has prescription to a patient,182or Rule, as it relates to the timing of selected eyeglasses can lead consumers withholds a prescription pending prescription release, is also clear in to believe that they are receiving their payment by the patient for the several ways. First, the regulatory prescription because it comes with the examination, the prescriber may not history makes evident that two of the eyeglasses, or to believe that what they offer to sell that patient eyeglasses at foundational purposes of the Rule have are paying for is their prescription copy, that time.183The prescriber may only been to (a) separate the eye examination when, in fact, they are paying for their offer to sell the patient eyeglasses after from the purchase of eyeglasses, and (b) examination, and the prescription copy the prescription is released.184 ensure that consumers have possession is free per the Rule. The Commission Furthermore, per the discussion above of their ophthalmic prescriptions so periodically receives complaints from regarding automatic prescription they are able to comparison-shop for consumers who believe they were release, the Commission still glasses.173The singular fact that charged for their prescription when, in concludes—as it concluded multiple VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60753 times in the past—that the burden of prescriber obtains the patient’s prescription portability, and thereby ensuring prescriptions are released must verifiable affirmative consent.187 increase benefits and decrease burdens rest on the prescriber and not the To ensure that patients are able to related to prescription release. patient.185And thus automatic release make an informed choice about whether
copy of their prescriptions could enable sufficient to address the FTC’s concerns
III. Final Rule Pertaining to Affirmative patients to share prescriptions more about prescription release, and ensure Consent to Digital Delivery of Eyeglass easily with sellers when purchasing patient access to their prescription.195 Prescriptions eyewear, and this in turn could Another commenter, an ophthalmic potentially reduce the number of patient technician, expressed concerns over the A. Digital Delivery Option in the NPRM and seller requests for verification or added recordkeeping burden from the and the Basis for Such Amendment additional copies of the prescription. To proposed confirmation requirement, As discussed above, §456.2(a) of the enhance portability, the Commission noting that their practice already has a Eyeglass Rule provides that it is an noted that electronic delivery methods record of the prescription on file for the unfair act or practice for a prescriber to should allow patients to download, patient and that most EHRs track when fail to provide to the patient one copy save, and print the prescription.191 prescriptions are printed out.196 of the patient’s prescription Although having a prescription
prescribers and patients prefer paper One anonymous commenter copies.199 3. Comments Regarding Giving Patients questioned whether portals would need Recent data shows that the number of to be configured to require a patient a True Choice as to How To Have Their prescribers offering patients access to signature whenever a patient accesses Prescription Delivered their health information through an EHR the portal to print a prescription.208 Some commenters expressed concerns system or patient portal has increased Workshop panelist Dr. Michael Repka, that not all patients may benefit from significantly. A survey from 2022 found Medical Director for Governmental electronic access to their prescription, that nearly 3 out of 5 U.S. adults Affairs at the AAO, described an both as a result of limitations in reported they were offered and accessed intricate process his office undertakes to broadband capabilities and due to their online medical record or patient attempt to obtain a signature of differences in patient needs and health portal, which was a 50% increase since prescription-receipt from a patient who literacy that might affect patients’ ability 2020.200Patients also increased their accesses their contact lens prescription to access their prescriptions online.217 use of apps to access online medical via a portal.209The Commission, Commenters asserted that patients must records, and patients using apps to view however, notes that this represents a retain the ability to receive a paper copy their online medical records accessed misunderstanding of the CLR’s digital- of their prescription.218The challenges them more frequently than those who prescription-delivery provision, which in educating patients on how to access used only a web-based method.201 specifically removes the signature- their prescription on a portal were also Available information suggests, requirement when prescriptions are noted by Workshop panelist Dr. Stephen however, that disparities still exist in digitally delivered, and likewise, Montaquila, a Rhode Island optometrist, the availability and use of patient confirmation signatures would not be who acknowledged that some patients portals among some populations, required when prescriptions are prefer a paper copy.219 including older patients.202A variety of delivered digitally under the amended Other commenters described their factors may influence the limited portal Eyeglass Rule. Using a digital delivery experience with patients frequently use in such populations, including lack method to comply with §456.2 would losing or forgetting their prescription of access to technology and personal relieve the prescriber of having to when going to order glasses. The preference, and some groups (including collect a signature from the patient commenters pointed to the remedy of Black and Hispanic individuals) may be confirming their receipt of the having the prescription available on the less likely to report being offered access prescription.210Under the new portal, or noted that the patient could to a portal in the first place, suggesting §456.4(a)(1)(ii), prescribers using a request a duplicate copy of the a need for improvement in provider digital delivery method would not need prescription or the seller could call to communication and clinic practices.203 to request that the patient sign a verify a prescription with the prescriber, In addition, of those patients who access separate statement confirming receipt of and argued that these solutions should their online medical records through an the prescription.211Instead, prescribers resolve concerns over prescription app or web-based patient portal, would need merely to retain evidence access and portability.220The Eyeglass relatively low numbers are downloading that the prescription was sent, received, Rule does not, however, require and transmitting their health or made accessible, downloadable, and prescribers to respond to seller information, which ‘‘suggests a need for printable, which commenters have verification requests or provide further education of both individuals acknowledged EHRs generally are duplicate copies of prescriptions, as is and providers on these features,’’ configured to do.212Similarly, an required by the CLR. The Commission according to the Office of the National emailed or texted prescription should also remains concerned about the VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60755 ongoing lack of understanding and that patients are able to freely consent, pursuant to §456.3.’’ The limitations in patient access to portals comparison-shop for eyeglasses.222 Commission clarifies that if the or other health technology, and Accordingly, if a patient consents to the prescriber identifies the digital method concludes that requiring all patients prescriber emailing or texting the that will be used for prescription agree to digital delivery is not prescription, or placing it on a portal, delivery and allows the patient to appropriate at this time.221 this method of delivery must take place choose whether to consent to that at the end of the examination, and delivery method (rather than making it C. Additional Discussion and before the prescriber or prescriber’s staff the default), then allowing patients to Commission Determination Regarding attempts to sell the patient eyeglasses. sign an authorization just once would the Affirmative Consent to Digital The digital delivery option includes a satisfy the Rule’s requirements. But as Delivery recordkeeping provision, but, as the noted by the commenters, if the 1. Final Rule Determination To Add Commission concluded in the CLR final prescriber changes their digital delivery Option for Digital Delivery of Eyeglass rule, the burden of retaining a record of policies (for example, by switching from Prescriptions patient consent should be minimal, email delivery of prescriptions to access The Commission agrees with the ‘‘since prescribers who opt for on a portal), they would need to re- comments in favor of permitting, but not electronic delivery of prescriptions will, obtain the patient’s digital delivery requiring, electronic delivery of the in all likelihood, obtain and/or store consent. Additionally, prescribers eyeglass prescription, provided such consent electronically.’’223As should allow a patient to revoke consent consumers are informed about, and detailed below, the Commission is at any time. modifying the proposed rule text to consent to, the delivery method. Based Further, the Commission believes that expressly recognize that consent to on its review of the record, the prescribers could use a single document digital delivery can be obtained either Commission is hereby modifying the to obtain verifiable consent to digital on paper or in a digital format. In any Rule to require that prescribers provide delivery of both contact lens and case, obtaining and storing a record of patients with a copy of their eyeglass prescriptions so long as it is patient consent should not take longer prescription either (a) on paper or (b) clear to consumers that they are than obtaining and storing a patient’s after obtaining verifiable affirmative consenting to digital delivery for both. confirmation of prescription release,224 consent to digital delivery, in a digital Ensuring that patients are aware of and prescribers who use digital delivery format that can be accessed, where to locate their prescriptions, and to provide the prescription would not downloaded, and printed by the patient. how to access them, should be a priority need to request that the patient Obtaining such consent to digital for prescribers, so regular re-education acknowledge receipt of the prescription delivery will require the prescriber to on these points is appropriate.228 by signing a separate confirmation identify the specific method or methods Furthermore, §456.3(c) requires that statement. Finally, offering a of electronic delivery that will be used, prescribers maintain records or prescription in a digital format would be and collect the patient’s affirmative evidence of a patient’s affirmative an option for prescribers, but is not consent to the specified delivery consent for a period of not less than mandatory, so prescribers can choose method in a way that is verifiable, i.e., not to offer electronic delivery of three years. It is important to note that can later be confirmed, such as through prescriptions if they find the if a prescriber intends to provide digital a signed consent form or electronic recordkeeping provision overly delivery to a patient for more than three approval (as discussed below). burdensome.225 years following that patient’s signed Prescribers must then keep evidence of One related issue raised by some consent, they should not dispose of the a patient’s affirmative consent for a commenters is whether prescribers consent record after three years. Rather, period of not less than three years. could obtain a patient’s consent to the prescriber should retain the patient’s Patients who decline to consent, for any digital delivery a single time rather than signed consent for as long as the reason, must be given a paper copy of at every visit, and only need to obtain prescriber relies on it to authorize their prescription. Likewise prescribers consent again if the prescriber changes digital delivery of the prescription, plus who prefer to provide paper copies to their digital-delivery policy, a practice another three years.229 their patients need not offer an permitted by the Department of Health
this section may also make the Accordingly, §§456.3 and 456.4, setting Participants at the workshop requirement more noticeable and forth the requirement for obtaining a discussed that some EHR companies understandable to consumers. The FTC patient signature confirming haven’t updated their systems in light of is also cognizant that the preferred prescription receipt, allow prescribers to the new CLR requirements to allow drafting practice for regulations is to set meet the requirements of these prescribers to collect signatures out requirements in the body of the rule, provisions by obtaining the patients electronically, which would reduce the rather than in the definitions.232 signature either ‘‘on paper or in a digital record-keeping burden.235Nevertheless, Accordingly, the Commission is format.’’242This will resolve prescriber commenters suggested that the Rule amending §456.2(a), ‘‘Separation of confusion regarding the need to print should expressly permit prescribers to examination and dispensing,’’ to state out digital forms and collect wet obtain patient signatures digitally or on that the automatic prescription release signatures that might then need to be paper.236For example, regarding the shall be provided on paper; or in a scanned and stored electronically in an confirmation of prescription release, digital format that can be accessed, EHR system. Alleviating prescriber NAROC wrote, ‘‘[t]he Commission may downloaded, and printed by the patient, misunderstanding regarding signature want to specifically allow for the after obtaining verifiable affirmative collection should help reduce waste and signature to be an electronic signature consent, pursuant to §456.3. The facilitate faster, more efficient Rule by means of either a handwritten Commission is then adding a new compliance.243 signature input onto an electronic §456.3 to the Rule titled, ‘‘Verifiable signature pad or a handwritten signature 4. Final Rule Clarifies That Digital affirmative consent to providing the input on a display screen with a stylus Delivery Methods Identified in prescription in a digital format.’’233 New §456.3 sets out the remainder of device. . . . While it is not clear to us Affirmative Consent Request Must in the text proposed in the NPRM as how many optometry or ophthalmology Fact Be Used §456.1(h)(2). It requires that when a offices use electronic signatures today, The Commission recently sent cease prescription copy is provided in a this clarification may pave the way for and desist letters to prescribers of digital format, the prescriber shall more offices to adopt this method of contact lens prescriptions and eyeglass inform the patient of the specific collecting a signature, making the prescriptions in response to consumer method(s) of electronic delivery that confirmation process more efficient and complaints that the prescribers did not will be used; obtain, on paper or in a less reliant on paper receipts in the release their prescriptions at the end of digital format, the patient’s verifiable future.’’237Dr. Montaquila the contact lens fitting or eye affirmative consent to receive a digital acknowledged that some practices are examination, or otherwise violated the copy through the identified method or already using electronic methods to CLR or Eyeglass Rule.244As discussed at methods; and maintain records or capture patient signatures required by the workshop, in subsequent evidence of a patient’s affirmative the CLR.238 communications with letter recipients, consent for a period of not less than Throughout the process of updating Commission staff obtained samples of three years, as specified in the new the CLR to permit digital prescription forms some prescribers were using to §456.3. delivery and require confirmation of comply with the CLR consent-to-digital- Since the digital delivery provision, prescription release, the Commission delivery and confirmation-of- as adopted herein as §456.3, was clearly acknowledged that prescribers may prescription-release requirements. Staff proposed as §456.1(h)(2) in the NPRM, obtain a patient’s signature either on noted, ‘‘[w]e’ve seen forms where moving the requirement to a new paper or digitally. In the NPRM for the there’s not a separate signature about section in the Rule complies with the Contact Lens Rule review, the digital consent. We’ve also seen forms rulemaking requirements of both the Commission proposed, ‘‘[t]he where the information is included in an Administrative Procedure Act and the acknowledgment form shall be in a intake form among a lot of other FTC Act, while ensuring that regulated format that allows either conventional information that the patient may not entities and the general public do not or electronic signatures. Prescribers may see. And in some cases, the specific overlook the requirements because they maintain copies of the acknowledgment method of electronic delivery is not were included in the definitions.234The forms in paper or electronically.’’239In necessarily identified. It may say, ‘We Commission recognizes that the the SNPRM for the CLR, the will provide you with your prescription placement of the digital delivery Commission stated, ‘‘[t]he precise digitally either by text, email, or provision in a new, dedicated section wording of such confirmations would be portal.’’’245 differs from the CLR, where it appears left to the prescriber’s discretion, but for The Commission is concerned that in the definitions. The requirements in prescribers opting for (a), (b), or (c), a patients cannot provide informed each rule, however, are effectively the patient’s written or electronic signature consent to digital delivery if prescribers same. The Commission can amend the would always be required.’’240 do not identify the delivery method that CLR during the next periodic rule Similarly, when proposing changes to will be used. Patients will not know review to mirror the Eyeglass Rule and, the Eyeglass Rule in its NPRM, the where to locate their prescription if they in the meantime, can provide clarity to Commission noted the ‘‘recordkeeping are not told which delivery method the prescribers through guidance materials. burden could be reduced to the extent prescriber plans to use. This can result VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60757 in the patient effectively not receiving IV. Final Rule Pertaining to sign it. A prescriber shall maintain the the prescription, as required by the Confirmation of Prescription Release records or evidence of confirmation for Rule. Similarly, providing a disclosure not less than three years. Such records
Dr. David Durkee suggested that adding concerned about multiple signature proposal, and asserted that the the burden of another confirmation lines.298 Commission should focus its energies requirement would be
(3) ‘‘The complexity of the paperwork I with their prescriptions, and to create a In addition, the marginal cost of the have to complete at a doctor’s mechanism for prescription-release amendment to the Eyeglass Rule should appointment is overwhelming’’; and (4) verification and enforcement. Therefore, be relatively low because the CLR ‘‘Having to sign more paperwork at a the Commission finds that the signed already requires prescribers to obtain doctor’s appointment would make me confirmation of prescription release (a confirmation of prescription release and more aware of my patient’s rights.’’ The form of ‘‘paperwork’’) will increase to maintain records of such. Some options provided to the respondents for prescriber compliance, and that will prescribers likely have forms and each statement are: ‘‘Completely agree,’’ lead to increased competition that ‘‘Somewhat agree,’’ ‘‘Neutral,’’ benefits consumers. systems in place already, which may ‘‘Somewhat disagree,’’ and ‘‘Completely The Commission also carefully need only minor adjustments to disagree.’’321 considered information and comments accommodate confirmations for eyeglass These questions, and the extent to on the record that question the prescriptions.328 which consumers agree or disagree with Commission’s estimate of time for
2. Comments About Options for infections that go untreated can lead to §456.3(a)(1)(iv), which allows a Obtaining the Confirmation and eye damage or even blindness,’’ among prescriber, with the patient’s affirmative Commission Determination others. The fifth paragraph presents five consent, to release the prescription bullet points listing common symptoms digitally so long as they retain evidence The Eyeglass Rule NPRM proposed in of an eye infection, such as ‘‘Irritated, that the prescription was sent, received, §456.3(a) the same options to confirm red eyes,’’ ‘‘Light sensitivity,’’ and or made accessible, downloadable and prescription release of eyeglass ‘‘Sudden blurry vision.’’ The last printable. In discussing this option, he prescriptions as the options available to paragraph, directly above a patient displayed a model consent form used by confirm prescription release of contact signature and date line, states, ‘‘Sign many practices for contact lens lens prescriptions in the Contact Lens below to acknowledge that you were prescription release entitled Rule. They consist of: (i) a signed provided with a copy of your contact ‘‘prescription access notice policy statement confirming receipt of the lens prescription at the completion of statement.’’ The model form states that prescription; (ii) a prescriber-retained your contact lens fitting.’’ access to prescriptions is available to copy of a contact lens prescription that As for proposed §456.3(a)(1)(ii), in patients digitally and that physical contains a statement confirming receipt which prescribers retain signed copies copies of prescriptions are available, of the prescription; (iii) a prescriber- of contact lens prescriptions that and provides a place for a patient retained copy of the receipt for the contain a statement confirming receipt signature. He noted that the electronic examination containing a statement of the prescriptions, Dr. Montaquila prescription-release approach can take confirming receipt of the prescription;
the Contact Lens Rule in order to Montaquila then implied that this paper The final rule, §456.4(a)(1), replaces recommend for or against their option was less convenient or accurate the four options from the NPRM with inclusion in the Eyeglass Rule’s because 88% of office-based physicians two broader options in paragraphs confirmation requirement. have transitioned to EHRs.340According (a)(1)(i) and (ii) that encompass the a. Comments at the Eyeglass Rule to Dr. Montaquila, some prescribers are options proposed in the NPRM, but also Workshop handwriting prescriptions after ensure prescribers have flexibility and generating a prescription in an choice in how they obtain their At the workshop, Dr. Montaquila electronic health record, and this confirmations. The first option, discussed the ‘‘range of approaches’’ duplication increases cost, time, and the §456.4(a)(1)(i), covering instances prescribers use to comply with the possibility for errors.341In support of where prescribers provide a paper copy CLR’s confirmation-of-prescription- his assertion about greater errors from of the prescription, provides that the release requirements and provided handwritten prescriptions, he cited to a prescriber must request that the patient concrete examples of the way some of Weill Cornell Medical College study of acknowledge receipt of the prescription the options are currently in use. He drug prescriptions finding error rates in by signing a separate statement called option (a)(1)(i), the signed 30 per 100 written prescriptions versus confirming receipt of the prescription. statement option, a flexible option seven per hundred in electronic Section 456.4(a)(1)(i) adopts the currently in use. But, he stated that, for prescriptions.342He stated that some proposed §456.3(a)(1)(i) with some offices that have electronic health EHRs permit prescriptions containing modifications so that it encompasses the records, offices must print the statements of confirmation to be proposed §456.3(a)(1)(ii) (where a prescription from the electronic health printed, but this creates a different prescriber can retain a copy of a records systems, request a signature, problem because once it is signed by the prescription that contains a signed scan or retain the prescription with the patient, the office ‘‘needs to take that statement confirming receipt of the acknowledgment, and store the prescription back, copy and perhaps prescription) and proposed acknowledgment.336He provided an scan it and then retain that for three §456.3(a)(1)(iii) (where a prescriber can example of a template form that he said years.’’343 retain a signed copy of the sales receipt is in use by many offices.337This form, Section 456.3(a)(1)(iii) of the NPRM for the examination that contains a entitled ‘‘Contact Lens Prescription Eyeglass Rule confirmation proposal statement confirming receipt of the Signed Acknowledgment Form’’ is (and existing Contact Lens Rule prescription). The NPRM’s proposed recommended by the AOA to its confirmation requirement) allows §456.3(a)(1)(ii) and (iii) are essentially members and is in its ‘‘Contact Lens prescribers to retain a signed statement examples of documents—prescriptions Rule Compliance Toolkit.’’338The form confirming prescription receipt on a and sales receipts—that can contain contains six paragraphs, with the first copy of the examination payment separate statements confirming receipt stating, ‘‘Included below is important receipt. According to a 2023 AOA of the prescription, and these methods information to review prior to receiving survey of optometrists, about 15% of of obtaining confirmation continue to be your contact lens prescription.’’ The prescribers said they use this method,344 permitted under the final rule’s broader middle three paragraphs consist of but Dr. Montaquila stated that he had option §456.4(a)(1)(i). advice, attributed to the Centers for not found that any of his colleagues had The Commission adopts §456.4(a), Disease Control and the Food and Drug a payment system in place that would which requires that the statement Administration, on healthy contact lens allow for the use of this method with confirming receipt be separate. wearing habits, and include respect to the confirmation of contact Prescribers should provide a signature recommendations such as ‘‘Schedule a lens prescription release.345 line that clearly and conspicuously visit with your eye doctor at least once Dr. Montaquila also addressed the applies to a statement of confirmation a year’’ and ‘‘Understand that eye digital release option, proposed that the patient has received their VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60763 prescription. If instead it is part of a 3. Final Rule Modification To Add after the eye examination is completed, multi-paragraph form containing Explicit Recognition of a Prescriber’s but also contains a long-standing unrelated information, such as advice Ability To Obtain a Confirmation on exception to allow a prescriber to refuse about contact lens wear and care habits Paper or in a Digital Format to give the patient a copy of their or the symptoms of eye infections, If the prescriber provides a paper prescription until the patient has paid which then requests a signature at the copy of the prescription to the patient, for the eye examination, so long as the prescriber would have required end of the form, it may not be a valid the prescriber must request that the immediate payment had the eye method to request confirmation of patient acknowledge receipt by signing examination revealed that no prescription release. While additional a separate statement confirming receipt ophthalmic goods were required.353The information supplied on the model form of the prescription. As discussed above CLR contains a similar provision, may be useful to patients, it can confuse with respect to obtaining signatures of permitting the collection of fees for an patients as to what it is they are signing affirmative consent to digital delivery, eye examination, fitting, and evaluation for, and add additional time to the participants at the workshop discussed before the release of a contact lens that some EHR companies haven’t confirmation obligation. Indeed, as prescription, but also provides updated their systems in light of the discussed in this document’s PRA clarification that for purposes of this new CLR requirements to allow analysis section, the use of a model exception, a patient’s presentation of prescribers to collect signatures template from AOA containing several proof of insurance coverage for those electronically, which would reduce the additional paragraphs unrelated to the services shall be deemed to constitute a record-keeping burden, and suggested confirmation requirement may well payment.354The Eyeglass Rule does not that the Rule should expressly permit contribute to some prescribers’ claims contain this insurance clarification, and prescribers to obtain patient signatures that it takes more than 10 seconds to staff has received questions from the digitally or on paper.349Specifically, at obtain a contact lens prescription the workshop, Dr. Repka stated that the public about this issue. The confirmation from a patient.347 electronic medical records of the future Commission proposed that such a proviso, which was initially formulated Section 456.4(a)(1)(ii) applies to will be able to accept electronic by Congress in drafting the FCLCA,355 instances where the prescriber provides signatures that will be stored in ways be added to the Eyeglass Rule, both a digital copy of the prescription to the other than on paper and says, ‘‘if there’s because it is appropriate that a patient’s patient and is, with one minor an option to do that, it would be nice. proof of insurance coverage equates to If you still needed it to be on a printable alteration,348the same as the NPRM’s payment, and to bring the two rules into PDF, then not as convenient.’’350 proposed §456.3(a)(1)(iv). If a prescriber When proposing changes to the conformity and eliminate unnecessary provides the prescription digitally, after Eyeglass Rule, the Commission noted confusion.356Accordingly, in the NPRM obtaining verifiable affirmative consent, the ‘‘recordkeeping burden could be the Commission proposed to amend the prescriber need not request the reduced to the extent that prescribers §456.2(a) to add the sentence, ‘‘For patient sign a separate statement have adopted electronic medical records purposes of the preceding sentence, the confirming receipt. However, the systems, especially those where patient presentation of proof of insurance prescriber does need to retain evidence signatures can be recorded coverage for that service shall be that the prescription was sent, received, electronically and inputted deemed to be a payment.’’357The or made accessible, downloadable, and automatically into the electronic Commission invited public comment on printable. In the final rule’s record.’’351The Commission resolves the potential benefits and burdens of §456.4(a)(1)(ii), that evidence serves as therefore to change the Rule to such an amendment.358 the ‘‘confirmation of prescription explicitly state that obtaining patient B. Comments on NPRM and Discussion release.’’ signatures ‘‘on paper or in a digital at Workshop Regarding the Insurance The Commission recognizes that by format’’ is permissible and complies Coverage as Payment Proposal with the Rule. Accordingly, §456.4 of altering its NPRM proposal in this The Commission received a few the final rule sets forth this language.
manner, the options for obtaining public comments addressing this The Commission believes this will confirmation of prescription release in proposed amendment. NAROC resolve prescriber confusion regarding the Eyeglass Rule will not precisely supported the Commission’s the need to print out digital forms and mirror the language of the options clarification that proof of insurance collect wet signatures that might then provided in the Contact Lens Rule, but coverage shall be deemed to constitute need to be scanned and stored these are differences in textual language, a payment under §456.2(a), and opined electronically in an EHR system. As not the Rules’ policy or effects. The that this clarification will generally with electronic collection of patient obligations for prescribers with respect increase compliance with the Rule’s consent to digital delivery, alleviating prescription release requirement.3591– to when and how to offer a prescription, prescriber misunderstanding regarding 800 CONTACTS also supported and how prescribers can obtain and signature collection should help reduce ‘‘amending the [Rule] to follow the CLR store a confirmation of receipt, are waste and facilitate faster, more in requiring that prescribers accept essentially the same for contact lens and efficient, Rule compliance.352 proof of insurance coverage as payment eyeglass prescriptions. For clarity
C. Additional Discussion and a person’s eyes or the presence of any refractive eye examination, whether Commission Determination Regarding visual anomaly by the use of objective using the term ‘‘refractive eye the Insurance Coverage as Payment or subjective tests.’’368As discussed examination’’ in place of ‘‘eye Proposal above, the Rule currently allows eye examination’’ could help avoid care prescribers to refuse to provide the confusion over when the prescriber The Commission has decided that the patient with their prescription when the must release the prescription, and proposed clarification in the NPRM’s patient has not paid for the ‘‘eye whether prescribers should be allowed §456.2(a) will aid prescribers’ examination’’—which refers back to the to withhold release of the prescription compliance with the Rule and help definition describing the refraction—as subject to any charges other than the ensure that patients and prescribers understand when a prescription should long as the prescriber does not have one due for the refractive eye be released. Accordingly, the different policies for those whose examination.375 Commission is adopting the provision examination revealed that no B. Comments on NPRM and Discussion as proposed in the NPRM as ophthalmic goods were required.369In at Workshop Regarding the ‘‘Refractive §456.2(a)(2). Regarding the AAO’s response to the ANPR, the AOA and Eye Examination’’ Proposal concern that prescribers should be several individual prescribers requested allowed to wait until an insurance that the Commission modify the Rule to 1. Comments About the Proposed carrier confirms a patient’s eligibility for change the term ‘‘eye examination’’ to Terminology Change a benefit at the time of service, the ‘‘refraction.’’370These commenters Commission notes that this is, in fact, stated that an eye examination The FTC received some comments in what the provision would permit. determines the health of the eye and support of the proposed terminology Section 456.2(a)(2) states that proof of includes many components that are not change. 1–800 CONTACTS agreed with insurance coverage—not merely used to determine the refractive the Commission’s proposal to replace possession of an optical or health condition. According to some the term ‘‘eye examination’’ with the insurance policy—will be deemed to commenters, the Rule’s definition for, term ‘‘refractive eye examination’’ constitute payment. For the anonymous and use of, the phrase ‘‘eye throughout the Rule.376The National commenter who was concerned about examination’’ more accurately describes Taxpayers Union asserted that clarifying vision plans that show authorizations refractive services rather than the full that an ‘‘examination’’ triggering the for services but do not guarantee scope of an eye examination.371 prescription release requirement is ‘‘one payment, this prescriber could withhold Commenters stated that the Rule should involving a refractive diagnostic . . . the prescription pending payment if reflect that a comprehensive eye should provide some reduction in coverage cannot be conclusively examination and a refraction are overhead for providers, who might established. But in such a case, the separate services,372and that while eye otherwise spend time and effort prescriber also could not offer to sell the health exams are typically covered by explaining to the consumer those patient eyeglasses until after releasing Medicare, the testing required to conditions under which a prescription the prescription to the patient.364 produce the refractive prescription may is not automatically furnished.’’377 Participants at the workshop not be a covered service under Medicare NAROC stated that it was not aware of discussed that some patients may prefer or other insurance plans, and therefore compliance concerns arising from the not to have to make two separate patients may be required to pay out of use of the term ‘‘eye examination’’ payments—one for the examination fee, pocket for the service.373The versus ‘‘refractive eye examination,’’ prior to receiving the prescription, and commenters suggested that changing the and had never heard the complaint that a separate one for the purchase of Rule to reflect the separate services and a prescriber did not understand the eyeglasses, if they choose to purchase payments involved would reduce context of the prescription-release from their prescriber’s office.365 consumer confusion. requirement, but acknowledged that the Commission staff noted that the In the NPRM, the Commission proposed change would eliminate the Eyeglass Rule does not mandate when responded to the ANPR commenters by issues described in the NPRM.378 prescribers collect payment for proposing to replace the term ‘‘eye NAROC further recognized that examination fees or eyeglasses, but examination’’ with ‘‘refractive eye prescribers also conduct examinations instead merely requires that the examination’’ throughout the Rule, that are not related to prescribing prescription be released immediately noting that the Eyeglass Rule’s purpose corrective eyewear, and noted that the after the exam and before offering to sell is to ensure that prescribers provide proposed change might improve the the patient eyeglasses.366Prescribers patients with a copy of their FTC’s ability to enforce the Rule, in that may decide to wait to collect the prescription at the completion of an eye the prescriber would not have the VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60765 excuse that they did not understand prescription for corrective eyewear, if term to ‘‘refractive eye examination’’ scope of the term.379 the refractive error is not the cause of throughout the Rule.394Both the While not expressly taking a position the decreased vision and comorbidities comments the Commission received in on the NPRM proposal to change the are present. Commenters felt that the 2015 and the panel discussion at the terminology, the American Academy of eye care provider should, in their 2023 workshop confirmed that the Ophthalmology did express concern—in discretion, be free to make the medical definition in the Rule most accurately relation to insurance payments—that decision of whether to dispense the describes a refraction. A refractive eye many patients are confused as to the diagnostic refraction, and not be examination can be a portion of a more difference between health exams that required by the Rule to release a copy comprehensive exam, but by changing are covered by insurance and refractive of the prescription solely because they the terminology, the Rule will provide exams which often are not.380The had tested the patients’ refractive a clear indication to the consumer and association said the Commission could error.389Commenters also stated that prescriber that if the refraction has been be ‘‘more proactive’’ in explaining that regardless of whether the provider completed, the prescription should be eye health exams and exams that lead to releases the prescription in that case, provided, barring a medical decision by eyeglass prescriptions are not the same they should be able to charge the patient the prescriber. services.381 for the diagnostic examination that was By making this change, the AOA, while in favor of the proposed completed.390 Commission is not suggesting that change in 2015, noted that its position consumers would not benefit from a
2. Comments About the Need To Allow the Rule language has resulted in some patient eyeglasses.396Moreover, the Prescribers To Make a Medical Decision patients believing that they do not have prescription should not be withheld To Withhold the Prescription, Where to pay for the refractive exam.392 merely due to it being inconvenient for Appropriate Commission staff noted, based on their the prescriber to provide it. Commenters also noted that while a experience enforcing the Eyeglass Rule, The Commission concludes that refraction may be provided to a patient that some practices may tell patients changing the term to ‘‘refractive eye for the purpose of determining their that there is a charge for the examination’’ may help consumers most current and appropriate eyeglass prescription, without indicating that the understand that they may be required to prescription, it may also be ‘‘completed charge is actually for the refractive pay for the refraction if it is not covered as a ‘diagnostic tool’ to assist in the exam, rather than for receiving the by a vision plan or other health determination of visual status when prescription, and that this can lead to insurance. Furthermore, this there are comorbidities in the visual consumer confusion about their rights terminology change will help system.’’387In this case, the intent of under the Rule.393 prescribers understand that while they the refraction may not be to create and may withhold the prescription pending
VII. Miscellaneous Issues Raised in agreed with the Commission’s concern, decisions over the hiring of additional Comments as discussed in the NPRM, that staff or the elimination of refractive A. Pupillary Distance requiring pupillary distance services.407 measurements on prescriptions could On the other hand, some sellers and 1. Background and Comments place the patient in the optical consumers said they would like the In the NPRM, the Commission dispensary—where pupillary distance Commission to reconsider its decision explored whether to amend the Rule to measuring devices are typically located and require prescribers to include require the inclusion of pupillary and operated—prior to the patient pupillary distance on prescriptions. distance on eyeglass prescriptions. receiving their prescription, thereby Online seller Eyeglasses.com stated that Pupillary distance is the measurement undercutting the Rule’s long-standing it receives hundreds of prescriptions (in millimeters) of the distance between principle (a foundation of the Rule) of from consumers each day and about half the pupils of a person’s eyes and is separating a patient’s eye examination of them do not include the pupillary typically needed to properly fit a pair of from the retail dispensing of eyeglasses. distance measurement, making it eyeglasses.397The Rule has historically The AOA and the OAA added further challenging to provide them with left it to the States to determine what that, historically, taking pupillary eyeglasses.408The seller contended that measurements constitute a complete distance measurements is not a standard the failure to provide pupillary distance refractive prescription, and thus, it has part of an eye examination by an is an obstacle to consumer choice, and been up to the States to determine optometrist or ophthalmologist (it is expressed its belief that prescribers do whether pupillary distance is required typically performed by an optical goods not add this measurement because they to be included on prescriptions.398In dispenser, such as an optician, in the either do not want to take the extra time the NPRM, the Commission analyzed dispensary after a patient decides to to take the measurement, or because comments received in response to the purchase glasses), and stated that there such prescribers sell eyeglasses ANPR in favor of and against adding a was no reason to require that themselves, and withhold the pupillary distance requirement and prescriptions from refractive eye exams, measurement to make it more difficult concluded that there was not adequate written by optometrists and for consumers to buy eyeglasses evidence in the rulemaking record at ophthalmologists, should include elsewhere. According to Eyeglass.com, this time to determine that the failure to pupillary distance.402The AOA also consumers are frequently too provide a pupillary distance on a pointed to Commission language in the embarrassed to ask for the pupillary prescription is an unfair practice.399As NPRM stating that there are zero-cost distance measurement, and if they do a result, in the NPRM the Commission and relatively-low-cost alternative ask the prescriber, it gives the prescriber did not propose to require prescribers to methods for consumers to obtain their an opportunity to discourage the patient include the pupillary distance pupillary distance if they wish to shop from buying online or elsewhere. The measurement on prescriptions.400 for glasses online.403The trade seller also noted that some prescribers However, since it had last invited association NAROC also agreed with the charge a fee to measure the pupillary comment on the question of whether to Commission’s NPRM determination, distance, which is not prohibited by the require the inclusion of pupillary stating that if the pupillary distance Rule.409 distance in a prescription in 2015, and requirement was added, prescribers and 1–800 CONTACTS, which also sells the market for optometry and eyeglasses opticians might end up at odds over eyeglasses, reiterated the view that not may have evolved since then, the whose pupillary distance measurement giving consumers their pupillary Commission, in the NPRM, again should control.404 distance measurement could discourage invited comment on this issue. The OAA further expressed concern online shopping and result in Specifically, the Commission asked for that if pupillary distance is required on diminished competition and less input and information about changes to prescriptions, opticians filling the consumer choice.410It opined that the State regulation on the content of prescription would have to abide by the elements of unfairness are met when a prescriptions, or to changes in the exact measurements written on the prescriber’s office takes the pupillary marketplace, or to changes in prescription by the prescriber, distance measurement during the technology, that might affect and alter regardless of the accuracy of the patient’s visit but fails to automatically the Commission’s prior conclusion that information or their own measurement, provide that measurement to the pupillary distance on prescriptions and stated that opticians—who have a patient, and reiterated that patients may should not be required by rule.401 long history of performing pupillary not know to ask for their pupillary In response, the Commission did not distance measuring tests—may consider distance, may not want to offend the receive any comments addressing several factors such as: whether the prescriber by asking for that changes to State regulations on the current pupillary distance measurement measurement, or may be refused or content of prescriptions, or changes in matches the previous measurement, charged for that measurement.411 the marketplace, or changes to changes that may have occurred since According to 1–800 CONTACTS, technology pertaining to pupillary the issuance of the prescription, and the obtaining the pupillary distance distance. Commenters in favor of and complexity of the prescription.405 measurement on their own may be a against the inclusion of pupillary The AAO also agreed with the costly or time-consuming hassle for distance on prescriptions largely Commission’s decision not to mandate some consumers, and some consumers reiterated viewpoints previously the inclusion of pupillary distance may not be aware of the ways in which expressed in response to the ANPR. measurements on eyeglass they can obtain their pupillary distance VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60767 measurement. Moreover, in response to in response to the ANPR,418indicating methods—while possibly not as precise the Commission’s stated concern that a that requiring the inclusion of pupillary as a measurement taken with expensive pupillary distance requirement could distance measurements on prescriptions equipment by an optician in a have the unintended and undesirable could potentially increase consumer dispensary—are low-cost or no-cost. For consequence of placing the patient in convenience and improve competition, instance, one seller stated that all you the dispensary prior to them having but could also impose burdens on need is a mirror and a printable ruler,421 their prescription in hand, 1–800 prescribers, hamstring opticians, and and another provided instructions for CONTACTS proposed that the pupillary undercut other pro-competitive aspects using their digital ruler.422Consumers distance measurement should be of the Rule. On balance, upon review of can also obtain this measurement at an released in some other format, separate the record, the Commission finds again in-person optical dispensary, though it from the refractive prescription itself.412 that there is not sufficient evidence that may come at a small cost if the For this scenario, the commenter the practice of not providing pupillary consumer is not purchasing eyeglasses explained, the prescriber would release distance is an unfair act or practice. at that shop.423Although some the prescription prior to the patient Purchasing eyeglasses online can, consumers reported problems with their entering the dispensary, and the patient indeed, be more convenient and less vision when using eyeglasses made with would then automatically receive their costly for consumers, and consumers pupillary distances they measured pupillary distance measurement can find it more difficult to shop online themselves using online tools,424 separately after having it measured in if their pupillary distance is not NAROC stated that many online sellers the dispensary.4131–800 CONTACTS provided by prescribers. But every State have developed accurate alternative asserted that an appropriately tailored determines what is required to be ways to measure pupillary distance.425 amendment to automatically release a included in an eyeglass prescription, Moreover, a new pupillary distance pupillary distance measurement is and only four require the inclusion of measurement does not have to be critical to creating prescription pupillary distance measurements. obtained every year or office visit. portability and promoting competition Based on the record developed, the Obtaining it once is usually sufficient, in the evolving market for prescription Commission concludes that preempting since for most people, the measurement eyewear.414 these State determinations by imposing does not change significantly from one Another commenter, a consumer, a requirement to include pupillary year to the next. The widespread stated that pupillary distance distance on the prescription may have a availability of these alternative methods measurements are needed to order detrimental overall effect for prescribers make it difficult to conclude at this time glasses online, where glasses are much and consumers. Some prescribers— that the injury to consumers from cheaper than in the optometrist’s particularly ophthalmologists—would prescribers failing to take and provide shop.415The commenter said that, when be required to take a measurement they pupillary distance measurements is both they ask their prescriber for the do not ordinarily take, or might feel substantial and not reasonably measurement, the prescriber does not obligated, for professional and liability avoidable. provide it, and instead tells them that reasons, to hire new staff or acquire new Importantly, the Commission’s the measurement will be taken when equipment to take this measurement, determination does not preclude States they buy eyeglasses. The commenter felt which could result in higher costs from defining prescriptions to include this was a way to force consumers to passed on to patients in the form of pupillary distance measurements. buy their eyeglasses at their prescriber’s higher prices.419Particularly for smaller Indeed, in the handful of States that office, or at the least, discourage them practices, the costs to these providers already do so, the Rule, by its operation, from buying glasses online.416 could be considerable. requires dispensing of such In addition, imposing such a measurements. But the Commission is 2. Pupillary Distance Requirement requirement could undermine the pro- mindful that the vast majority of States Determination competitive aim of the Rule. If the have not required prescribers to include After considering the comments and Commission required the inclusion of pupillary distance measurements, and evidence regarding pupillary distance, pupillary distance, some prescribers the Commission is reluctant to override the Commission does not disturb its might lead patients to the dispensary for the determinations of local jurisdictions conclusion, reached in the NPRM and the measurement, instead of adding without a clearer record establishing previous Eyeglass Rule rulemakings, not expensive pupillary distance that the status quo is unfair. to mandate the inclusion of pupillary measurement equipment to the exam For these reasons and others distance on prescriptions in States that room.420As noted above, such a shift described in the Commission’s do not otherwise include such a would place the patient in the NPRM,426the Commission has decided requirement. To determine an act or dispensary prior to the patient receiving at this time to retain its prior conclusion practice is unfair, the Commission must their prescription, a result that would not to amend the Rule to add a pupillary find that the act or practice causes or is blur the important distinction between distance requirement for likely to cause substantial injury to the clinical eye exam and the retail prescriptions.427 consumers; the injury is not reasonably dispensing process, a distinction that is
PRA. First, the Commission is total disclosure and recordkeeping bear a disproportionate share of the modifying the Rule to require that: (i) if burden from the new requirement at burden, which it estimated—based on a paper copy of the prescription was 2,979,167 hours for prescribers and their the NPRM proposal and the estimate provided to the patient, the prescriber staff (1,375,000 disclosure hours + that that a ‘‘modest optometry must request that the patient 1,604,167 recordkeeping hours).437 establishment’’ might perform 3000 acknowledge receipt of the prescription These totals were based on estimates examinations per year—at an additional by signing a separate statement on paper that it would take prescribers’ offices 167 hours and $4,123 per year for such or in a digital format confirming receipt one minute to hand out a prescription, an establishment.448 VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60769 Some commenters, however, weight. As explained in the call your eye doctor if you have eye disagreed that it would take a significant Commission’s notice responding to pain, discomfort, redness, or blurry amount of time to obtain a patient’s public comments on extending OMB’s vision’’) as well as five bullet points signed confirmation. The NAROC approval for CLR collection of listing some of the symptoms for an eye commented that thousands of information for another three years,454it infection (‘‘Irritated, red eyes, worsening optometrists affiliated in co-location is very likely the AOA survey pain in or around the eyes,’’ etc.).458 with NAROC member companies overestimates the average time While the template document is titled ‘‘regularly comply with [Contact Lens necessary to obtain a confirmation ‘‘Contact Lens Prescription Rule confirmation-of-prescription- because of the manner in which the Acknowledgment Form,’’ only at the release requirements, as well as other survey solicited prescribers to respond. very end is there a statement, ‘‘Sign requirements of the CLR and Eyeglass AOA emailed a newsletter to members below to acknowledge that you were Rule] with little or no added cost or and included an invitation to ‘‘Voice provided a copy of your contact lens other burden on the eye care your concerns’’ about complying with prescription at the completion of your practice.’’449According to NAROC the Contact Lens Rule. A small number contact lens fitting.’’459 representative and Eyeglass Rule of prescribers self-selected in response, According to workshop panelist Dr. workshop panelist Joseph Neville, ‘‘I’ve and took part in the survey. Because the Montaquila, the AOA template is a personally witnessed a couple of poll only included prescribers who common form that eye doctors are using situations where the process for contact responded to this invitation, it is to obtain patient confirmations.460If lenses seemed very easy. . . . the questionable whether its findings are this is indeed the case, it calls into prescription was handed over at the truly representative of the average question the relevance of AOA’s survey front desk by the staff person, and the prescriber.455Furthermore, framing the results finding that it takes patients 30 staff person maybe a bit simplistically survey as an invitation for concerned seconds or longer to comply with the said, ‘We’d like to ask you to sign this prescribers to air their grievances rather Contact Lens Rule requirements, since receipt for your prescription. We’re than as a disinterested information- the majority of those 30 seconds would required to get your signature gathering tool affects the objective likely be taken up by patients reading acknowledging that you’ve received it.’ reliability of survey responses, making it information that the rule does not And a couple of people, and again, much harder for the Commission to require, or even suggest, that they read. anecdotes here that I witnessed on this, accord it significant weight. Widespread use of AOA’s model just said, ‘Okay, fine, thank you.’’’450 template confirmation form might also The Commission also reiterates All of the above comments, however, account for why prescribers report that concerns—previously detailed in the are, as Mr. Neville acknowledged, patients have questions, or are confused, Commission’s CLR PRA Notice456—that anecdotal in nature.451The only new as to why they need to sign a new form, the amount of time prescribers ascribe empirical evidence that the Commission since patients are being asked not to patients reading and signing that is aware of regarding the time it will merely to confirm they received their Rule’s confirmation statement may, in take prescribers and their staff to prescription, but that they received fact, be due largely to non-mandated comply with a confirmation-of- other information from the CDC and choices with respect to the design of the prescription-release requirement comes FDA.461While the additional statement. The Contact Lens Rule from an American Optometric information from these two Federal requires that patients read and sign a Association submission filed in agencies may very well be useful to simple statement confirming receipt of response to a 2023 request for comment provide to patients, it is not required by their prescription, and allows that the about extending Office of Management the FTC, and the time it takes patients one-sentence statement, ‘‘My eye care and Budget (‘‘OMB’’) clearance for the to read it is not part of the Rule’s burden professional provided me with a copy of information collection requirements of of compliance.
the Contact Lens Rule.452In that my contact lens prescription at the Despite the aforementioned concerns submission, the AOA said that the completion of my contact lens fitting,’’ about the reliability of the AOA’s survey Commission ‘‘significantly fully satisfies the requirement. However, in establishing the time it takes for a underestimated’’ how long it would take the Contact Lens Rule also permits patient confirmation, the Commission prescribers to confirm prescription prescribers to design their own does not wholly discount the survey, release for the Contact Lens Rule confirmation form and statement, and but rather views it as suggestive, and an requirement, and cited a 2023 survey it the survey did not specify or ask additional indication that many conducted of some of its member prescribers what form or wording of the prescribers sincerely believe the optometrists which found that 84.8% confirmation statement that patients Commission’s 10-second estimate does report it takes 30 seconds or more to were reading and signing, making it not accurately reflect the time required obtain the patient’s signed confirmation difficult to determine a true average to obtain a patient’s signed for contact lens prescriptions, not time it would take to comply with the confirmation. The Commission has counting additional time necessary to requirements of the rule. Even more therefore decided to increase its address patient questions about the form concerning (from the standpoint of estimate for the time required to obtain they are signing, and 69.9% of assessing the burden) is that the AOA a patient confirmation signature (and prescribers said patients ‘‘typically’’ has supplied its members with a model the time to collect an affirmative have questions regarding the template confirmation form that consent to electronic delivery, in acknowledgment.453Since the includes several additional paragraphs instances where the prescription is confirmation-of-prescription-release consisting of ‘‘important information to provided digitally rather than in paper) requirement adopted herein is very review prior to receiving your contact for the Eyeglass Rule from 10 seconds— similar to that for the Contact Lens Rule, lens prescription.’’457This information as proposed in the NPRM—to 20 the Commission regards AOA’s includes various recommendations from seconds for this final rule. The comment regarding the CLR’s burden as the Centers for Disease Control (‘‘CDC’’) Commission concludes that 20 seconds on point. and the Food and Drug Administration may better reflect the time required for The Commission cannot, however, (‘‘FDA’’) about healthy contact lens use a patient to not just read a one-sentence accord the AOA survey significant (such as ‘‘Take out your contacts and confirmation, but also to physically sign VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60770 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations and return the document to prescriber’s 2. Estimated Hour Burden of time, and thus would be required to staff, and for any necessary staff Prescribers’ Staff To Obtain and Store obtain a signed confirmation for the explanation as to why the patient’s Patient Confirmation of Prescription other 75% of patients receiving signature is required.462The 20-second Release = 1,375,000 Hours (343,750 prescriptions.470That assumption was estimate may also better align with the Hours for Patients To Read and Sign based on the premise that the NPRM original HIPAA estimate that was a basis Confirmations, 1,031,250 Hours for offered prescribers four options for the initial CLR confirmation Prescribers’ Offices To Scan and Store (confirmation on a stand-alone estimate, since the original HIPAA Such Confirmations) document, confirmation on a prescription copy, confirmation on a proposal accorded 10 seconds to hand The requirement to generate and sales receipt, or digital delivery with no out the acknowledgment and another 10 present the confirmation of prescription confirmation required). With no specific seconds to obtain a patient’s signature release will not require significant time details that clearly show which option and collect the document.463 or effort. The requirement is flexible in prescribers would prefer, the that it allows different modalities and The Commission hereby provides Commission employed the assumption delivery methods at the discretion of the PRA burden estimates, analysis, and that prescribers would choose each of prescriber. The requirement is also discussion for the existing Eyeglass Rule four options in equal numbers. flexible in that it does not dictate other burden of automatically releasing a details, such as the precise content or The current Rule amendment has only prescription at the completion of a language of the patient confirmation. At two options, paper delivery or digital refractive eye exam, as well as the new the same time, prescribers and their staff delivery, and thus if the Commission requirement to collect patient signatures would not be obligated to spend time used the same equal-share assumption it as confirmation of prescription release formulating their own content for the followed in the NPRM, the percentage or as consent to electronic prescription confirmation, since the amended Rule attributed to digital delivery (and delivery. The Commission estimates provides draft language that prescribers thereby not implicating the burden of a these PRA burdens based on the are free to use, should they so desire. confirmation) for PRA purposes would comments and submissions discussed Furthermore, prescribers likely have be 50%. However, based on above, in conjunction with its long- forms and systems in place to maintain conversations with prescribers and the standing knowledge and experience confirmation records already, since they industry, the Commission has reason to with the eye care industry. The already must comply with the similar believe that regardless of widespread Commission is submitting these confirmation requirement of the Contact EHR adoption, many prescribers still do amendments and a Supporting Lens Rule, and may need make only not provide patient portals or deliver Statement to OMB for review. minor adjustments to accommodate prescriptions digitally to patients, and confirmations for eyeglasses thus it would not be correct to designate B. Commission Estimate of the Total prescriptions. As a result, the marginal 50% of all prescription releases as Burden = 3,208,333 Hours cost of the Confirmation amendment to digital delivery. Further supporting this 1. Estimated Hour Burden of 1,375,000 the Eyeglass Rule should be extremely view, the aforementioned AOA survey low, possibly lower than that estimated found that only 35% of prescribers said Hours for Prescribers To Release herein. they provided prescriptions Prescriptions As noted above, the requirement of electronically.471Even that might The number of adult eyeglass wearers §456.4(a)(1)(i) to collect a patient’s overcount the number of prescriptions in the United States is currently signature on the confirmation of delivered digitally, since the prescribers estimated to be approximately 165 prescription release and preserve it surveyed by AOA about their method million.464Assuming a biennial constitutes a new information collection for either obtaining patient refractive eyeglass exam for each as defined by OMB regulations that confirmations and delivering implement the PRA. Nonetheless, the prescriptions were permitted to select eyeglass wearer,465approximately 82.5 Commission determines it will require more than one option, so some of the million people would receive a copy of minimal time for a patient to read the 35% who chose digital delivery of their eyeglass prescription every year.
82.5 million prescriptions yearly × 20 scanning and storing/60 mins) per year. purposes to prescribers, rather than seconds each/60 secs/60 mins) to their office staff. As for the task of
substantial new burdens on individual attributed to prescribers, but based on prescribers and office staff. Since the As noted previously, §456.4(a)(1)(ii), more recent conversations with Rule allows flexibility in how the second option for satisfying the prescribers and others in the industry, it prescribers craft the confirmation confirmation-of-prescription-release has become evident that this task is statement, prescribers may add it to requirement, involves digital delivery of more appropriately designated as documents that they would already be prescriptions, and thus does not performed by prescribers’ office staff.478 saving, such as prescription copies (and necessitate that prescribers obtain or Therefore, the Commission will the majority of States already require maintain a record of the patient’s continue to assume that prescribers that optometrists keep records of eye signature confirming receipt of a release prescriptions to patients, but examinations for at least three years474) prescription. However, this option does that prescribers’ office staff perform the or customer sales receipts (which are require that prescribers obtain and task of collecting patient signatures on normally preserved for financial maintain records or evidence of the confirmations and digital-release accounting and recordkeeping patients’ affirmative consent to consents, as well as the labor pertaining purposes). Even if the prescriber electronic delivery for three years. to printing, scanning, and storing of chooses to create and use a separate Based on the previous estimate that both documents. confirmation statement, storing a one- 25% of patients will receive digital According to the U.S. Bureau of Labor page document per patient per year delivery of their prescriptions, the Statistics (‘‘BLS’’), general office clerks should not require more than a few Commission will use the assumption earn an average wage of $20.94 per seconds, and an inconsequential, or de that consumers sign such consents for hour, optometrists earn an average wage minimis, amount of record space. Some electronic delivery for one quarter of the of $68.75 per hour, and prescribers might also present the 82.5 million prescriptions released per ophthalmologists—which are listed by confirmation of prescription release in year,475and that this task would take BLS under ‘‘surgeons’’—earn an average electronic form, enabling patients to the same amount of time as to obtain wage of $150.06 per hour.479Using the sign a computer screen or tablet and preserve a signature of the patient’s average wage for office clerks, and the directly, and have their confirmation confirmation of prescription release. aforementioned estimate of 1,833,333 immediately stored as an electronic Thus, the Commission will assign total hours for office staff to obtain document. 114,583 hours for the time required for signed patient confirmations and For other prescribers, however, the prescribers’ offices to obtain patients’ consents to digital prescription delivery recordkeeping requirement would likely affirmative consent to electronic and to store such documents, the require that office staff electronically delivery of their prescriptions476and Commission calculates an incremental scan the signed confirmation and save it 343,750 hours for the time to store and burden of $38,389,993 from adding the as a digital document. For prescribers maintain such records.477 confirmation of prescription release to who preserve the confirmation by In total, the estimated incremental the Eyeglass Rule.480 scanning it, Commission staff estimates PRA recordkeeping burden for Based on our knowledge of the that preserving such a document would prescribers and their staff resulting from industry, we assume that of the consume approximately one minute of adding the confirmation-of-prescription- 1,375,000 prescriber-labor hours relating staff time. release requirement to the Rule amounts to the Rule’s requirement to release a The Commission does not possess to 1,833,333 total hours (343,750 and copy of the prescription to the patient, information on the percentage of 114,583 hours, respectively, to obtain optometrists are performing 85% prescribers’ offices that currently use signatures confirming release and (1,168,750) of such hours and and maintain paper records versus consenting to electronic delivery, plus ophthalmologists are performing the electronic records, or that scan paper 1,031,250 and 343,750 hours, remaining 15% (206,250) of such hours. files and maintain them electronically. respectively, to maintain records of Applying this to the BLS wage figures Thus, for purposes of this PRA analysis, confirmation and consent for three results in a prescriber-labor burden for and to again guard against possibly years) for prescribers’ offices. Adding the existing burden of releasing underestimating the Rule’s burden, the this incremental PRA burden to the prescriptions of $111,301,438 Commission will assume that all 1,375,000-hours burden resulting from ($80,351,563 for optometrists + prescriber offices who opt for the existing prescription-release $30,949,875 for ophthalmologists). §456.4(a)(1)(i) (who do not dispense requirement yields a total PRA Adding the $38,389,993 staff burden prescriptions electronically) require a disclosure and recordkeeping burden from the confirmation-of-prescription- full minute per confirmation statement from the Rule of 3,208,333 hours for release requirement to the $111,301,438 for storing such recordkeeping. prescribers and their staff. prescriber burden from the automatic Assuming—as the Commission did prescription-release requirement already
D. Capital and Other Non-Labor Costs since prescribers’ staff will already be workshop notice, and the discussions The recordkeeping requirements trained in obtaining patient from the Workshop itself, the detailed above regarding prescribers confirmation of prescription releases Commission submits this FRFA. This impose negligible capital or other non- under the Contact Lens Rule.482As a document serves as notice to the Small labor costs, as prescribers likely have result, complying with §456.4(a) will Business Administration of the agency’s already the necessary equipment and impose only minimal incremental costs certification of no significant impact. supplies (e.g., prescription pads, on prescribers’ offices.483
IX. Final Regulatory Analysis and confirming their patients’ receipt of need of corrective vision wear are not Regulatory Flexibility Act Analysis prescriptions, and estimates it will take receiving their eyeglass prescriptions Under section 22 of the FTC Act, 15 one minute for prescribers’ staff to meet after visiting their prescriber. It has also U.S.C. 57b–3, the Commission must their recordkeeping obligations. This concluded that a rulemaking to add a issue a final regulatory analysis related likely overstates the recordkeeping confirmation-of-prescription-release to a final rule only when it: (1) estimates burden, since, as noted above, storing a requirement is necessary to increase the that the amendment will have an annual one-page document per patient per year number of patients who receive their effect on the national economy of should not require more than a few prescriptions, to inform patients of the $100,000,000 or more; (2) estimates that seconds, and an inconsequential, or de Rule and of their right to their the amendments will cause a substantial minimis, amount of record space. prescriptions, and to ensure the change in the cost or price of certain Prescribers who decide to collect or separation of eye examination and categories of goods or services; or (3) maintain signatures electronically may eyeglass dispensing, which fosters a otherwise determines that the already have electronic health records competitive marketplace for eyeglasses. amendments will have a significant in place. Some prescribers might also The Commission notes that prescribers effect upon covered entities and upon present the confirmation of prescription who currently comply with the consumers. The Commission has release in electronic form, enabling automatic-release provision of the Rule determined that this final rule will not patients to sign a computer screen or may presently face a competitive have such an annual effect on the tablet directly, and have their disadvantage because of widespread national economy, on the cost or prices confirmation immediately stored as an non-compliance by other prescribers. of goods or services, or on covered electronic document. This creates an unlevel playing field businesses or consumers. As further noted in the Paperwork and undermines fair competition. In The amendments adopted in this final Reduction Act section of this final rule, addition, the Commission expects that rule require that prescribers obtain from the estimated cost to prescribers of this final rule will: reduce the number patients, and maintain for a period of no complying with all of the requirements of seller requests to prescribers for less than three years, a signed of the Eyeglass Rule is just .0042 of the eyeglass prescriptions; improve the confirmation of prescription release total retail market for prescription Commission’s ability to monitor overall acknowledging that patients received eyeglass sales, with the cost of this final compliance and target enforcement their eyeglass prescriptions at the rule representing less than a third of actions; reduce evidentiary issues, completion of their eye examination. that amount. In sum, the burdens complaints, and disputes between The amendments also require some imposed on small entities are likely to prescribers and consumers; and bring prescribers to obtain and maintain for be relatively small. the Eyeglass Rule into congruence with three years a patient’s consent to deliver The Regulatory Flexibility Act the confirmation-of-prescription-release prescriptions electronically, but only for (‘‘RFA’’), 5 U.S.C. 601–612, requires an requirements of the Contact Lens Rule, prescribers who elect to offer this agency to provide an Initial Regulatory reducing confusion for prescribers and method of delivery as an alternative to Flexibility Analysis (‘‘IRFA’’) with a consumers, and easing compliance and providing prescriptions in paper, and proposed rule and a Final Regulatory enforcement for both rules. only if the patient agrees. Flexibility Act (‘‘FRFA’’) with the final
confirmation of prescription release In the NPRM, the Commission In crafting the final rule, the (giving time for the patient to read the determined the proposed amendments Commission carefully considered the confirmation) in accordance with should not have a significant or comments received throughout the Rule VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60773 review process. This document contains substantial: namely, increased flexibility a substantial number of these entities a detailed discussion of the comments and choice for consumers; increased likely qualify as small businesses.489 received by the Commission and the competition among eyeglass sellers; a
optometry practices that already are prescription was sent, received or made In response to comments that the enduring financial challenges and accessible, downloadable, and printable. Commission, in its NPRM, staffing issues. A few commenters Prescribers are required to maintain the underestimated the amount of time it contended that compliance with the records or evidence associated with the takes to comply with the CLR proposed amendments would take confirmation of prescription release, or confirmation-of-prescription-release longer than the Commission estimated digital delivery of the prescription for at requirements, and for other reasons in its NPRM, as demonstrated by the least three years. In addition, if a noted in the PRA section of this amount of time it currently takes prescriber elects to provide a digital document, the Commission increased its prescribers to comply with the existing copy of the prescription to comply with time estimate for complying with the Contact Lens Rule requirements that are the Rule, the prescriber is required to new requirements.485 similar to those proposed for the identify to the patient the specific Eyeglass Rule. C. Description and Estimate of the method or methods of electronic In contrast to the position expressed Number of Small Entities to Which the delivery that they will use and to obtain above, commenters from NAROC said Amendments Will Apply or Explanation the patient’s verifiable affirmative that it is their understanding—based on Why No Estimate Is Available consent to receive a digital copy through responses from their prescriber the identified method or methods. The members—that compliance with the This final rule applies to eyeglass prescriber must maintain records or current Contact Lens Rule confirmation- prescribers, and many prescribers will evidence of the patient’s affirmative of-prescription-release requirement is fall into the category of small entities consent for at least three years. occurring with little or no disruption or (e.g., offices of optometrists with $9 As discussed in section C of section expense.484And as explained in the million or less in annual receipts).486 IX., Final Regulatory Analysis and PRA section of this document, the Determining a precise estimate of the Regulatory Flexibility Act Analysis, we Commission has concerns about the number of small entities covered by the assume that many of the estimated reliability of some of the evidence, cited Rule’s prescription release requirements 43,000 active optometrists and 18,000 by those critical of the Rule’s is not readily feasible because most active ophthalmologists fall within the confirmation proposal, as to the burden prescribers’ offices do not release the definition of a small entity. As of the existing contact lens confirmation underlying revenue information discussed in the PRA section of this requirement. The Commission did not necessary to make this determination. In document, we estimate that prescribers’ ignore or dismiss any comments and the NPRM, the Commission sought office staff perform the task of collecting evidence outright, however, and comment on the number or nature of patient signatures on confirmations and evaluated the evidentiary record as a small business entities for which the digital-release consents, as well as the whole in making a final determination. proposed amendments would have a labor pertaining to printing, scanning, The Commission is sensitive to the significant impact.487In response, the and storing of both documents. additional burden or cost that this final AOA commented that ‘‘doctors of Prescribers’ offices will have to train rule imposes on businesses. However, optometry reported collecting $826,612, staff on, and set up procedures for after weighing all of the comments and on average, in gross receipts in 2021.’’ complying with, the new requirements evidence, it finds that this final rule will The AOA also stated that 91.9% of of the Eyeglass Rule. However, as provide many benefits with a relatively optometry practices have fewer than 25 discussed in the PRA section of this small burden or cost. In particular, the employees.488Based on the AOA document, prescribers likely have forms Commission determines that the comment, and staff’s knowledge of the and systems in place to maintain potential benefit of increasing the eye care industry, including meetings confirmation records already, since they number of patients in possession of with industry members and a review of already must comply with the similar their eyeglass prescriptions is industry publications, staff expects that confirmation requirement of the Contact VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60774 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations Lens Rule, and may need make only confirmation-of-prescription-release offering to sell the patient ophthalmic minor adjustments to accommodate requirements for prescribers who do not goods, whether or not the prescription confirmations for eyeglasses have a direct or indirect financial is requested by the patient. Such prescriptions. interest in the sale of eyeglasses as prescription shall be provided: §456.4(c).492The purpose of such an (i) On paper; or E. Steps Taken To Minimize the exemption is to reduce the burden on (ii) In a digital format that can be Significant Impact, if Any, of the prescribers who do not sell lenses. accessed, downloaded, and printed by Amendments, Including Why Any the patient, after obtaining verifiable Significant Alternatives Were Not X. Congressional Review Act affirmative consent, pursuant to §456.3.
Adopted Pursuant to the Congressional Review (2) Provided: An ophthalmologist or Commenters at the ANPR stage Act (5 U.S.C. 801 et seq.), the Office of optometrist may refuse to give the recommended, as alternatives to the Information and Regulatory Affairs patient a copy of the patient’s signed acknowledgment proposal, designated this final rule as not a ‘‘major prescription until the patient has paid conspicuous signage declaring rule,’’ as defined by 5 U.S.C. 804(2). for the refractive eye examination, but consumers’ right to a copy of their prescription, or an eye care patients’ bill List of Subjects in 16 CFR Part 456 only if that ophthalmologist or optometrist would have required of rights notifying consumers of their Advertising, Medical devices, immediate payment from that patient rights under the Rule. As explained in Ophthalmic goods and services, Trade had the examination revealed that no the NPRM, the Commission ultimately practices.
ensuring contact lens prescription
eye care patients’ bill of rights, for is revised to read as follows: reasons including that the bill of rights (c) Charge the patient any fee in proposal does not require the type of Authority: 15 U.S.C. 57a. addition to the ophthalmologist’s or prescriber recordkeeping that would ■2. Amend §456.1 by revising optometrist’s refractive eye examination allow for better Rule monitoring and paragraphs (a), (b), (d), (e) and (g) to fee as a condition to releasing the enforcement, and would not help read as follows: prescription to the patient. Provided: An resolve disputes between patients and §456.1 Definitions. ophthalmologist or optometrist may prescribers over whether a prescription charge an additional fee for verifying
In an attempt to minimize the burdens seller when the additional fee is
whether they release a paper or digital the patient a form or notice waiving or copy of the prescription, and provides * * * * * disclaiming the liability or one-sentence sample language that (d) Ophthalmic services are the responsibility of the ophthalmologist or prescribers can elect to use should they measuring, fitting, and adjusting of optometrist for the accuracy of the release paper copies of prescriptions. ophthalmic goods subsequent to a refractive eye examination or the Moreover, this amendment aligns with refractive eye examination. accuracy of the ophthalmic goods and the prescription-release-related (e) An ophthalmologist is any Doctor services dispensed by another seller. provisions of the Contact Lens Rule, of Medicine or Osteopathy who thereby reducing the confusion and performs refractive eye examinations. §§456.3 through 456.5 [Redesignated as §§456.5 through 456.7] complexity that might arise for * * * * * consumers and prescribers from having (g) A prescription is the written ■4. Redesignate §§456.3 through 456.5 different confirmation-of-prescription- specifications for lenses for eyeglasses as §§456.5 through 456.7, respectively. release requirements for contact lens which are derived from a refractive eye ■5. Add new §456.3 to read as follows: and eyeglass prescriptions. In addition, examination, including all of the the marginal cost of the amendment to information specified by State law, if §456.3 Verifiable affirmative consent to the Eyeglass Rule should be relatively any, necessary to obtain lenses for providing the prescription in a digital format.
low because the Contact Lens Rule eyeglasses.
already requires prescribers to obtain ■3. Revise §456.2 to read as follows: For a prescription copy provided in a confirmation of prescription release and digital format, the prescriber shall: to maintain records of such. Some §456.2 Separation of examination and (a) Identify to the patient the specific prescribers likely have forms and dispensing. method or methods of electronic systems in place already, which may It is an unfair act or practice for an delivery that will be used, such as text need only minor adjustments to ophthalmologist or optometrist to: message, electronic mail, or an online accommodate confirmations for eyeglass (a)(1) Fail to provide to the patient patient portal; prescriptions. one copy of the patient’s prescription (b) Obtain, on paper or in a digital The Commission also adopts the immediately after the refractive eye format, the patient’s verifiable proposed exemption to the examination is completed and before affirmative consent to receive a digital VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60775 copy through the identified method or patient has paid for the eye examination, but The Study found that only a little more than methods; and only if the prescriber would have required one-third of prescribers were in ‘‘technical
of not less than three years. Such 13Am. Optometric Ass’n v. FTC, 626 F.2d 22Ophthalmic Practice Rules, Request for records or evidence shall be available 896, 915 (D.C. Cir. 1980). The Court held that Comments, 62 FR 15865, 15867 (Apr. 3, for inspection by the Federal Trade the harm arose by making comparison- 1997). Commission, its employees, and its shopping harder, removing seller incentives 2315 U.S.C. 7601–7610 (Pub. L. 108–164). representatives. to advertise, and reducing opticians’ ability 24Pursuant to the FCLCA, the Commission
Hon. Wendell Ford and Hon. John Danforth, Comment #0385 submitted by Parry); Regulations.gov: https:// Committee on Commerce, Science and DiBlasio (ANPR Comment #0441); Pulido www.regulations.gov/document/FTC-2015- Transportation, U.S. Senate, Commission (ANPR Comment #0019); Stuart (ANPR 0093-0001 (CLR RFC Comments); https:// Statement of Policy on the Scope of Comment #0841). www.regulations.gov/document/FTC-2016- Consumer Unfairness Jurisdiction (Dec. 17, 43AOA (ANPR Comment #0849 submitted 0098-0001 (CLR NPRM Comments); https:// 1980), appended to Int’l Harvester Co., 104 by Peele); see also Barnes (ANPR Comment www.regulations.gov/document/FTC-2017- F.T.C. 949, 1070, 1073 (1984) (also referred #0043) (stating she complies with the Rule 0099-0001 (CLR WS Comments); and https:// to as ‘‘FTC Policy Statement on Unfairness’’: although it is unnecessary since any ethical www.regulations.gov/document/FTC-2019- https://www.ftc.gov/legal-library/browse/ftc- doctor will release a non-expired 0041-0001 (CLR SNPRM Comments). policy-statement-unfairness). prescription to a patient); Kanevsky (ANPR Regulations.gov has assigned each comment 3115 U.S.C. 57a(b)(3). Comment #0364) (optometrist states she and an identification number appearing after the 3215 U.S.C. 57a(b)(3)(B). the prescribers she knows comply with the name of the commenter. This document cites 33Ophthalmic Practice Rules, Final Trade Rule). comments using the last name of the Regulation Rule, Statement of Basis and 44Contact Lens Rule, Notice of Proposed individual submitter, or the name of the Purpose, 54 FR 10285, 10288 (1989) (citing Rulemaking, 81 FR 88526 (Dec. 7, 2016) organization and the individual within the Credit Practices Rule, Statement of Basis and [hereinafter CLR NPRM]. organization who submitted the comment, Purpose, 49 FR 7740, 7742 (1980)). 45Contact Lens Rule, Supplemental Notice along with the last four digits of the comment 34See Ophthalmic Practice Rules, Final of Proposed Rulemaking, 84 FR 24664 (May identification number assigned by Trade Regulation Rule, Statement of Basis 28, 2019) [hereinafter CLR SNPRM]. Regulations.gov. and Purpose, 54 FR 10288. 46Contact Lens Rule, Final Rule, 85 FR 61The Commission has determined not to 35Id. 50668 (Aug. 17, 2020) [hereinafter CLR Final disturb that finding, even after analyzing 36Id. Rule]. comments suggesting it should do so. See 37Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 47Id. at 50687. section II.A, infra. 957, 988 (D.C. Cir. 1985) (quoting Jacob 48Id. 62See section II.A.1.a, infra note 126 and Siegel Co. v. FTC, 327 U.S. 608, 612–13 4916 CFR 315.3(c). text, noting that two third-party surveys of (1946)). 50CLR Final Rule, 85 FR 50687. eyeglass wearers reveal that the number of 38Contact Lens Rule, Request for 51Id. at 50687–88. consumers not receiving their eyeglass Comment, 80 FR 53272 (Sept. 3, 2015) 52CLR SNPRM, 84 FR 24668–69; CLR Final prescription automatically after a refractive [hereinafter CLR RFC]. Rule, 85 FR 50681–83. exam ranges from 25.6 million to 55.3 39Ophthalmic Practice Rules (Eyeglass 53CLR Final Rule, 85 FR 50717; 16 CFR million a year (based on the Commission’s Rule), Advance Notice of Proposed 315.2. estimate that 82.5 million consumers visit Rulemaking; Request for Comment, 80 FR 54Ophthalmic Practice Rules (Eyeglass their eye care prescriber for a refractive exam 53274 (Sept. 3, 2015) [hereinafter ANPR]. Rule), Notice of Proposed Rulemaking, each year). These figures are generally 40ANPR, 80 FR 53276. Request for Public Comment, 88 FR 248 (Jan. consistent with multiple prior surveys of 41The public comments responding to the 3, 2023) [hereinafter NPRM]. contact lens users, which found significant ANPR are posted on Regulations.gov at 55The public comments submitted in percentages of contact lens users were not https://www.regulations.gov/document/FTC- response to the NPRM are available on receiving their prescriptions from their 2015-0095-0001 (ANPR Comments). Regulations.gov at https:// prescribers following their exams, and Regulations.gov has assigned each comment www.regulations.gov/document/FTC-2023- provided an impetus for the adoption of a an identification number appearing after the 0001-0001 (‘‘NPRM Comments’’). There are confirmation-of-prescription-release name of the commenter. This final rule cites 47 comments available at this link. Twenty- requirement in the CLR amendments of 2020. comments using the last name of the seven comments were received in response to See section II.A.1.a, infra note 124; see also individual submitter, or the name of the the Commission’s NPRM, and 20 comments CLR Final Rule, 85 FR 50687. organization and the individual within the were submitted in response to a subsequent 63See 16 CFR 315.3. organization who submitted the comment, public notice. See infra note 59. 64This final rule does not revisit some along with the last four digits of the comment 56Public Workshop Examining Proposed amendments that the Commission previously identification number assigned by Changes to the Ophthalmic Practice Rules determined not to propose; namely, Regulations.gov. For instance, the full (Eyeglass Rule), Public Workshop and amending the Rule to require prescribers comment number assigned by Request for Public Comment, 88 FR 18266 provide additional copies of eyeglass Regulations.gov to the comment submitted by (Mar. 28, 2023) [hereinafter WS Notice]. prescriptions; to require that prescribers an individual named Publi is FTC–2015– 57Id. at 18268. respond to third-party seller requests for 0095–0040. In this document, that comment 58The workshop transcript (along with the copies of, or verification of, prescriptions; or is cited as ‘‘Publi (ANPR Comment #0040).’’ agenda and a video recording) is available on to set an expiration date for eyeglass This SBP will use this same identification the FTC website at https://www.ftc.gov/news- prescriptions. In the NPRM, the Commission method when discussing comments events/events/2023/05/clear-look-eyeglass- determined it did not need to seek further submitted in response to other rulemaking rule [hereinafter WS Transcript]. comment on these issues, and explained its notices. 59The public comments submitted in rationale for not proposing these 42See, e.g., Opticians Association of response to the WS Notice are available on amendments. See NPRM, 88 FR 266–67 Virginia (ANPR Comment #0647 submitted Regulations.gov at https:// (additional copy), 271–73 (third-party seller by Nelms) (stating that patients are led into www.regulations.gov/document/FTC-2023- requests), and 277–79 (expiration date). the dispensary before paying for their exam 0001-0029 [hereinafter WS Comments]. There 65American Academy of Ophthalmology and requesting the Rule be amended to are 47 comments available at this link. (‘‘AAO’’), ‘‘Eye Health Statistics,’’ https:// include language that the prescription be Twenty-seven comments were received in www.aao.org/newsroom/eye-health-statistics. given to the patient without additional sales response to the Commission’s NPRM, and 20 Estimates as to the number of VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60777 ophthalmologists vary, with some putting the inSights reports 2022 Q1, Q2, Q3, Q4. In its 101Sanders (WS Comment #0043) (Dr. number at closer to 17,000. Richard Edlow, NPRM, the Commission used a prior Vision Sanders’ calculation is based on comparing ‘‘By the Numbers: How Many ODs Are Council estimate of 165 million adult his assumptions about the number of Actually Practicing Medical Eyecare,’’ Rev. of eyeglass wearers, NPRM, 88 FR 252, which complaints received by the FTC to his Optm. Bus. (Nov. 3, 2021), https:// is within the 158–168 million range. estimate that prescribers perform 236 million reviewob.com/by-the-numbers-how-many- 74The Vision Council, Market inSights refractions every year, an estimate the FTC ods-are-actually-practicing-medical-eyecare/. 2022. has not seen evidence supporting); see also 66In some States, optometrists can 75The Vision Council, Market inSights Coast Eyes Pllc (WS Comment #0046) prescribe medicine and perform certain 2019–2022. (‘‘Nothing is broken here. Patients get their surgeries. AOA, ‘‘What’s a doctor of 76Vision Council Consumer inSights prescription without conflict. . . . optometry?’’ https://www.aoa.org/healthy- Report Q1 2023 at 23, 42. Prescribers are historically >99.9% compliant eyes/whats-a-doctor-of-optometry? 77See Opticians Association of America in the market’s current state.’’) Coast Eyes 67Bureau of Labor Statistics, U.S. Dep’t of (NPRM Comment #20) (noting that according Pllc is operated by Dr. Sanders. Labor, Occupational Outlook Handbook, to Optics Magazine, the online eyewear 102AOA (WS Comment #0047 submitted Optometrists, https://www.bls.gov/ooh/ industry will continue to experience a by Benner). healthcare/optometrists.htm. Estimates as to compound annual growth rate of 6.96% 103While the ophthalmic community has the number of optometrists vary, with some between 2022 and 2027). repeatedly stated that overall prescriber putting the number at closer to 48,000. 78Vision Council Consumer inSights compliance with prescription release is Edlow, supra note 65. Report Q2 2023 at 39, 42. extremely high, the community has not 68Management & Bus. Acad. for Eye Care 79Vision Council Consumer inSights offered the FTC a consumer survey on this Prof’ls, ‘‘Best Practices of Spectacle Lens Report Q2 2023 at 41. issue, despite repeated comments from the Mgmt’’ 2 (2015) (estimating revenue from 80See, e.g., Practice Tips by First Insight Commission noting the absence of empirical prescription eyewear sales at 44% of total Corporation, ‘‘How to Calculate and Increase evidence to support their claim of substantial practice revenue, with contact lens sales Your Optical Capture Rate,’’ (July 6, 2021), compliance, or to rebut the multiple revenue at 16%, eye exam revenue at 21%, https://www.first-insight.com/blog/calculate- consumer surveys in the record which show and medical eye care revenue at 17%), increase-optical-capture-rate/; Eric Rettig, prescriber non-compliance. See NPRM, 88 FR https://files.optometrybusiness.com/Best%20 ‘‘How We Increased Frame Capture Rate by 260 (‘‘the Commission notes, as it did in the Practices%20Spectacle%20Lenses.pdf, see 20% in 3 Years,’’ Rev. of Optm. Bus. (Sept. CLR Final Rule, that despite multiple also infra note 174, Lovejoy (WS Transcript 7, 2022), https://reviewob.com/how-we- opportunities and requests for comment at 19) (noting that data he has seen over the increased-frame-capture-rate-20-in-3-years/. since 2015, the Commission has yet to find years shows that between 50–60% of gross 81Vision Council Market inSights 2022 at or receive any reliable consumer-survey data revenues for practitioners who dispense 11. rebutting or contradicting the submitted eyewear is derived from product sales). 82Catherine Roberts, ‘‘Get Great Glasses findings [showing compliance problems] for 69Id., see also Margery Weinstein, ‘‘Key For Way Less,’’ Consumer Reports, Oct. 2023, either contact lens users or eyeglass wearers, Practice Metrics: Numbers to Track & Grow at 36. or establishing (other than anecdotally) that to Help Speed Practice Recovery,’’ Rev. of 83Id. consumers consistently receive their Optm. Bus. (Aug. 5, 2020), https:// 84Id. prescriptions from prescribers.’’). Indeed, www.reviewob.com/key-practice-metrics- 8516 CFR 456.2(a). when suggesting that the Commission numbers-to-track-grow-to-speed-practice- 8616 CFR 456.2; see also Presiding consider the NERA survey, the AOA recovery/ (noting that product sales in 2019 Officer’s Report, supra note 19, at 17–24, 206. referenced the repeated comments from the continued to account for the majority of gross 87Eyeglass I Rule, 43 FR 23992; Eyeglass II, Commission about the lack of survey data revenue (54%), with eyewear at 37%) (citing 54 FR 10302; see also Eyeglass I Report, 261, evidencing compliance. AOA (WS Comment Glimpse & Care Credit, ‘‘Independent 265. (‘‘[W]ith prescription in hand, #0047 submitted by Benner). Optometry Key Performance Metrics: 2019 consumers would be free to seek out the 104AOA (WS Comment #0047 submitted Trend Report’’ at 5, 9)). price, quality and other features which best by Benner). 70OpticianEDU.org, ‘‘Optician suit their needs and capabilities.’’ The 105Id. According to Dr. Andrew Stivers Certification,’’ https://www.opticianedu.org/ ophthalmic prescription is ‘‘the means by from NERA Consulting, the survey did not optician-certification/. The Commission has which consumers can comparison shop,’’ and specifically ask about compliance with the not independently verified the precise thus ‘‘[i]f the Commission does not act to Rule’s automatic-prescription-release number of States that currently require guarantee consumers their prescriptions, requirement because the survey was not opticians to obtain licenses. consumers may be unable to take full designed to examine compliance, but rather 71Bureau of Labor Statistics, U.S. Dep’t of advantage of this competition.’’). to examine consumer conduct and shopping Labor, Occupational Outlook Handbook, 88See 2004 ER, 69 FR 5453. habits for eyewear and, consequently, Opticians, https://www.bls.gov/ooh/ 89Neilly (WS Transcript at 4–5). explore the ongoing need for consumers to healthcare/opticians-dispensing.htm. 90Id. at 5. possess a copy of their prescription. 72Vision Council, ‘‘VisionWatch—The 91Id. According to Dr. Stivers, whether prescribers Vision Council Market Analysis Report,’’ at 92Formerly known as the National are automatically providing patients with 17 (Dec. 2019) [hereinafter VisionWatch Association of Optometrists and Opticians, or their prescriptions is not as relevant if the Report]. NAOO. manner in which consumers purchase 73Determining the precise number of 93NAROC (NPRM Comment #0024 eyewear indicates that they don’t suffer harm adults, and adult eyeglass wearers, in the submitted by Neville). (or as great a harm) from not having their United States at any given time, is not 94Durkee (NPRM Comment #0015). prescriptions released automatically. ‘‘I do possible, and estimates will change every 95Michaels (WS Transcript at 14). not address the Commission’s contention of year. According to the U.S. Census Bureau, 96Id. at 7; see also Cooper (NPMR significant non-compliance with automatic in 2020 there were 258.3 million adults in Comment #0009) (asserting that patients are release, although the provided evidence the United States. ‘‘U.S. Census Bureau, Age receiving their prescriptions, the problem lies suggests a relatively limited problem, and and Sex Composition: 2020,’’ 2020 Census with inaccurate filling of these prescriptions does not provide evidence linking such a Briefs (2023), https://www2.census.gov/ by ‘‘unlicensed, untrained people’’). problem to harm today.’’ Stivers (NPRM library/publications/decennial/2020/census- 97AAO (NPRM Comment #0027 submitted Comment #0018). briefs/c2020br-06.pdf. Meanwhile, four by Repka). 106AOA (WS Comment #0047 submitted different surveys of U.S. residents in 2021 98OAA (NPRM Comment #0020 submitted by Benner). and 2022 by The Vision Council found that by Allen); AOA (WS Comment #0047 107It is also not certain that there were not 61–65% of adults wear glasses, which submitted by Benner). more than three respondents who mentioned equates to approximately 158–168 million 99AOA (NPRM Comment #0023 submitted a prescriber’s failure to release their adults who wear eyeglasses, based on the by Benner). prescription. According to NERA, due to 2020 census. Vision Council Consumer 100Michaels (WS Transcript at 11). budgetary constraints, responses to open- VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60778 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations ended questions were not formally coded and at their last eye exam. Of that 61% who 120Warby Parker (ANPR Comment #0817 reviewed. Rather, NERA searched all open- received a copy of the prescription, the poll submitted by Kumar). ended responses for variations of the words found that 55% were given the copy 121‘‘FCLCA Study, Focus on Prescription ‘‘prescription,’’ ‘‘Rx,’’ ‘‘had to,’’ ‘‘forced,’’ automatically (in other words, approximately (Rx)’’ at 2, 9, supra note 112. ‘‘made to,’’ ‘‘choice,’’ and ‘‘pressure.’’ AOA 34%—55% of 61%—of the total eyeglass 122In particular, these survey results could (WS Comment #0047 submitted by Benner). wearers surveyed were given a copy in full not have been affected by some consumers The three consumers who raised the issue of compliance with the Rule), 31% of the 61% erroneously thinking they should have failure to release the prescription were were not given a copy automatically but received their prescriptions when, in fact, identified via this search. It is possible, requested their prescription and were given their contact lens fitting had not been however, that additional respondents may it immediately in response (19% of the total finalized, since eyeglass prescriptions do not have referenced a prescriber’s failure to surveyed), and 14% of the 61% were not entail a fitting, and there is little or no reason release prescriptions but used words or given a copy of their prescription, asked for for a consumer to think their eyeglass phrases that did not show up during NERA’s it, and were told to call the office or return prescription had been finalized when, in fact, targeted search, and the Commission did not for it at a later time (8.5% of the total it hadn’t been. receive the responses to the open-ended surveyed). 39% of the total eyeglass users 123See supra, note 118, explaining the questions. This adds to the challenge of surveyed were not given a copy and did not fitting process for contact lenses. In theory, ascribing weight to, or drawing conclusions ask for it, and thus never received a copy of the differences between the contact lens from, responses (or the lack of responses) to their prescription. The survey was sponsored prescription process and the eyeglass open-ended survey questions. by 1–800 CONTACTS but conducted by an prescription process should mean that fewer 108See CLR Final Rule, 85 FR 50676; CLR independent third-party polling firm, SSI, eyeglass patients are confused as to whether SNPRM, 84 FR 24674–75. By some estimates, and respondents were not informed of the they did or did not receive their prescriptions less than 5% of actual fraud victims file identity of the survey sponsor. As explained when they were supposed to. The fact that complaints, and for consumer complaints infra note 124, the Commission has the percentage of eyeglass users surveyed about FTC rule violations the percentage recognized some concerns about the who said they did not receive their drops even further, perhaps because filing a methodology used for this survey, prescriptions is similar, or even higher than complaint requires that consumers know particularly the use of the word ‘‘hard copy,’’ that of contact lens wearers surveyed adds considerable credence to both types of what an FTC rule specifies, that it has been and the lack of an ‘‘I don’t know’’ response surveys, and provides further support for the violated, and how to complain to the FTC option for some questions, but believes that conclusion that a substantial number of about it. Id. It has generally been the the information remains strongly suggestive consumers are not automatically receiving Commission’s experience that while a large of non-compliance, particularly when viewed their prescriptions from prescribers as the number of complaints can indicate a rule in conjunction with information from other Eyeglass Rule requires.
compliance problem, a dearth of complaints sources and the absence of contradictory 124The results from the individual does not necessarily indicate that there isn’t data.
a rule compliance problem. 113Id.
12) (‘‘[T]he big thing that has really changed of consumers benefit from having a copy of Survey questions may have been flawed (and is the ability of consumers to find prices, to their prescription with which to shop came under criticism) because consumers shop to find competitors, before they even elsewhere. This seems supported by the were simply asked whether it was true or leave their house. Before the internet, before NERA survey showing convenience is the false that ‘‘once a person decides where to good information availability, really the only most important factor in a consumer’s have his eye examined, he must purchase his way to price compare, if there was also these decision as to where to buy glasses. On the eyeglasses from his doctor,’’ creating the advertising restrictions was to actually go to other hand, another interpretation is that possibility that some consumers answered the establishment.’’); Montaquila (WS 83% of consumers buy glasses from their ‘‘false’’ not because they understood they Transcript at 32) (stating that people often prescriber because many were not given their were free to take their prescription and shop come to his office knowing beforehand where prescription, and they either felt elsewhere, but rather because they knew they VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60780 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations could not be forced to buy eyeglasses if they 162CLR SNPRM, 84 FR 24675 (citing a https://reviewob.com/3-things-we-did-to- didn’t want to. Eyeglass II Report, supra note Caravan ORC International survey submitted increase-capture-rate-by-15/. See also supra 14, at 259–61. The Commission, after by Consumer Action (CLR NPRM Comment notes 80, 152. reviewing both the Market Facts and AARP #2954 submitted by Sherry) and SSI survey 171Botha (WS Transcript at 53). surveys, and other evidence in the record, submitted by 1–800 CONTACTS (CLR NPRM 17216 CFR 456.2(a). ultimately concluded at that time that ‘‘there Comment #2738 submitted by Williams)). 173Eyeglass I Rule, 43 FR 23992. See continues to be a lack of consumer awareness 163See Consumer Action (CLR NPRM section I.B, supra (discussing the history and about prescription rights.’’ Eyeglass II, 54 FR Comment #2954 submitted by Sherry) (noting purpose of the Rule). 10303. The two surveys are now roughly 40 survey results showing that 65% of Hispanics 174In most medical fields, a prescriber is years old, and more recent surveys show that and 63% of African Americans were unaware prohibited from selling the product that they many consumers are not fully aware of their of their prescription rights, compared to 58% prescribe so as to prevent potential conflicts prescription rights. See infra notes 161–163 of white Americans surveyed, and that of interest. See generally Limitation on and text. Hispanics were less likely to be given copies Certain Physician Referrals (commonly 161As with the SSI survey referenced of their prescriptions after their contact lens known as the ‘‘Stark Law’’) 42 U.S.C. 1395nn, above, the 2015 survey performed on behalf exams); National Hispanic Med. Ass’n & (prohibiting physician self-referral, including of 1–800 CONTACTS was submitted during League of United Latin Am. Citizens (CLR for outpatient prescription medications); the Contact Lens Rule review, but it was a SNPRM Comment #0146 submitted by Anti-Kickback Statute, 42 U.S.C. 1320a–7b(b) poll of eyeglass wearers and is therefore on Benavides) (‘‘Our community continually has (prohibiting physicians from receiving point. 1–800 CONTACTS (CLR NPRM been victimized and denied their compensation for a prescription referral). Comment #2738 submitted by Williams). As prescriptions by prescribers and doctors at a While there are a few other medical noted during the Contact Lens Review, the higher rate than most other Americans’’); professions apart from eyecare—such as manner in which the consumer awareness League of United Latin Am. Citizens (CLR veterinary care—in which the prescriber may questions were phrased in the survey NPRM Comment #2336 submitted by Wilkes) sell what they prescribe, the Commission is submitted by 1–800 CONTACTS did raise (noting that many ‘‘working families’’ take unaware of another field in which prescribers some concerns about the weight that should time off from work to visit their eye doctor generate such a substantial share of their be accorded to the results. In particular, the because they believe their eye doctor is the income from commercial product sales. See questions were leading and used a term— Lovejoy (WS Transcript at 19) (‘‘I do think only place to buy eyewear).
‘‘hard copy’’—that some consumers might that optometry is unique among the 164CLR SNPRM, 84 FR 24675; see also not understand. On the other hand, the healthcare professions in the amount of supra note 152 and text, noting that some question’s phrasing may have led to under- revenue, the percentage of the total revenue prescribers blur the separation between reporting by consumers who did not want to that comes from product sales, the products exams and retail dispensing as a means of acknowledge that they were unaware of their that they prescribe. The surveys that I’ve seen improving their eyeglass sales ‘‘capture rate.’’ rights under Federal law (this is known as and information over the years shows it 165CLR SNPRM, 84 FR 24675.
social-desirability bias). See Diamond, consistently staying over 50%, maybe as high 166Id.
Reference Guide on Survey Research, in as 55 or 60% of gross revenues comes from 167Am. Fin. Servs. Ass’n v. FTC, 767 F.2d Reference Manual on Scientific Evidence, product sales in the practitioners that are 957, 988 (D.C. Cir. 1985) (quoting Jacob 2nd. ed., 248–64 (Federal Judicial Center dispensing optometrists.’’); NAROC (WS Siegel Co. v. FTC, 327 U.S. 608, 612–13 2000), https://wwws.law.northwestern.edu/ Comment #0049 submitted by Neville) (1946)).
faculty/fulltime/diamond/papers/reference (‘‘Private dispensing optometrists today still 16816 CFR 456.2.
guidesurveyresearch.pdf; Floyd Jackson make most of their revenue from selling the 169See Aceto (WS Transcript at 52); Santini Fowler, Jr., How Unclear Terms Affect Survey eyewear that they prescribe. These (ANPR Comment #0047) (prescribers should Data, The Public Opinion Quarterly (Summer optometrists have a strong incentive to be required to provide a copy of the eyeglass 1992), https://www.jstor.org/stable/2749171; improve the ‘capture rate’ of in-office prescription before the consumer is led or see generally, Carl A. Latkin, et al., The eyewear sales to their patients.’’). enters the prescriber’s optical dispensary);
relationship between social desirability bias 175H.R. Rep. No. 108–318 at 5 (2003); see Opticians Ass’n of VA (ANPR Comment and self-reports of health, substance use, and also Letter from Senators Richard social network factors among urban #0647 submitted by Nelms) (‘‘More often Blumenthal and Orrin G. Hatch of the U.S. substance users in Baltimore, Maryland, 73 than should be occurring, patients are led Senate Regarding the Contact Lens Rule Addictive Behaviors 133–36 (2017), https:// into the dispensary before paying for the Rulemaking Proceeding & the Proposed Rule www.sciencedirect.com/science/article/abs/ exam, and shown their options for eyewear. Set Forth in the Notice of Proposed pii/S0306460317301752?via%3Dihub (social We would ask the Rule be amended to Rulemaking (Aug. 11, 2017), https:// desirability bias is the tendency of survey include language that the prescription must www.ftc.gov/system/files/filings/initiatives/ respondents to answer questions in a manner be given to the patient on completion of the 677/public_comment_from_senators_ that will be viewed favorably by others, and exam without additional sales pressure or blumenthal_and_hatch_re_contact_lens_ can skew survey results by over-reporting intimidation.’’). rulemaking.pdf (these comments were made attitudes and behaviors that may be 170See Practice Tips by First Insight in reference to the contact lens marketplace, considered desirable attributes, while Corporation, ‘‘How to Calculate and Increase but the same potential conflict of interest underreporting less desirable attributes). Your Optical Capture Rate’’ (Jul. 6, 2021) exists when eyeglass prescribers also sell Social-desirability bias in this instance likely (describing how one doctor ‘‘recommends eyeglasses to their patients). serves to artificially lower the number of and prescribes the eyewear needs while the 176Eyeglass I Report, supra note 7, at 265. patients unaware of their right to their patient is still in the exam chair . . . [and] 177The ophthalmic community and its prescription. In other words, the way the then invites and guides the patient to the representative associations were once fervent question was phrased could lead to results optical department, introducing the eyewear advocates for the ‘‘total vision care’’ that make it appear that more patients are layout’’), https://www.first-insight.com/blog/ approach to eyecare, and argued that patients aware of their rights than is, in fact, the case. calculate-increase-optical-capture-rate/; received the best care when they obtained See ‘‘FCLCA Study, Focus on Prescription Nicole Lovato, ‘‘3 Things We Did to Increase glasses and contacts from the same eye (Rx),’’ attached as Exhibit B to 1–800 Capture Rate by 15%,’’ Rev. of Optm. Bus. doctor who examined them and determined CONTACTS (CLR RFC Comment #0555 (Oct. 27, 2021) (describing how after each their prescription. See Eyeglass I Report at submitted by Williams) (One question was exam visit, the doctor or a technician will 236–39. While the AOA no longer publicly phrased, ‘‘Are you aware that it is your right walk the patient to the optical dispensary to advocates for ‘‘total vision care,’’ some under federal law, as a patient to receive a try and sell them glasses, and ‘‘pulls out a prescribers still occasionally comment to the hard copy of your contact lens/eye glasses chair from the table and tells the patient, FTC that patients would be best served by a prescription from your eye exam provider?’’ ‘Have a seat, someone will be right over to total-vision-care approach. and the other asked, ‘‘Are you aware of the get you finished up.’ It is important to state 178See section I.D.5, supra, discussing the following . . .—Your eye exam provider it this way. If you say anything about benefits of in-person eyeglass fittings. cannot charge you for an actual hard copy of purchasing it gives the patient an 179This is a different situation from your prescription?’’). opportunity to say they are not interested.’’), patients complaining that they did not VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60781 receive their prescription from their provided guidance with respect to the 196Anonymous (NPRM Comment #0006). prescriber even after paying for their exam, Contact Lens Rule for similar bundles of eye See also Rosemore (WS Comment #0045) or had to ask for their prescription in order exams offered with contact lenses, instead of (‘‘As an optometrist, the added requirements to get a copy. There is much less room for eyeglasses. In that context, the Commission would be a significant burden on my consumer confusion with respect to those has stated that a prescriber is not prohibited practice. Requiring more paperwork, types of complaints than for complaints that from offering a bundled package of an eye consents, data storage, and time makes the consumers had to pay for their prescription. examination and contact lenses, provided cost of doing business go up significantly.’’). 180The majority of patients who go in for that consumers have an option to purchase 197One workshop participant suggested an eye exam and need new glasses do end the eye examination separately and still that prescribers who use electronic health up purchasing them from their prescriber. receive their prescription. Contact Lens Rule, records should not be required to transcribe According to data from The Vision Council, Final Rule, 69 FR 40482, 40494. A similar an electronic prescription into a handwritten 83% of consumers surveyed who recently result is appropriate here. one, as this could introduce errors into the had an eye exam and bought glasses said they 185CLR SNPRM, 84 FR 24675; Eyeglass I prescription. See Montaquila (WS Transcript purchased the eyewear from their prescriber. Rule, 43 FR 23998. at 22) (‘‘Handwriting prescriptions after The Vision Council, Consumer inSights Q1 186NPRM, 88 FR 268–69. generating one in an electronic format 2022. This is true even though, on average, 187NPRM, 88 FR 268. increases time and cost, and is not risk-free. prescribers charge significantly higher prices 188Id. Researchers at Weill Cornell Medical College for eyeglasses than other alternatives such as 189Id. found error rates of 30 per 100 written online eyeglass sellers. The Vision Council, 190CLR Final Rule, 85 FR 50717; 16 CFR prescriptions, and only seven per 100 Market inSights 2019–2022. 315.2. electronic prescriptions. Now, that of course 18116 CFR 456.2(a). 191CLR SNPRM, 84 FR 24668. was from medications, but I would propose 182There are situations where a doctor may 192OAA (NPRM Comment #0020 that contact lenses are no less complex when conduct a refractive exam on a patient but submitted by Allen) (‘‘OAA believes that this written on a sheet of paper.’’). The FTC’s then use his or her professional judgment to revision ensures that the FTC’s regulatory requirement that patients be given the option refrain from writing a prescription for language is keeping pace with updates in to receive a paper copy would not necessitate corrective eyewear. See Lovejoy (WS technology.’’); 1–800 CONTACTS (NPRM a prescription to be converted from an Transcript at 56) (‘‘[C]onsumers may want a Comment #0025 submitted by Montclair) electronic record to a handwritten one; prescription when they shouldn’t have one (‘‘1–800 also supports . . . allowing instead the prescription could be printed out [for medical reasons], and the potential prescribers to release a prescription in digital on paper, as was described by other prescriber, the physician or optometrist, format with a patient’s verifiable affirmative workshop participants. See Hyder (WS ought to have the ability to say, ‘No, I’m not consent to a specific method for digital Transcript at 53) (‘‘If it’s coming from the prescribing eyewear for you for the following delivery.’’); Aceto (WS Transcript at 42) EHMR, I tend to get that when I’m checking reasons.’ And make a note of that in the (‘‘[F]rom the optician standpoint and those out because it’s being printed someplace record.’’). In such situations, the prescriber who fill the prescription, it’s sort of brilliant. other than the exam room.’’). would have no reason to offer to sell the Because again, we’re keeping up with our 198See, e.g., U.S. Dep’t of Health & Human patient eyewear and would be prohibited current status of technology. It helps people, Servs., The Office of the National from doing so under the Rule. it’s an all about an access type thing, and I Coordinator for Health Information 183Panelists at the workshop discussed think that that’s a really, really good Technology (‘‘ONC’’), ‘‘Do I Need to Obtain whether greater clarity in the Rule could help option.’’). Consent From My Patients to Implement a ensure that patients have their prescription 193AOA (NPRM Comment #0023 Patient Portal?,’’ https://www.healthit.gov/ in hand before being invited to purchase submitted by Benner). faq/do-i-need-obtain-consent-my-patients- eyeglasses. See Aceto (WS Transcript at 52) 194NAROC (NPRM Comment #0024 implement-patient-portal (noting that the (‘‘That’s one concern that some of our submitted by Neville). Health Insurance Portability and optician members have had some concerns 195Anonymous (NPRM Comment #0007) Accountability Act (‘‘HIPAA’’) permits the with, and that is at the end of the actual (‘‘Most practices have an EMR system that disclosure of health information to the doctor’s exam, oftentimes they’re directed to also has a patient portal. Most of these patient without requiring the patient’s the dispensary just as a matter of course, and patient portals provide access to the eye glass express consent and that portals are ‘‘an they purchase [eyeglasses] at the end of the prescription. This new ‘rule’ is not necessary. excellent way to afford patients access to actual [exam]. And the copays, the exam fees, If there is ever a question, the EMR system their own information and to encourage them the glasses are all taken [together]. Then they will always have a copy of the prescription to be active partners in their health care.’’). said, here’s your eyeglass prescription. And available for anyone that wants it.’’); 199CLR SNPRM, 84 FR 24668. some of our members have asked, is there a Anonymous (NPRM Comment #0011) (‘‘In 200U.S. Dep’t of Health & Human Servs., way that we could clarify that the 2009 The Hitech Act was passed which ONC, ‘‘Individuals’ Access and Use of Patient prescription should come to them at the end assured the use of electronic medical records. Portals and Smartphone Health Apps, 2022,’’ of the doctor’s experience?’’). The EMR (The Electronic Medical Records Data Brief: 69 (2023), https:// 184The Commission realizes that some eye Mandate) requires healthcare providers to www.healthit.gov/sites/default/files/2023-10/ care practices advertise a bundle where the convert all medical charts to a digital format. DB69_IndividualsAccess-UsePatientPortals_ consumer pays a fixed price for an eye Incurring more costs on businesses for 508.pdf. examination and one or more pairs of frames, storage, paper, ink, private and government 201Id. or complete eyeglasses. Such an offer may payroll, etc., is not an [] economically 202National Institutes of Health, National also be advertised as an opportunity to obtain intelligent idea in a recession driven Cancer Institute, Health Information National a free eye exam with the purchase of economy.’’); Michaels (WS Transcript at 7) Trends Survey, Hints Brief Number 52, eyeglasses. The amendment to the Rule’s (‘‘in my experience, 100% of the ‘‘Disparities in Patient Portal wording is not intended to change those prescriptions that are coming out of our Communication, Access, and Use’’ (2020), practices’ ability to make, and lawfully offices are automatically uploaded https://hints.cancer.gov/docs/Briefs/HINTS_ deliver upon, such offers. However, the electronically to a portal the very second that Brief_52.pdf (‘‘[S]ignificant disparities exist prescriber must still provide the prescription the prescription is finalized. . . . That was in patient portal use, with underserved to the patient before offering to sell them the most important piece of the MIPS groups (including racial and ethnic eyeglasses. By doing so, the patient should program that Medicare had. It mandated that minorities, those with lower socioeconomic have the choice to take advantage of the patients get access to their portals. And so, status, older individuals, and persons with advertised bundle, or to pay the practice’s in our experience, the vast majority of our disabilities) using these tools less often.’’). routine cost of an examination and walk patients don’t want paper copies of the 203Id. away with no eyeglasses, but with their prescription. They want electronic copies so 204U.S. Dep’t of Health & Human Servs., prescription. The exam cannot be contingent that they can have access in their phone and ONC, ‘‘Individuals’ Access and Use of Patient on the purchase of eyeglasses, as stated in the access at 2:00 in the morning, whenever they Portals and Smartphone Health Apps, 2022,’’ Rule. See 16 CFR 456.2. The Commission has want it.’’). supra note 200. VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60782 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 205See, e.g., Hyder (WS Transcript at 43) 211See section III, infra. is the same. Not everybody has the same (‘‘I would say that we’re supportive of giving 212Anonymous (NPRM Comment #0006) access. Not everybody has the same the option for digital prescriptions. But again, (‘‘We already have a record of the broadband capabilities, the same smartphone we would agree with not mandating that prescription on file for the patient and most technologies. And a lot of patients lack every type of digital option be available.’’); EHRs track when they are printed out.’’); health literacy that encourages us as a Beatty (WS Transcript at 42) (‘‘I think we do Lovejoy (WS Transcript at 10) (the completely available use to, or available have to be careful with how we consider that requirement, as proposed, ‘‘sounds like it avenue for them to receive access to their delivery though. Requirements for that would not be difficult to have a record of the prescriptions.’’); Aceto (WS Transcript at 42) delivery to include all of the methods, patient receiving access to their prescription (‘‘My only concern with [technology] is not including SMS and MMS, would or could through [the] portal, so that would not seem everybody, as we talked about with different actually produce new burden. Not everyone like a significant burden.’’). clientele and different patients and different who delivers these things electronically has 213Lovejoy (WS Transcript at 10). modalities, not everybody’s as well versed.’’); access to an SMS system or an MMS system. 214Beatty (WS Transcript at 43) (‘‘So if a Hyder (WS Transcript at 45) And so we’d want to be able to provide the portal could possibly be confusing, having a (‘‘ophthalmology patients who are older[—for possibility of delivering them electronically, website where the patient can enter the] digital option, they may not even want but also allow for the provider to have the rudimentary data and then get back just the or have any idea of how to access [it].’’). choice of how the electronic delivery would prescription information that they were 218Brown (WS Transcript at 7) (‘‘So it is occur.’’). looking for should be acceptable too.’’). encouraging, but it seems [] that there’s a 206NAROC (NPRM Comment #0024 215Montaquila (WS Transcript at 23) missed opportunity if patients can access submitted by Neville) (‘‘We note with (‘‘[The electronic] approach is not without their records digitally, but if they’re not also approval that the prescriber will not be challenges. The method requires many steps given other means to access their required to offer a digital copy of the and a secure system for data transmission. prescriptions.’’); Beatty (WS Transcript at 42) prescription, which some prescribers may Additionally, some electronic health record (‘‘And so we’d want to be able to provide the not be able to offer. But we also suspect that systems cannot automatically transmit the possibility of delivering [prescriptions] those prescribers using digital release for eyeglass or contact lens prescription to the electronically, but also allow for the provider contact lenses will likely use it for eyeglass patient portal. So when a patient requests an to have the choice of how the electronic prescriptions as well, again, adding electronic copy of their prescription in those delivery would occur. And then the patient efficiency to office operations.’’).
(HHS) Notice of Privacy Practices which does a really good system with a signature pad. acknowledging things appropriately . . . in not require acknowledgment to be obtained The system I use now has an iPad. You can this case, whether or not we separate the at every visit. Seeking authorization to open up, they can sign on the iPad. But I am acknowledgement for the availability of the provide a prescription electronically could talking to other colleagues who say that their prescription.’’).
follow the same approach.’’). EHR system has no option similar to this. All 247See section I.B, supra.
patient] as to what the office policy is, future will be able to accept this as an 249See NPRM, 88 FR 286 (previously whether that’s paper or electronic or a electronic signature, that it will store in some proposed as §456.1(h)(2)).
combination thereof. It could happen at the fashion other than necessarily on a paper that 250NPRM, 88 FR 265.
outset when they first establish their says any of the three things that you’ve had 251The NPRM proposed to redesignate the relationship with us and only if we change there. So that if there’s an option to do that, provisions currently codified at §§456.3 policy or they make a request, because the it would be nice. If you still needed it to be through 456.5 as §§456.4 through 456.6, patients could understand, ‘I know your on a printable PDF, then not as respectively, and add a new Section 456.3. policy and I’m happy with it.’ Or, ‘I’m not convenient.’’). 252Id. at 266. happy with it, I want it done a different way.’ 237NAROC (NPRM Comment #0024 253Id. at 280. And that could all be documented when we submitted by Neville). NAROC also requested 254Id. at 280–81. first meet them or at any time at [a] time [of] the Commission be open to petitions from 255These comments are in addition to the their choosing. So putting it in the patient’s prescribers to allow additional digital comments detailed above on the need for hands to have control.’’). methods of verifications as technology automatic prescription release due to a lack 228See, e.g., 45 CFR 164.520(c)(1)(ii) (‘‘No evolves and provided examples including the of compliance and patient awareness of their less frequently than once every three years, use of a personal identification number by rights to a prescription. See section II.A, the health plan must notify individuals then the patient in an EHR, a fingerprint, a retinal supra. covered by the plan of the availability of the scan, voice recognition or other verifiable 256Williams (NPRM Comment #0002) notice and how to obtain the notice.’’). consent documentation. WS Comment #0049 (‘‘This is a great idea and will protect 229For example, consider an instance submitted by Neville. The FTC is open to patients!’’); Wolin (NPRM Comment #0003) where a prescriber obtains a patient’s new digital methods of verifications such as (‘‘I support the proposed rule changes as a affirmative consent to digital prescription biometric data so long as the processes are smart and efficient update’’); Riffle (NPRM delivery via email in September 2024, and optional, secure, there are methods in place Comment #0013) (‘‘I agree with the proposed the prescriber relies on that consent to email to confirm and verify the identity of the rule’’); Anonymous (NPRM Comment #0017) prescriptions until and including the signatory, and the signatures are designed (‘‘I support the proposal to require eye patient’s September 2028 appointment. In such that they cannot be used by anyone doctors to obtain signed confirmation of 2029 the prescriber changes the digital other than their genuine owners. prescription release.’’). delivery policy to delivery via patient portal, 238Montaquila (WS Transcript at 23) (‘‘For 257NAROC also points out that more and the consumer signs a new affirmative the approach on screen, the consent is prescriptions in the hands of consumers consent during their annual 2029 obtained on paper, but then other practices might reduce the number of requests for appointment. The prescriber’s office should will use an electronic means to collect that additional copies. NPRM Comment #0024 retain the original affirmative consent to signature.’’). submitted by Neville; WS Comment #0049 email delivery at least through September 239CLR NPRM, 81 FR 88535. submitted by Neville. 2031 (September 2028 appointment plus 240CLR SNPRM, 84 FR 24667. 258NAROC (NPRM Comment #0024 three years), and should retain the 2029 241NPRM, 88 FR 265. submitted by Neville; WS Comment #0049 consent to delivery via portal for three years, 242See sections I.D.4 supra, IV.C.3 infra. submitted by Neville). VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60784 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 259NAROC (WS Comment #0049 section VIII, infra, for an updated estimate for unnecessary, time consuming, and intrusive submitted by Neville). the amended Rule. requirement [that would] add to cost of doing 260Consumer Action (NPRM Comment 275WS Transcript at 40. business which ultimately gets passed on to #0026 submitted by McEldowney). 276NPRM Comment #0024 submitted by the patient (consumer)’’); Anonymous 261NPRM Comment #0028 submitted by Neville. (NPRM Comment #0011) (costly, time Sepp. 277Id. consuming, and redundant). WS Transcript 2621–800 Contacts (NPRM Comment #0025 278Some of these comments were at 23–24. submitted by Montclair). discussed above with respect to the 288Durkee (NPRM Comment #15). 263Id. Another commenter stated that he Commission’s determination that the failure 289WS Transcript at 9. Voicing a similar approves of the Rule and hopes the Rule is to provide a prescription continues to be an concern, Dr. Montaquila said he’s seen enforced. White (NPRM Comment #0022). unfair act or practice. See section II.A supra. widespread confusion from patients as to 264NAROC (NPRM Comment #0024 One other commenter expressed disfavor why they are signing a prescription or submitted by Neville). It encourages the with the proposal, but did not provide confirmation of prescription release and he Commission to report on how its access to specific reasons for the opposition. states that ‘‘they don’t understand the prescribers’ confirmation of prescription Anonymous (NPRM Comment #0004). process.’’ WS Transcript at 24. Dr. Masoudi release has been used and whether it can 279AOA (WS Comment #0047 submitted raised communication issues surrounding the demonstrate that the cost to prescribers by Benner). form when language barriers exist between associated with the confirmations is justified 280AOA (WS Comment #0047 submitted the patient and staff. WS Transcript at 27. by improved enforcement. Id. by Benner). Appendix A to this comment 290WS Transcript at 23. 265WS Transcript at 32–33. See also contains a summary it created of the 291WS Transcript at 23–24. Consumer Action (NPRM Comment #0026 purported study results. 292WS Transcript at 29. submitted by McEldowney) (‘‘In fact, 281AOA (WS Comment #0047 submitted 293WS Transcript at 29. providers should welcome this record- by Benner). Similarly, at the workshop, Dr. 294AAO (NPRM Comment #27). keeping as a way to prove that they are Stivers suggested that most consumers sign 295Id. The AAO recommended the following the law if challenged.’’). papers at the doctor’s office without reading Commission exempt from the confirmation- 266NAROC (WS Comment #0049 them and questioned whether the of-prescription-release amendment submitted by Neville). confirmation of prescription release ophthalmology practices with fewer than ten 267WS Transcript at 19. ‘‘accomplish[es] anything in the broader full-time employees because they often 268WS Comment #0049 submitted by context of all of the information that the operate with limited administrative support Neville. See also supra note 174 (citing patient is trying to absorb in that kind of and may not use electronic health records. Id. Lovejoy (WS Transcript at 19) noting the high environment.’’ WS Transcript at 10. 296WS Transcript at 31. Dr. Montaquila percentage of optometrists’ gross revenue that 282See also Stivers, WS Transcript at 11 stated that he has not seen much difference comes from the product sales)). (noting that regulations like the Eyeglass Rule since the Contact Lens Rule confirmation 269NAROC (WS Comment #0049 require businesses to hire expensive requirement was put in place andthat he’ll submitted by Neville). Consumer Action does attorneys and consultants to advise them, give prescriptions whether or not there is a not believe it is a burden on prescribers to and the Commission should take into confirmation requirement in place. obtain, document, and retain a consumer’s account the burden placed on ‘‘the vast 297WS Transcript at 29. affirmative receipt of their prescription. majority of practitioners or businesses in 298WS Transcript at 37–38. NPRM Comment #0026 submitted by general that are absolutely law abiding.’’ 299NPRM, 88 FR 287. McEldowney. 283See section VIII, infra. 300NPRM, 88 FR 287. 270NAROC (WS Comment #0049 284During the pendency of the Eyeglass 301Id. at 281. submitted by Neville). At the workshop, Rulemaking, the American Optometric 302The Commission has determined not to Joseph Neville said that he’s been talking Association filed a comment in response to add an exemption for ophthalmology over the last two years with their members the Commission’s Paperwork Reduction Act practices with fewer than ten full-time and they ‘‘said they’re not having problems (‘‘PRA’’) notice for the Contact Lens Rule. employees, as requested by the AAO. See [complying] with the Contact Lens Rule.’’ WS That comment, CLR PRA Comment #0007 supra note 295. It is equally important for Transcript at 28. (submitted by Benner), is available at: https:// patients at these practices to be aware of their 271WS Transcript at 31. www.regulations.gov/comment/FTC-2023- right to receive their prescriptions and 272National Taxpayers Union (WS 0049-0007 (emphasis in original). receive their prescriptions as it is for patients Comment #0028). 285AOA (NPRM Comment #0023 at larger practices. If the practices sell 273Id. submitted by Benner; WS Comment #0047 eyeglasses or have a direct or indirect 274Id. The Commission has not been able submitted by Benner). financial interest in the sale of eyeglasses, to replicate NTU’s cost calculation. Based on 286Rosemore (WS Comment #0045) ‘‘As an they must comply with the confirmation-of- NTU’s estimate that a ‘‘modest optometry optometrist, the added requirements would prescription-release amendments. establishment’’ might conduct 3000 be a significant burden on my practice . . . 303WS Transcript at 34. examinations per year, and using the NPRM I’m not sure what sort of issue the 304WS Transcript at 34. burden estimate of 10 seconds to obtain a Commission believes it is solving here.’’ Dr. 305Warby Parker (ANPR Comment #0817 patient’s confirmation and one minute to Rosemore added, ‘‘I am disturbed that my submitted by Kumar) (bill of rights and store it, the requirement would impose an profession continues to get treated like a signage); Tedesco (ANPR Comment #0042) additional paperwork burden on such a punching bag. It appears to me that we are (signage). practice of 58.3 hours per year (3,000 × 70 viewed by some at the Commission as 306AOA (NPRM Comment #0023 seconds ÷ 60 ÷ 60). Using the NPRM predators to consumers instead of the doctors submitted by Benner); Masoudi (WS estimated wage rates for optometrists and we are to our patients. I did nothing to Transcript at 38) (suggesting that the FTC office staff, such an additional burden would deserve that treatment.’’ Coast Eyes Pllc (WS should be more active in making consumers amount to an incremental burden of Comment #0046) (‘‘Nothing is broken here. more aware of their rights ‘‘before they even $1,439.88. However, staff does not know how Patients get their prescriptions without walk in our door.’’). Other commenters accurate NTU’s estimate for a ‘‘modest conflict. The financial/time/paper (material) discussed a need for greater education optometry establishment’’ is, and does not burden on small business is not justified by generally in this area. See section VII.B, infra. possess information about typical practices. the number of complaints.)’’. 307NPRM Comment #0023 submitted by As explained in this document’s PRA 287Anonymous (NPRM Comment #0006) Benner. According to the AOA, these section, staff based its ultimate burden (‘‘something that would take an immense include: (1) online retailers cannot guarantee calculations on the expected overall number amount of time and take away from patient the glasses purchased will meet the of refractive exams that would result in a care.’’); Anonymous (NPRM Comment #0007) consumers’ visual needs; (2) if the eyeglasses written prescription every year rather than (isn’t ‘‘necessary’’ and would be ‘‘very time do not fit well, the online retailer is not trying to determine a number for a typical consuming.’’); Cooper (NPRM Comment required to adjust the glasses in person, but practice. See Paperwork Reduction Act, #0009) (‘‘yet another example of an will often instruct the consumer how to self- VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60785 adjust the glasses; and (3) the online retailer action in addition to, or instead of, the signed recommended in the AOA’s online toolkit for is not obligated to respond to any complaints acknowledgment proposal. The Commission complying with the CLR, five out of six or issues surrounding the purchase. Id. See discusses business and consumer education paragraphs are extraneous to the also American Optometric Association, as an additional method to increase business confirmation-of-prescription-release ‘‘AOA: No letting up on Eyeglass Rule and consumer awareness of responsibilities proposal). advocacy,’’ Nov. 2, 2023, https:// and rights, respectively, in section VII.B, 325These options include permitting www.aoa.org/news/advocacy/federal- infra. electronic delivery of eyeglass prescriptions, advocacy/aoa-no-letting-up-on-eyeglass-rule- 314NPRM, 88 FR 264 (signage), 263–64 (bill in which case prescribers would not need to advocacy. of rights). request that the patient acknowledge receipt 308Durkee (NPRM Comment #15). At the 315See CLR SNPRM, 84 FR 24675; Eyeglass of the prescription. Yet, flexibility exists for workshop, panelist Pete Sepp of NTU I Rule, 43 FR 23998. prescribers who prefer to provide paper inquired about the FTC not enforcing the 316NPRM, 88 FR 263. copies to their patients, as they do not need Rule against prescribers who take actions 317Commission staff first identified this to offer an electronic option. See section III.C, aimed at improving automatic prescription issue in its Eyeglass II Report, where it supra. For instances in which a patient release and suggested such actions be treated explained that the automatic release refuses to confirm prescription release, the as ‘‘safe harbors’’ from FTC enforcement. One requirement had not helped to prevent prescriber shall note the patient’s refusal on example he provided was for prescribers to ‘‘evidentiary squabbles’’—as the Commission the document and sign it. show a training video to their employees on had hoped it would—but instead had 326See section III.C, supra. prescription release and retain evidence of increased them, because whether or not a 327If multiple eyeglass prescriptions are the training. WS Transcript at 33. As prescriber had released a prescription could provided on paper at the same time, the explained in response, although every not, in most cases, be ascertained absent prescriber can obtain confirmation of instance where a prescription is not documentary evidence. Eyeglass II Report, prescription release with one signature, and automatically provided to a patient is a civil supra note 14, at 275–76. need not obtain separate signatures for each penalty violation, the Commission is 318See sections IV.C.2.a and VIII.A, infra prescription confirmation. generally not looking for one-off instances of (describing how many prescribers are using 328To reduce the burden associated with non-compliance in its enforcement actions. confirmation forms that contain extraneous prescription release, a prescriber could create See Bernstein (WS Transcript at 34). information and thus, likely take far longer a document requesting a single signature to Nevertheless, the Commission does not to read and sign than actually required under confirm receipt of both an eyeglass and a believe expressly establishing ‘‘safe harbors’’ the rule). contact lens prescription (in cases where of the type described by Pete Sepp would 319This calculation is based on estimates both prescriptions are finalized at the same sufficiently counter the significant non- that there are 165 million eyeglass wearers time). Such a document could meet the compliance detailed elsewhere in this who get exams every other year, and that requirements of both rules so long as it is document. there are 18,000 ophthalmologists and 43,000 clear and conspicuous what the patient is 309See section II, supra. optometrists in the United States. As signing for, and that the signature requested 310Id. discussed above, section I.D.5, supra note 67, confirms receipt of both the contact lens and 311NPRM, 88 FR 263. This inquiry is this may undercount the number of eyeglass prescriptions. Similarly, as particularly relevant in that, as the optometrists, which could mean the per- mentioned above, a prescriber could use one Commission has stated, it is primarily provider burden is even less. On the other document to obtain verifiable affirmative interested in bringing actions against repeat hand, the burden may fall differently on consent to digital prescription release of both offenders, not prescribers who may make a different providers (depending on their size, contact lens and eyeglass prescriptions. one-off mistake in forgetting to release a or volume, or electronic-records adoption, for 329NPRM, 88 FR 287. prescription. instance), and at least one commenter, the 330Id. 312U.S. v. Doctors Eyecare Ctr., Inc., No. National Taxpayers Union, felt it might be 33116 CFR 315.3(c)(3). 3:96–cv–01224–D (N.D. Tex. June 24, 1996). disproportionally felt by small providers. See 332See NPRM, 88 FR 260–61. The same The complaint alleged that the eye care section IV.B, supra. purpose is stated for the exemption in the center only released prescriptions when 320AOA (WS Comment #0047 submitted Contact Lens Rule. CLR Final Rule, 85 FR patients asked for them, and included by Benner). 50687. waivers of liability on patients when doing 321Id. 333Current guidance issued by the so. The prescriber paid a $10,000 civil 322AOA’s appendix A to its workshop Commission in connection with the Contact penalty and was enjoined from future comment (WS Comment #0047 submitted by Lens Rule states the same. FTC, FAQs: violations of the Eyeglass Rule. See Press Benner) does not contain information about Complying with the Contact Lens Rule, Release, Fed. Trade Comm’n, Dallas Eyecare the methodology of the survey or the https://www.ftc.gov/business-guidance/ Center Agrees to Settle Charges That They representativeness of the surveyed resources/faqs-complying-contact-lens-rule Failed to Give Consumers Copies of Their population. This analysis assumes the (‘‘If you’re not sure if your interest qualifies, Eyeglass Prescriptions (May 3, 1996), https:// methodology is sound and the population err on the side of caution and ask your www.ftc.gov/news-events/press-releases/ surveyed is appropriately representative— patients to confirm receipt of their 1996/05/dallas-eyecare-center-agrees-settle- assumptions which may or may not be prescriptions.’’). charges-they-failed-give. correct. 334One commenter requested an 313NAROC’s comment mentions that, 323Moreover, 28% of respondents disagree exemption in long-term care settings for the while a requirement for signage in the office with the statement that the amount of confirmation requirement, as well as for was rejected as inadequate, industry paperwork they have to complete at a affirmative consent for digital delivery. This members might use the option of making doctor’s appointment is overwhelming (with commenter said that, in the long-term care information easily available to customers in another 25% responding neutrally) and 34% setting, the parties responsible for the other formats, such as websites or point of of respondents disagree with the statement patients are almost never present during the sale handouts about patients’ rights or that the complexity of the paperwork they exam and the patients themselves are not prescriber responsibilities. NPRM Comment have to complete at a doctor’s appointment able to give consent and as a result, #0024 submitted by Neville. NAROC is overwhelming (with another 25% prescribers coordinate care with, and provide proffered these ideas as additive to, and not responding neutrally). prescriptions to, facility staff. Morer (NPRM instead of, the confirmation proposal, which 324However, the Commission notes that Comment #0021). In such situations, the it supports. An anonymous commenter some of the burden that commenters suggest Commission recommends the prescriber note suggests that the FTC should educate the has resulted from the CLR confirmation-of- in their records to whom the prescription consumer and ‘‘[m]aybe provide a template prescription-release requirement appears to was provided (e.g., staff or caregiver), and to the providers so that the consumer gets the be wrongfully attributed to that requirement. whether it was provided on paper, or made same info, presented the same way at every See sections IV.C.2.a, infra, and section available digitally and by what method. As provider?’’ WS Comment #0037. It is unclear VIII.A, infra (describing how in one form in with the instance where a patient refuses a whether the commenter is suggesting this use by many prescribers’ offices, and copy of a prescription, see supra note 325, VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60786 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations the prescriber could relay that information to medication errors by seven-fold’’ (2010), the FTC clarify the difference between the Commission should questions about https://news.cornell.edu/stories/2010/03/e- covered services—such as eye health compliance arise. prescribing-cuts-medication-errors-seven- exams—and non-covered services—such as 33516 CFR 315.3(c)(1) (CLR); NPRM, 88 FR fold. refractive exams—because ‘‘insurance is 266. 343WS Transcript at 22. complex and I think sometimes it can be a 336Montaquila (WS Transcript at 22). The 344AOA (CLR PRA Comment #0007 challenge to confirm whether or not the Commission notes that other offices using submitted by Benner), https:// coverage is available for a patient.’’). EHRs could collect and store signatures www.regulations.gov/comment/FTC-2023- 364See section II.C, supra. electronically, as Dr. Montaquila noted they 0049-0007 (filed in response to FTC Request 365Beatty (WS Transcript at 52); Lovejoy do for the consent to digital delivery. Id. at For Comment, 88 FR 55044 (Aug. 14, 2023), (WS Transcript at 52–53).
23. https://www.regulations.gov/document/FTC- 366Botha (WS Transcript at 53). 337Montaquila presentation, FTC Eyeglass 2023-0049-0001). As discussed more fully in 367However, prescribers who wait to Rule Workshop, https://www.ftc.gov/system/ the PRA section of this document (section collect payment for the examination until the files/ftc_gov/pdf/Stephen-Montaquila-OD- VIII, infra notes 452–55 and accompanying eyeglass purchase is completed are precluded Presentation.pdf. text.), the Commission has doubts about the from using a confirmation method in which 338AOA, Contact Lens Rule Compliance methodology used for this survey,and does the statement confirming receipt of the Toolkit (July 2020), https://www.aoa.org/ not rely on it for any determinations. prescription is included on the sales receipt. AOA/Documents/doctor%20resources/ 345WS Transcript at 22–23. Dr. Montaquila 36816 CFR 456.1(b). Contact-Lens-Rule-Compliance-Toolkit.pdf. stated that EHR or practice management 36916 CFR 456.2(a). 339WS Transcript at 22. Dr. Montaquila systems were not flexible enough to 370See AOA (ANPR Comment #0849 shared an example of a what the prescription accommodate this functionality. Id. submitted by Peele); Brauer (ANPR Comment pad looks like. See Montaquila presentation, 346The Commission points out that if the #0045); Yadon (ANPR Comment #0046); FTC Eyeglass Rule Workshop, https:// prescriber delivers the prescription digitally, Bolenbaker (ANPR Comment #0633). Some of www.ftc.gov/system/files/ftc_gov/pdf/ but the patient has not opted-in to the digital these commenters also stated that the defined Stephen-Montaquila-OD-Presentation.pdf. delivery option, the prescriber has not term in the Rule is at odds with the This pad is also shown in the AOA’s toolkit, satisfied the requirements of §456.2. See definition of eye examination in the American Medical Association’s Current with a note that doctors should contact the section III.B.1, supra. Procedural Terminology codes to bill AOA Marketplace if interested in obtaining 347See Section VIII, infra. outpatient and office procedures, because the product. See AOA, Contact Lens Rule 348Section 456.4(a)(1)(ii) relating to digital that definition does not include a refraction.
Compliance Toolkit at 9 (July 2020), https:// prescription release, now cross references AOA (ANPR Comment #0849 submitted by www.aoa.org/AOA/Documents/doctor%20 §456.3, requiring verifiable affirmative Peele); Bolenbaker (ANPR Comment #0633).
resources/Contact-Lens-Rule-Compliance- consent to providing the prescription in 371AOA (ANPR Comment #0849 submitted Toolkit.pdf. At the bottom of each digital format.
prescription sheet, after a statement in bright 349See section III.B, supra. Bolenbaker (ANPR Comment #0633).
blue declaring, ‘‘Contact lenses are medical 350WS Transcript at 36. 372Bolenbaker (ANPR Comment #0633).
devices which require ongoing medical care 351NPRM, 88 FR 265. See section III.C.3, 373Lehman (ANPR Comment #0610).
for optimal performance and safety. Please supra notes 239–40 and text (citing 374NPRM, 88 FR 279.
contact our office if you experience any signs Commission language from the CLR NPRM 375NPRM, 88 FR 281.
of complications including pain, redness, and CLR SNPRM supporting the position 376NPRM Comment #0025 submitted by loss of vision,’’ there is a statement in black that, for the CLR, prescribers may obtain a Montclair.
for patients to ‘‘Sign below to indicate you patient’s signature either on paper or 377NPRM Comment #0028 submitted by were provided a copy of your contact lens digitally.).
prescription at the completion of your 352Although prescribers may similarly 378NPRM Comment #0024 submitted by contact lens fitting,’’ with a space for a comply with the CLR by obtaining digital Neville.
signature and the date. signatures, the Commission recognizes that, 379Id.
refractive condition of a person’s eyes or the #0025 submitted by Montclair). 424Bailer (ANPR Comment #0191); presence of any visual anomaly by the use of 411Id. Emanuel (ANPR Comment #0282); Land objective or subjective tests.’’ §456.1(b). A 412Id. (ANPR Comment #0311).
prescriber who charged a patient only one 413This commenter urged the Commission 425ANPR Comment #0748 submitted by fee—designated as for an eye health exam— to require prescribers to ask patients to Cutler.
but also performed an exam that determined the refractive condition of a person’s eyes or confirm receipt of the PD measurement, in 426NPRM, 88 FR 276. the presence of any visual anomaly, is still addition to receipt of the prescription. 1–800 427Because the Commission did not find required to automatically release the CONTACTS (NPRM Comment #0025 adequate evidence of unfairness, it need not prescription upon completion of the exam. A submitted by Montclair). consider alternative ways to remedy that prescriber is only permitted to not release a 414Id. unfairness. Thus, it does not address seller 1– prescription automatically following a 415Beckman (WS Comment #0041). 800 CONTACTS’ alternate methods for refractive exam if the prescriber makes a 416Id. An unidentified commenter agreed, providing pupillary distance to patients. medical determination that the patient indicating that when the optometrist fails to 428WS Transcript at 38. should not be given a prescription for measure and include pupillary distance 429WS Transcript at 4–6, 16. eyeglasses. measurements on the prescription, they are 430WS Transcript at 23–24. 396Workshop panelists who spoke on this preventing the consumer from shopping 431Anonymous (WS Comment #0037). issue were unanimous in agreeing that if a around and discovering lower prices 432NPRM Comment #0027 submitted by prescriber decides not to provide the elsewhere. Anonymous (NPRM Comment Repka. prescription in their medical judgment, then #0010). Another consumer comment does not 433NPRM Comment #0024 submitted by it is appropriate that they do not sell eyewear explicitly mention pupillary distance, but Neville. In addition, at the workshop, Mr. to that patient. WS Transcript at 57. stated it is their right to receive all of their Lovejoy stated that the FTC should give 397See, e.g., ACLens, ‘‘Measuring Pupillary personal medical information, and states they prescribers some guidance on how to educate Distance (PD),’’ https://www.aclens.com/ have to go to other sellers to be able to afford their own customers and make sure the measuring-pupillary-distance. eyeglasses. Crete (WS Comment #0035). message is consistent throughout the 398The Rule, as amended, defines a 417See section I.C, supra. industry. WS Transcript at 58. prescription as the ‘‘written specifications for 418See NPRM, 88 FR 274. 434See, e.g., https://www.ftc.gov/business- lenses for eyeglasses which are derived from 419As explained in the NPRM, pupillary guidance/resources/complying-eyeglass-rule a refractive eye examination, including all of distance measuring systems vary in cost and (for prescribers); https://consumer.ftc.gov/ the information specified by state law, if any, precision, and ‘‘if the Commission required articles/buying-prescription-glasses-or- necessary to obtain lenses for eyeglasses.’’ 16 prescribers to include pupillary distance contact-lenses-your-rights (for consumers); CFR 456.1(g). As of the date of the NPRM, measurements on prescriptions, it is unlikely https://www.ftc.gov/news-events/news/press- only four States, Alaska, Kansas, that prescribers would use less expensive releases/2020/12/ftc-sends-28-warning- Massachusetts, and New Mexico, required rulers and the like, but instead—for letters-regarding-agencys-eyeglass-rule (press the inclusion of pupillary distance professional and liability reasons—would release); https://consumer.ftc.gov/consumer- measurements on prescriptions. NPRM, 88 select more technologically sophisticated alerts/2020/12/ftc-warns-eye-care- FR 273. methods, such as a digital centration device, prescribers-follow-law-or-else (consumer VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 60788 Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations alert); https://www.ftc.gov/business- many refractive eyeglass examinations a straightforward confirmation statement such guidance/blog/2023/04/required-action-after- typical practice performs—or even what a as, ‘‘My eye care professional provided me refraction-ftc-staff-sends-cease-desist-letters- ‘‘typical practice’’ is and whether it is with a copy of my contact lens prescription about-eyeglass-rule-compliance (business advisable to weigh the burden based on a at the completion of my contact lens fitting.’’ guidance). typical practice experience—and finds it The Commission’s understanding is based on 4355 CFR 1320.8(b)(3)(vi). preferable to calculate the burden based on a common sense reading of the statement, but 43616 CFR 456.4(a)(1). the overall number of eyeglass wearers in the is also supported by a survey submitted 437NPRM, 88 FR 283. United States, and the estimate that each during the Contact Lens Rule rulemaking 438Id. at 282–83. wearer obtains a refractive eye exam for showing that 90% of consumers responded 439CLR Final Rule, 85 FR 50709. The eyeglasses every two years. they understood the proposed confirmation estimates for the Contact Lens Rule’s 449NAROC (NPRM Comment #0024 statement, and 94% responded that they had confirmation requirement were, in turn, submitted by Neville); see also Consumer no follow-up questions. Laurence C. Baker, based on a (1) survey of how long it took Action (NPRM Comment #0026 submitted by ‘‘Analysis of Costs and Benefits of the FTC consumers to read a proposed Contact Lens McEldowney) (‘‘we do not believe it is a Proposed Patient Acknowledgment and Rule confirmation statement, and (2) burden on providers to obtain, document, Recordkeeping Amendment to the Contact previously approved burden estimates for a and retain a consumer’s affirmative receipt of Lens Rule,’’ 13 (2017), https://www.ftc.gov/ similar patient-acknowledgment requirement their prescription.’’). system/files/summaries/initiatives/677/ under HIPAA rules, found at 45 CFR 450Neville (WS Transcript at 28–29). 10192017_meeting_summary_from_mko_for_ 164.520(c)(2)(ii). 451Coast Eyes Pllc did not provide any the_contact_lens_rule_rulemaking_ 44088 FR 284. evidence in support of its $18,000 estimate, proceeding.pdf. 441Anonymous (NPRM Comment #0006). and it is not clear where this calculation 462The Commission recently made a 442Anonymous (NPRM Comment #0007). comes from. similar revision to its estimate of the time 443AOA (NPRM Comment #0023). See also 452AOA (CLR PRA Comment #0007 required to obtain confirmation for the Rep. Williams, House Committee on Small submitted by Benner), https:// Contact Lens Rule, and the revised burden Business (WS Comment #0044) (‘‘The www.regulations.gov/comment/FTC-2023- figures received clearance by the Office of Committee fears that this rule will have a 0049-0007 (filed in response to FTC Request Management and Budget. See supra note 454. disproportionate impact on small businesses For Comment, 88 FR 55044 (Aug. 14, 2023), 463Standards for Privacy of Individually by adding redundant requirements to already https://www.regulations.gov/document/FTC- Identifiable Health Information, Final Rule, understaffed practices.’’). 2023-0049-0001). 67 FR 53182, 53261 (Aug. 14, 2002) 444Michaels (WS Transcript at 9) (‘‘I don’t 453Id. According to the AOA, the survey (implementing 45 CFR 164.520(c)(2)(ii)). think that it’s a burden to provide the was conducted in-house by its Health Policy 464See section I.D.5, supra note 73. prescription. Where I see the burden is to ask Institute and Research Departments, and 465The Commission relies on industry for paperwork, to say, ‘Sign this piece of distributed to member optometrists via sources for its estimate that eyeglass wearers paper acknowledging that we’ve already AOA’s weekly email newsletter with a link typically obtain one refractive eye exam given you a prescription.’ There’s a lot of and invite to the survey titled, ‘‘Voice your every two years. See, e.g., AOA, Excel and time, effort, discussion around that. I think concerns by Oct. 9: Complying with the FTC Jobson Medical Information, The State of the that that is something that is greatly Contact Lens Rule.’’ Of members who Optometric Profession: 2013, at 4, https:// underestimated in terms of how long it responded to the AOA’s link request, 327 www.reviewob.com/wp-content/uploads/ takes.’’); AOA (WS Comment #0047 completed the survey. 2016/11/8-21-13stateofoptometryreport.pdf submitted by Benner). 454FTC Notice, Proposed Collection, 88 FR (showing an average interval between exams 445Coast Eyes Pllc (WS Comment #46). 88076, 88079, Dec. 20, 2023 (‘‘2023 CLR of 25 months); AOA, Comprehensive Eye 446Montaquila (WS Transcript at 23–24). PRA’’). Following this notice and response to Exams, https://www.aoa.org/healthy-eyes/ Dr. Montaquila did not break down his 4- commenters, on Jan. 26. 2024, OMB caring-for-your-eyes/eye-exams? (showing minute estimate by task, so it is unclear how approved the extension request for CLR recommended examination frequency for long he estimates it takes for a consumer to clearance. Notice of Office and Management adult patients 18–64 of ‘‘at least every two simply read and sign the confirmation and Budget Action, OMB Control No. 3084– years’’ for asymptomatic/low risk patients). statement, as opposed to the time it takes for 0127. In contrast to the CLR, which establishes a his staff to print out the prescription and 455The Commission notes that while the one-year minimum term for most contact lens confirmation and store the patient AOA claims to represent some 50,000 prescriptions (16 CFR 315.6(a)) (a term-length confirmation as a record. In its NPRM, the optometric professionals, only 327 members mirrored by a majority of States, see CLR Commission allowed a total of two minutes responded to the AOA’s invitation and NPRM, 81 FR 88545, n.245) the Eyeglass Rule and 10 seconds for the entire process (one completed the survey, which could indicate does not discuss or define prescription minute for prescribers to print out the that many of those who self-selected and took expiration terms, and many States do not set prescription, 10 seconds for the confirmation part in the survey were those who have any limit for eyeglass prescriptions. Some signature, and an additional minute for staff concerns about the confirmation eyeglass wearers, therefore, can legally go to store the signed confirmation.). requirement, while most other AOA members many years between refractive eye 447National Taxpayers Union (NPRM do not have such concerns. However, there examinations. But the Commission will use Comment #0028 submitted by Sepp). could be other reasons for the relatively small two years as a basis for purposes of this 448See section IV.B, supra note 274 and number of prescribers (in proportion to the assessment, since that is recommended text. As noted previously, the Commission total membership) who responded, so the interval for the majority of eyeglass wearers. has not been able to replicate the NTU Commission will not draw inferences from 466See, e.g., CLR SNPRM, 84 FR 24693 estimate. Accepting NTU’s assumption that a the low response rate. n.347. small practice performs 3000 refractive 4562023 CLR PRA, 88 FR 88079. 467CLR Final Rule, 85 FR 50709. This eyeglass examinations per year, the 457See section IV.C.2.a, supra, discussing estimate was based on responses to a confirmation requirement would add a the AOA model form exhibited by Dr. consumer survey regarding how long it paperwork burden of $1,439.88 for such a Montaquila at the workshop. A copy of the would take consumers to read the form, and practice based on the proposal and PRA model form is available at https:// a prior PRA estimate for consumers to analysis applied in the NPRM, and an www.aoa.org/AOA/Documents/ complete a similar signed acknowledgment. increased paperwork burden of $1,318.73 doctor%20resources/Contact-Lens-Rule- See CLR SNPRM, 84 FR 24693; NPRM, 88 FR based on the amendment and PRA analysis Compliance-Toolkit.pdf. 282. of this Final Rule. While the AOA has stated 458Id. 468See supra note 462–63 and that approximately 92% of optometry 459Id. accompanying text. practices have fewer than 25 employees and 460Montaquila (WS Transcript at 23). 469In order to utilize §456.4(a)(1)(ii) average $826,612 in gross receipts per annum 461The Commission has never subscribed however, a prescriber must obtain and (AOA NPRM Comment #23), the Commission to the belief that consumers will be greatly maintain records or evidence of affirmative does not have information detailing how confused as to why they are signing a consent by patients to electronic delivery of VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 144/Friday, July 26, 2024/Rules and Regulations 60789 their prescriptions. The burden to do so is III.C., supra, prescribers may not need to 481The Vision Council, Market inSights included in the recordkeeping burden obtain patient consents at every visit. But the 2022. Total market value of eyeglass frames calculation of this PRA section. Commission does not have reliable and lenses. Does not include exams, reading 470NPRM, 88 FR 283. information as to the percentage of glasses, or contact lenses. The $149,691,431 471AOA (CLR PRA Comment #0007 consumers that are new to their prescribers cost of the Eyeglass Rule is 0.0042 of the total submitted by Benner). as opposed to being repeat visitors or how $35.6 billion market value. 472The survey found that approximately often prescribers’ practices with digital 482It is possible that bringing the 57% said they used a separate signed prescription delivery will change and require prescription confirmation requirements for confirmation form, 35% said they opted for new consents, and thus how many will or eyeglass prescriptions into conformity with digital delivery, 15% used a confirmation will not have to sign a consent-to-electronic- those for contact lenses will ease staff statement on a signed sales receipt, 27% used delivery. Thus, the Commission will assume, training burdens rather than increase them, a confirmation statement on a signed for PRA calculation purposes, that every time since prescribers’ staff will not have to learn prescription copy, and 9% selected ‘‘other.’’ a consumer receives a digital prescription, to differentiate between the two types and As noted, prescribers were permitted to the prescriber’s staff has collected a signed treat them differently for rule purposes.
choose more than one option, so these consent. This very likely results in a 483As explained in the PRA Section, supra, percentages add up to more than 100%. significant overestimation of the consent the Commission calculates an incremental 473Section 456.3(a)(3) also requires that in burden.
the event that a patient declines to sign a 47620,625,000 prescriptions yearly × 20 burden of $38,389,993 from adding the confirmation of prescription release to the confirmation requested under paragraph seconds/60 secs/60 mins. (a)(1)(i) the prescriber must note the patient’s 47720,625,000 affirmative consents × one Eyeglass Rule. The Commission need not issue a final regulatory analysis under section refusal on the document and sign it. minute/60 mins) for storing such records. However, the Commission has no reason to 478This is further supported by comments 22 of the FTC Act because this amount does believe that such notation should take any during the Eyeglass Rule Workshop, such as not meet the threshold of an annual effect on longer than for the patient to read and sign that of panelist Dr. Montaquila, who noted the national economy from the amendment of the document, so the Commission will that his staff completes the process ‘‘from $100 million or more or cause the other maintain its calculation as if all explaining why we’re doing it to the patient, changes or effects described in section confirmations requested under paragraph providing them with their prescription, 22(a)(1)(B) and (C). See 15 U.S.C. 57b–3. (a)(1)(i) require the same amount of time. It making copies, providing their prescription 484NAROC (WS Comment #0049 is worth noting that using the 82.5 million back to them, and ultimately storing it. . . . submitted by Neville). figure here is an overestimate by the Our staff has to explain, ‘You’re signing this 485See section VIII, supra. Commission, since it does not deduct for the for this reason’’’ Montaquila (WS Transcript 486See 13 CFR 121.201 (Small Business number of patients who visit a prescriber at 22, 28). See also Neville (WS Transcript at Size Regulations). who does not have a direct or indirect 28) (commenting that he has observed 487See NPRM, 88 FR 285. financial interest in the sale of eye wear and situations where the doctor pushed a button 488AOA (NPRM Comment #0023 would not be required to confirm receipt of to have the prescription printed out at the submitted by Benner). prescriptions under Rule amendment front desk, the prescription was handed over 489According to one publication, 65% of §456.4(c). However, staff does not currently at the desk by the staff person, and the staff optometrists work in a practice owned by an possess information as to what number of person obtained the patient’s signature on the optometrist or ophthalmologist, practices that prescribers will qualify for the exception in confirmation); AOA Report for Complying are likely small businesses. See AOA, ‘‘An §456.4(c), and so has assumed that all with the FTC Contact Lens Rule, (survey to Action-Oriented Analysis of the State of the patients receiving a prescription will either prescribers, Question 3, ‘‘Have you Optometric Profession: 2013,’’ at 7 https:// sign a confirmation of prescription release or experienced challenges in training staff on reviewob.com/wp-content/uploads/2016/11/ a consent to receive their prescription the new requirements for the Contact Lens 8-21-13stateofoptometryreport.pdf. This electronically every year. Rule?’’; Question 9 ‘‘How much time per day publication also reported that although it 474See, e.g., 246 Mass. Code Regs. §3.02 does your staff spend on addressing patient could not ascertain the precise number of (requiring optometrists to maintain patient questions with the acknowledgment form independent optometric practices, it records for at least seven years); Wash. and process?’’). estimated that as of 2012, there were 14,000 Admin. Code §246–851–290 (requiring 479Bureau of Labor Statistics, U.S. to 16,000 optometric businesses with no optometrists to maintain records of eye Department of Labor, Occupational corporate or institutional affiliation. Id.
exams and prescriptions for at least five Employment Statistics, https://www.bls.gov/ 490NPRM, 88 FR 264.
years); Iowa Admin. Code r. 645–182.2(2) news.release/ocwage.t01.htm. 491Id. at 263.
(requiring optometrists to maintain patient 480Based on information that there are 492NPRM, 88 FR 287.
records for at least five years). approximately 61,000 optometrists and 47520,625,000 prescriptions (82.5 million ophthalmologists in the United States, this [FR Doc. 2024–15620 Filed 7–25–24; 8:45 am] prescriptions × 25%). As noted in section averages to $629 per prescriber per year. BILLING CODE 6750–01–P VerDate Sep<11>2014 18:33 Jul 25, 2024 Jkt 262001 PO 00000 Frm 00049 Fmt 4701 Sfmt 9990 E:\FR\FM\26JYR3.SGM 26JYR3 DORP32NR021KSD rellehmurdd 68034 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations FEDERAL TRADE COMMISSION j. Substantially Different Product F. Description of Steps Taken To Minimize
certain specified unfair or deceptive acts 5. §465.2(d) by people who do not exist, who did not or practices involving consumer reviews 6. Knowledge Standard actually use or test the product or or testimonials. This final rule, among 7. Other Proposals service, or who were misrepresenting other things, prohibits selling or C. §465.3—Consumer Review or their experience with it; (2) review purchasing fake consumer reviews or Testimonial Reuse or Repurposing hijacking, where a seller steals or testimonials, buying positive or negative D. §465.4—Buying Positive or Negative repurposes reviews of another product; consumer reviews, certain insiders Consumer Reviews (3) marketers offering compensation or creating consumer reviews or E. §465.5—Insider Consumer Reviews and other incentives in exchange for, or Consumer Testimonials testimonials without clearly disclosing conditioned on, the writing of positive
FORFURTHERINFORMATIONCONTACT: 2. §465.7(b) relationships, or (b) soliciting reviews Michael Ostheimer, (202) 326–2699, H. §465.8—Misuse of Fake Indicators of from employees or relatives without Attorney, Division of Advertising Social Media Influence instructing them to disclose their Practices, Bureau of Consumer I. §465.9—Severability relationships; (5) the creation or Protection, Federal Trade Commission, V. Final Rule operation of websites, organizations, or Room CC–6316, 600 Pennsylvania VI. Final Regulatory Analysis Under Section entities that purportedly provide Avenue NW, Washington, DC 20580. 22 of the FTC Act independent reviews or opinions of
I. Background 1. Estimated Benefits of the Final Rule reviews displayed represent most or all
II. The Legal Standard for Promulgating the c. Benefits Related to Competition suppression of customer reviews by Rule 2. Estimated Costs of the Final Rule physical threat or unjustified legal
III. Overview of the Comments VII. Paperwork Reduction Act on, among other things, whether such
IV. Section-by-Section Analysis B. Issues Raised by Comments, the notice of proposed rulemaking
B. Notice of Proposed Rulemaking Commission’s proposal, the majority of Bureau (‘‘IAB’’), a trade association, Based on an extensive review of the commenters generally supported the argued that there were two disputed comments received in response to the Commission’s proposal. Three issues of material fact.17The other two ANPR, the Commission’s own history of commenters submitted timely requests hearing requesters discussed their enforcement, and other sources of to make oral statements at an informal comments submitted pursuant to the information, the Commission published hearing (‘‘the hearing requesters’’).11 NPRM. At the conclusion of this hearing the NPRM on July 31, 2023.5In the session, the presiding officer issued an
18(a)(1)(B), the rule must also include a 26The presiding officer stated that testimony by the trade association’s ‘‘attorney about survey Statement of Basis and Purpose (‘‘SBP’’) 3215 U.S.C. 57a(d)(1). In addition, section responses is hearsay and will be weighed that addresses: (1) the prevalence of the 22(b)(2) of the FTC Act requires the Commission to accordingly.’’ Order by Presiding Officer Foelak acts or practices addressed by the rule; prepare a final regulatory analysis. 15 U.S.C. 57b–
(Mar. 4. 2024), https://www.ftc.gov/system/files/ftc_ 3(b)(2). The final regulatory analysis is in section gov/pdf/r311003aljorder20240304-1.pdf. (2) the manner and context in which the VI of this document. 27IAB received eighteen responses to the first 33ANPR, 87 FR 67425–26. survey and nineteen to the second. See Post- 29Order by Presiding Officer Foelak at 5 (May 8, 34NPRM, 88 FR 49370–77. Hearing Letter Brief from Interactive Advertising 2024), https://www.ftc.gov/system/files/ftc_gov/pdf/ 35Id. at 49370–72. AI tools make it easier for bad Bureau to Presiding Officer Foelak (Mar. 13, 2024), r311003aljdecision20240508.pdf. The presiding actors to pollute the review ecosystem by https://www.ftc.gov/system/files/ftc_gov/pdf/ officer added that, ‘‘[u]nquestionably, there is generating, quickly and cheaply, large numbers of r311003iabposthearingbrief20240313.pdf. insufficient evidence in the record to make a realistic but fake reviews that can then be 28See Transcript of Informal Hearing on Proposed specific finding as to the size of the compliance distributed widely across multiple platforms. AI- Trade Regulation Rule on the Use of Consumer costs associated with the proposed rule.’’ Id. at 5 generated reviews are covered by the final rule, Reviews and Testimonials (Mar. 6, 2024), https:// n.9. which the Commission hopes will deter the use of www.ftc.gov/system/files/ftc_gov/pdf/ 30Id. at 6. AI for that illicit purpose. r311003informalhearing03062024.pdf. 31See 15 U.S.C. 57a(a)(1)(B). 36NPRM, 88 FR 493720–73. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68037 comment by the North American B. Manner and Context in Which the process for obtaining redress under Insulation Manufacturers Association Acts or Practices Are Deceptive or section 19(a)(2).47By allowing the (‘‘NAIMA’’) asserting that testimonials Unfair Commission to secure redress more by those misrepresenting their The rule is intended to curb certain quickly and efficiently, this rule will experiences with insulation products unfair or deceptive uses of consumer also allow the Commission to preserve are plentiful.37The Commission reviews and testimonials. It contains enforcement resources for other mission concluded that the unfair or deceptive several provisions to promote accuracy priorities.48As an additional benefit, the rule will enable the Commission to seek reuse or repurposing of consumer and truthfulness in reviews and civil penalties against violators.49 reviews is prevalent, relying upon a testimonials and, thus, will allow Without an efficient way to seek civil prior Commission case and numerous American consumers to make better- penalties, bad actors have little fear of news articles.38To show how informed purchase decisions. The key being penalized for using fraud and commonly incentives are given in provisions of the rule prohibit conduct deception in connection with reviews exchange for reviews with the that is inherently deceptive or unfair, and endorsements. Increased deterrence including creating, selling, and buying incentives conditioned on the sentiment will have consumer welfare benefits and fake or false reviews or testimonials;
of the reviews, the NPRM pointed to will benefit honest competition.50 buying reviews in exchange for, or FTC and private cases, analyses by Moreover, the final rule is likely to conditioned on, their sentiment; and researchers of markets for procuring impose relatively small compliance using reviews and testimonials from reviews, and the experience of a small costs on honest businesses.51 company insiders that hide their business employee commenter who said relationships to the company. The rule III. Overview of the Comments52 a competitor was providing incentives also includes prohibitions against for 5-star reviews.39The Commission The Commission received 100 misleading, company-controlled review found prevalence of unfair or deceptive websites or entities; unfair or deceptive responsive and non-duplicative insider reviews and testimonials based review suppression practices; and the comments in response to the NPRM from a diverse group of individuals on its prior cases; a State AG action; misuse of fake indicators of social media (including consumers and law statistics from a review platform influence.
prevalence of suppression of negative in more detail in sections VI and VIII of 48When the rule has been violated, the reviews on retailer or business websites this document. The record demonstrates Commission can commence a Federal court action based on a platform’s comment, a recent that the most significant anticipated and seek to recover money for consumers or obtain FTC case, and what it learned in another benefit of the final rule is increased an order imposing civil penalties. See 15 U.S.C. 57b(a)(1), 15 U.S.C. 45(m)(1)(A). Without the rule, investigation about more than 4,500 deterrence of clearly unfair or deceptive the path to monetary relief is longer and requires merchants that were automatically acts or practices involving consumer the Commission to first conduct an administrative publishing only 4- or 5-star consumer reviews or testimonials. Another proceeding to determine whether the respondent violated the FTC Act; if the Commission finds that reviews.42The NPRM relied upon significant benefit is the expansion of the respondent did so, the Commission issues a reports by platform and other the remedies available to the cease-and-desist order, which might not become commenters, as well as FTC and State Commission, including the ability to final until after the resolution of any resulting AG cases, regarding review suppression more effectively obtain monetary relief. appeal. Then, to recover money for consumers, the Commission must prove in a separate Federal court by unjustified legal threat or physical This is particularly critical given the action that the violator engaged in fraudulent or threat.43Finally, with respect to the U.S. Supreme Court’s decision in AMG dishonest conduct. See 15 U.S.C. 57b(a)(2). prevalence of sales and misuse of fake Capital Management, LLC v. FTC, which 49See section 5(m)(1)(A) of the FTC Act, 15 indicators of social media influence for held that equitable monetary relief, U.S.C. 45(m)(1)(A) (providing that violators of a trade regulation rule ‘‘with actual knowledge or including consumer redress, is not commercial purposes, the NPRM knowledge fairly implied on the basis of objective discussed cases brought by the FTC, a available under section 13(b) of the FTC circumstances that such act is unfair or deceptive Act.46Post-AMG, the Commission’s and is prohibited by such rule’’ are liable for civil State AG, and private parties, and primary means for obtaining redress is penalties for each violation). In addition, any entity published reports on social media bots or person who violates such a rule (irrespective of section 19 of the FTC Act. By issuing and fake social media accounts.44 the state of knowledge) is liable for any injury the final rule, the Commission can caused to consumers by the rule violation. The obtain such redress based on violations Commission may pursue such recovery in a suit 37Id. at 49373. of the rule in one proceeding under under section 19(a)(1) of the FTC Act, 15 U.S.C. 38Id. at 49373–74. section 19(a)(1), which will be 57b(a)(1). 39Id. at 49374. 50NPRM, 88 FR 49382–85.
41Id. at 49375 45ANPR, 87 FR 67426–27; NPRM, 88 FR 49387– 52Minor changes to formatting, grammar, and 42Id. at 49376. 88. punctuation have been made to some of the 43Id. 46See AMG Cap. Mgmt., LLC v. FTC, 593 U.S. 67, comments quoted in this document. These changes 44Id. at 49376–77. 82 (2021). do not entail any substantive changes. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68038 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations proposed rule.53The NPRM also posed Rule addresses many concerns about Numerous individual commenters,65 twenty-three specific questions for the unfair or deceptive acts or practices trade associations,66and consumer public.54The first two are broad involving consumer reviews and organizations67expressed general questions addressed in this section III, testimonials, such as false and biased support for the proposed rule. For which also discusses several issues or reviews.’’59Both of these commenters example, an individual commenter concerns that commenters raised also noted areas in which they thought wrote, ‘‘I completely agree with the generally without reference to particular proposal. . . . Because review sections certain provisions of the proposed rule sections of the rule. Responses to the have become so untrustworthy (being should be adjusted or clarified; those more specific questions in the NPRM impossible to tell whether a company issues are addressed below.60A are discussed in section IV of this has paid for positive reviews of its own consumer organization said that ‘‘[i]n document, a section-by-section analysis product, or for negative reviews on a general, . . . the proposed Rule will of the final rule. Questions relating to rival’s product), review sections have reduce the incentives for businesses to the Paperwork Reduction Act (‘‘PRA’’) become functionally useless for me. purchase, disseminate, or sell fake and Regulatory Flexibility Act (‘‘RFA’’) This makes it difficult to purchase any consumer reviews or testimonials,’’ but and are addressed in sections VII and products online, since real consumer VIII of this document, respectively.55 thought that the proposed rule should feedback is one of the few ways to have placed explicit restrictions on determine whether I should buy the
A. Furthering the Commission’s Goal third-party review platforms.61The product or service without first In Question 1 of the NPRM, the Commission notes that this topic is examining it in person.’’68Another Commission asked whether its proposal beyond the scope of the rulemaking, individual stated, ‘‘I support the rules as would further the Commission’s goal of which focuses instead on those specified, and applaud the FTC’s action protecting consumers from clearly responsible for inarguably unfair or in this regard. It is extremely difficult unfair or deceptive acts or practices deceptive acts or practices regarding for the consumer to determine the involving consumer reviews and reviews and testimonials. validity of online reviews—even within testimonials.56 specific retailers such as amazon. There Several commenters expressly B. Adoption of the Proposed Rule as a is little benefit for large online retailers addressed this question. A review Final Rule to ensure that reviews are accurate, and platform and a business that specializes this fact is evident in the large number in identifying fake online reviews In Question 2 of the NPRM, the of bogus reviews found on amazon, submitted comments stating that the Commission inquired whether it should newegg, youtube and other sites.’’69A proposed rule would further the finalize the proposed rule, the reasons third individual wrote, ‘‘I strongly Commission’s goal of protecting for why commenters were in favor of or support the rules against fake review consumers from clearly unfair or against the finalization of the proposed deceptive acts or practices involving rule, and whether the Commission 65Amelia Markey, Cmt. on NPRM (July 31, 2023), consumer reviews.57Another review should make any changes to its original https://www.regulations.gov/comment/FTC-2023- platform commenter answered that proposal.62 0047-0003 (‘‘Markey Cmt.’’); Chris Hippensteel, there are ‘‘numerous advantages of the Cmt. on NPRM (Aug. 1, 2023), https:// Only two commenters directly www.regulations.gov/comment/FTC-2023-0047- FTC’s proposed new Rule,’’ that it is addressed this question. A business 0006 (‘‘Hippensteel Cmt.’’); Jeremy Anderson, Cmt. ‘‘generally supportive of this on NPRM (Aug. 1, 2023), https:// commenter agreed that the Commission intervention overall,’’ and that the www.regulations.gov/comment/FTC-2023-0047- proposed rule ‘‘will be helpful to set out should finalize the proposed rule.63A 0007 (‘‘Anderson Cmt.’’); Caroline Fribance, Cmt. review platform commenter said it on NPRM (Aug. 11, 2023), https:// clear rules that expressly prohibit www.regulations.gov/comment/FTC-2023-0047- ‘‘supports this Rule and would support practices like writing or purchasing fake 0017 (‘‘Fribance Cmt.’’); Pia Edborg, Cmt. on NPRM reviews, providing compensation or the Commission finalizing the Rule.64It (Aug. 17, 2023), https://www.regulations.gov/ incentives in exchange for reviews, and also suggested adjustments to the comment/FTC-2023-0047-0027 (‘‘Edborg Cmt.’’); certain acts of unfair review Commission’s proposal, which are A ht n tp o s n : y // m w o w u w s . 1 re , g C u m la t t . i o o n n s N .g P o R v/ M co ( m A m ug e . n 2 t 0 /F , T 20 C 2 -2 3 0 ), 2 3- suppression.’’58A business commenter addressed below in this document. 0047-0031 (‘‘Anonymous 1 Cmt.’’); Jessica Ludlam, similarly answered that the ‘‘Proposed Cmt. on NPRM (Aug. 24, 2023), https:// www.regulations.gov/comment/FTC-2023-0047- 0036 (‘‘Ludlam Cmt.’’); SUPERGUEST, Cmt. on 53NPRM, 88 FR 49388. NPRM (Sept. 8, 2023), https://www.regulations.gov/ 54Id. at 49388–89. comment/FTC-2023-0047-0046 (‘‘Superguest 55Id. at 49388. In addition to soliciting public Cmt.’’); Sean Poole, Cmt. on NPRM at 1–2 (Sept. 22, comment on the NPRM’s PRA and RFA analyses in 2023), https://www.regulations.gov/comment/FTC- the PRA and RFA sections, the NPRM also posed 2023-0047-0063 (‘‘Poole Cmt.’’); Artemio Magana, two specific questions related to the PRA and RFA Cmt. on NPRM (Sept. 28, 2023), https:// analyses. Question 4 inquired whether ‘‘the www.regulations.gov/comment/FTC-2023-0047- proposed rule contains a collection of information,’’ 0079 (‘‘Magana Cmt.’’). and Question 5 asked, ‘‘Would the proposed rule, 66American Dental Association, Cmt. on NPRM if promulgated, have a significant economic impact at 1 (Sept. 28, 2023), https://www.regulations.gov/ on a substantial number of small entities? If so, how comment/FTC-2023-0047-0078 (‘‘ADA Cmt.’’); could it be modified to avoid a significant economic 59Family First Life, LLC, Cmt. on NPRM at 2 Travel Technology Association, Cmt. on NPRM at impact on a substantial number of small entities?’’ (Sept. 29, 2023), https://www.regulations.gov/ 1, 4–5 (Sept. 29, 2023), https:// Id. at 49381–86, 49388. comment/FTC-2023-0047-0104 (‘‘Family First Life www.regulations.gov/comment/FTC-2023-0047- 56NPRM, 88 FR 49388. Cmt.’’). 0097 (‘‘Travel Tech. Cmt.’’). 57Yelp Inc., Cmt. on NPRM at 3 (Sept. 29, 2023), 60Trustpilot Cmt. at 2–3; Family First Life Cmt. 67Coalition of Civil Society Organizations, Cmt. https://www.regulations.gov/comment/FTC-2023- at 2–3. on NPRM at 1–3 (Sept. 29, 2023), https:// 0047-0088 (‘‘Yelp Cmt.’’); The Transparency 61Consumer Reports, Cmt. on NPRM at 2–3 (Sept. www.regulations.gov/comment/FTC-2023-0047- Company, Cmt. on NPRM at 1, 5 (Sept. 29, 2023), 29, 2023), https://www.regulations.gov/comment/ 0108; U.S. Public Interest Research Group https://www.regulations.gov/comment/FTC-2023- Education Fund, Cmt. on NPRM at 2 (Sept. 29, FTC-2023-0047-0099 (‘‘Consumer Reports Cmt.’’).
0047-0107 (‘‘Transparency Company Cmt.’’). 2023), https://www.regulations.gov/comment/FTC- 58Trustpilot, Cmt. on NPRM at 2 (Sept. 29, 2023), 62NPRM, 88 FR 49388. 2023-0047-0109 (‘‘US PIRG Cmt.’’). https://www.regulations.gov/comment/FTC-2023- 63Transparency Company Cmt. at 6. 68Markey Cmt. 0047-0084 (‘‘Trustpilot Cmt.’’). 64Trustpilot Cmt. at 3. 69Anderson Cmt. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68039 and testimonials and fines for and prohibit payments for reviews.’’77 more broadly, extending to the activities businesses and people who write them. A review platform’s comment of legitimate businesses that do not As a consumer, I often use reviews to ‘‘applaud[ed] . . . the Commission . . . uncover abuses that they ‘should have’ help determine whether a product or for its extensive efforts to address the identified, regardless of their good faith service is reliable; the prevalence of fake problem of deceptive review practices, efforts’’ and that ‘‘[s]uch an overbroad reviews makes this impossible.’’70A as reflected in the Commission’s notice rule would have significant unintended trade association commented, ‘‘The of proposed rulemaking, and . . . fully negative consequences on legitimate NPRM proposes rules that are support[ed] and endorse[d] the conduct.’’85An industry organization appropriately scoped to target the bad Commission’s proposed Rule.’’78Its commented that the proposed rule ‘‘is actors [who are] intent on committing suggestions for several provisions are an important step, and we share the fraud through fake or deceptive discussed below. A consumer group Commission’s goal of improving reviews. . . . The NPRM strikes the stated that the proposed rule ‘‘is consumer confidence in reviews and appropriate balance between enhancing needed’’ and ‘‘addresses an urgent testimonials’’ but ‘‘strongly urge[d] the the Commission’s tools to target bad problem: fabricated and otherwise Commission to reexamine . . . [four] actors and preserving industry deceptive reviews and ratings of provisions’’ to address what it viewed as flexibility to develop innovative and products and services,’’ but asked for First Amendment concerns and for effective solutions to maintain numerous modifications to strengthen other reasons.86The specific consumer confidence in reviews.’’71A it.79These proposals are discussed suggestions or concerns raised by these consumer organization stated, ‘‘The below. and other commenters are addressed Commission absolutely should finalize A few individual commenters80and below. In particular, whether in the text the proposed rule to better protect industry commenters81were supportive of the final rule or in the discussion shoppers and hold businesses of a rule but expressed the need for below, the Commission is clarifying the accountable.’’72 clarifications or modifications. An scope or meaning of various rule individual commenter wrote that ‘‘[a]ll provisions to cover the specific A number of individual consumers,73 of the rules proposed . . . make activities or conduct that harm a review platform,74other industry (common) sense’’ but identified ‘‘a few consumers and avoid ambiguity or members,75and consumer scenarios that highlight that the overbreadth.
organizations76supported the language in the proposed rules is a bit Only four commenters, two Commission’s proposal, but urged the ambiguous’’ and that with ‘‘steep Commission to go further and impose individual commenters87and two trade penalties like this, guidelines need to be additional requirements, such as by associations,88said that the proposed clear, concrete, AND simple so adding provisions that would apply to rule was unnecessary or unwarranted. businesses can understand.’’82Another third-party review platforms. As noted One of the individuals, wrote that ‘‘the individual commenter said that the above, such provisions would be rule seems to be unnecessary as it is proposed rule ‘‘takes great strides,’’ but beyond the scope of the rulemaking. that two proposed sections, 465.4 and unlikely to actually provide the benefit Similarly beyond the scope of the 465.6, are too restrictive.83A retailer to consumers of removing falsified rulemaking is an individual’s suggestion wrote, ‘‘On the whole, . . . the reviews’’ because it is difficult to that the Commission should restrict the Proposed Rule contains provisions that identify and trace fake reviews and highlighting of testimonials on websites are reasonable and would provide ‘‘punish[] an offender’’ and that the proposed rule ‘‘also has potential to additional protection to consumers’’ but penalize non-offenders’’ when 70Anonymous 1 Cmt. ‘‘there are a few provisions . . . that are competitors purchase ‘‘review 71Travel Tech. Cmt. at 1, 4. not well drafted or that need additional bombs.’’89The commenter asserted that 72US PIRG Cmt. at 2. language.’’84Another retailer said that it 73Michael Ravnitzky, Cmt. on NPRM at 1–2 (Aug. the FTC’s estimated benefits are based ‘‘supports a tailored rule that focuses on 6, 2023), https://www.regulations.gov/comment/ on faulty assumptions such as that ‘‘the FTC-2023-0047-0013 (‘‘Ravnitzky Cmt.’’); Adam the bad actors that harm consumers,’’ entirety of the loss’’ from false reviews Foster, Cmt. on NPRM at 1–2 (Sept. 21, 2023), but that the proposed rule ‘‘sweeps ‘‘would be eliminated simply because https://www.regulations.gov/comment/FTC-2023- 0047-0052 (‘‘Foster Cmt.’’); Anonymous 2, Cmt. on the rule is enacted.90The commenter 77Anonymous 3 Cmt.
NPRM at 1, 4 (Sept. 22, 2023), https:// said that the FTC should either maintain www.regulations.gov/comment/FTC-2023-0047- 78Yelp Cmt. at 1, 4–8.
Cmt. at 2–11. 84Hammacher Schlemmer Cmt. at 1. 90Id. 3. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68040 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations testimonials, etc.’’91The other it.95Further, the compliance costs 2. Definition-by-Definition Analysis individual commenter said that the estimated by the Commission are greatly
indication how or why a trade Commission’s responses to the A trade association commenter noted regulation rule is needed, or how such comments, and the provisions adopted correctly that the Commission’s a rule would more effectively address in the final rule.96 rulemaking authority is limited to acts concerns about such deceptive
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68041 entity.’’101The Commission is adopting appearances alone would likely not Commission’s Endorsement Guides,109 this recommendation to clarify the communicate anything to consumers the Commission did not intend for any intended scope of the definition. about the celebrity’s use or experience provision using the term ‘‘testimonials’’ For the reasons explained in this with a product, service, or business. to apply to endorsements by entities. To section, the Commission is finalizing A second trade association asserted clarify that the Commission does not the definition of ‘‘business’’ to mean an that the definition of a ‘‘celebrity intend for any provision using the term individual who sells products or testimonial’’ does not give advertisers ‘‘testimonials’’ to apply to endorsements services, a partnership that sells adequate notice as to when a testimonial by entities, the Commission is products or services, a corporation that is a ‘‘celebrity’’ testimonial or a substituting the word ‘‘individual’’ for sells products or services, or any other ‘‘consumer’’ testimonial.104The the word ‘‘person’’ wherever the word commercial entity that sells products or commenter requested that the appeared in the Commission’s original services. Commission provide further guidance proposal.110The only section of the rule on what constitutes a ‘‘well-known’’ that applies to endorsements by entities b. Celebrity Testimonial individual.105Based upon common or purported entities is §465.6, which The proposed rule defined ‘‘celebrity usage, well-known individuals include addresses company-controlled review testimonial’’ as ‘‘an advertising or those famous in the areas of websites or entities. However, §465.6 promotional message (including verbal entertainment, such as film, music, does not apply to consumer or celebrity statements, demonstrations, or writing, or sport, and those known to testimonials. depictions of the name, signature, the public for their positions or likeness, or other identifying personal successes in business, government, c. Clear and Conspicuous characteristics of an individual) that politics, or religion. Individuals who The proposed rule defined ‘‘clear and consumers are likely to believe reflects earn money through their work as conspicuous’’ to mean ‘‘that a required the opinions, beliefs, or experiences of ‘‘influencers’’ are also well known, as disclosure is easily noticeable (i.e., a well-known person who purchased, are those who have been featured in the difficult to miss) and easily used, or otherwise had experience with news or media. More important, understandable,’’ including in eight a product, service, or business.’’ The whether someone is well known does enumerated ways, listing proposed Commission is finalizing the definition not matter for purposes of rule requirements for ‘‘any communication of this term—which is used in §465.2, interpretation and enforcement because that is solely visual or solely audible,’’ Fake or False Consumer Reviews, any provisions that apply to celebrity ‘‘[a] visual disclosure,’’ ‘‘[a]n audible Consumer Testimonials, or Celebrity testimonials also apply to consumer disclosure,’’ and ‘‘any communication Testimonials—with one modification. testimonials. using an interactive electronic A trade association commenter said A business commenter suggested medium,’’ and providing, inter alia, that that the definition of a celebrity replacing ‘‘a well-known person’’ in the such disclosures ‘‘must use diction and endorsement should be clarified to definition with a ‘‘widely known all- syntax understandable to ordinary exclude ‘‘a situation where a celebrity or purpose public figure’’ or ‘‘widely consumers,’’ ‘‘must appear in each celebrity likeness appears or is used by known public figure’’ for the purpose of language in which the representation a business as a promotion, without any ‘‘clarity.’’106It said that Black’s Law that requires the disclosure appears,’’ specific advertising or opinions Dictionary defines the term ‘‘all-purpose and ‘‘must not be contradicted or presented.’’102The commenter gave the public figure’’ to mean ‘‘[s]omeone who mitigated by, or inconsistent with, example of an athlete who appears at a achieves such pervasive fame or anything else in the communication.’’ business to sign autographs or simply notoriety that he or she becomes a Based on the following, the Commission appears, without making any statements public figure for all purposes and in all is finalizing the definition of this term— or representations about the business.103 contexts.’’107To be ‘‘well known,’’ one which is used in §465.5, Insider Such situations should not be excluded need not have such pervasive fame as to Consumer Reviews and Consumer from the scope of the definition because be a public figure for all purposes and Testimonials—with one modification. a business’s use in advertising or in all contexts. For example, an A trade association commenter promotion of a celebrity or a celebrity’s influencer may be well known to a suggested not using the terms ‘‘diction’’ image can, even without any additional subset of individuals interested in a and ‘‘syntax’’ in the definition because statements, imply that the celebrity has particular subject. The commenter gave many of those subject to the rule ‘‘may a positive opinion of the business or its no justification for narrowing the not know the meaning of th[os]e products or services and therefore definition of a ‘‘celebrity testimonial,’’ words.’’111The commenter suggested constitute a celebrity testimonial. and the Commission declines to do so. replacing them with ‘‘words’’ and However, if consumers would not A public interest research center interpret the celebrity’s appearance to commenter said that the definitions of 109See Fed. Trade Comm’n, Guides Concerning reflect the celebrity’s opinions of, beliefs ‘‘celebrity testimonials’’ and ‘‘consumer Use of Endorsements and Testimonials in about, or experiences with, a business or testimonials’’ should ‘‘be broadened to Advertising (‘‘Endorsement Guides’’), 16 CFR 255.4. its products or services, then the explicitly include non-natural persons, 110The Commission is using the term ‘‘individual’’ in the context of this rule to mean a appearance is not a testimonial. That such as businesses and public sector single human being. See Individual (def. 1), issue is thus highly dependent on entities.’’108Although endorsements by Dictionary.com, LLC, https://www.dictionary.com/ specific facts. Further, to take the such organizations are addressed in the browse/individual (last visited July 5, 2024) commenter’s example, it is highly (defining ‘‘individual’’ as ‘‘a single human being, as distinguished from a group’’). The Commission unlikely that a celebrity who does 104IAB Cmt. at 14. notes that, in the context of a different rulemaking, nothing more than sign autographs or 105Id. it has proposed defining ‘‘individual’’ to mean ‘‘a appear at a business could violate 106Family First Life Cmt. at 4–5. person, entity, or party, whether real or fictitious, §465.2, because such signings or 107Id. at 5. See Black’s Law Dictionary (11th ed. other than those that constitute a business or 2019). government’’ under 16 CFR 461. See Fed. Trade 108Electronic Privacy Information Center, Cmt. on Comm’n, Trade Regulation Rule on Impersonation 101Yelp Cmt. at 3. NPRM at 3 (Sept. 29, 2023), https:// of Government and Businesses, 89 FR 15072, 15083 102NADA Cmt. at 5. www.regulations.gov/comment/FTC-2023-0047- (Mar. 1, 2024). 103Id. 0111 (‘‘EPIC Cmt.’’). 111NFIB Cmt. at 2.
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68042 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations ‘‘grammar.’’112‘‘Diction’’ means the noted that a staff business guidance the Commission would consider a choice and use of words.113‘‘Syntax’’ document, issued in 2000 and updated disclosure at the beginning of a text- involves the arrangement of words and in 2013, allowed for the possibility that only consumer review to ‘‘stand out.’’ phrases and is a subset of grammar.114 avoidable disclosures, e.g., those A trade association said that ‘‘the The Commission believes that the available through a hyperlink, could be average social media user is familiar meaning of ‘‘diction’’ and ‘‘syntax’’ are clear and conspicuous.118The with where text is found in any given sufficiently clear. Commission believes that a disclosure is social media post, and social media One trade association commenter not effective when it is not seen or platforms already make text visible asserted that it is unnecessary to have a heard, including when the reason for it against a variety of backgrounds’’ so definition of ‘‘clear and conspicuous’’ not being seen or heard is its ‘‘[r]equiring the endorsement-disclosure because the ‘‘phrase . . . has a meaning avoidability. The staff guidance said text to differ from other text is not only under FTC jurisprudence.’’115The that ‘‘[d]isclosures that are an integral impractical, but it could actually create definition is based on that jurisprudence part of a claim or inseparable from it confusion for social media users who and decades of Commission experience should not be communicated through a have grown accustomed to viewing all policing deceptive and unfair conduct. hyperlink,’’ and the purported text related to a post in a certain The Commission believes it is both independence and objectivity of a manner.’’124The Commission helpful and necessary that the rule reviewer or testimonialist is often recognizes that, on a social media provides more explicit guidance on integral.119Further, some readers platform that allows only uniform text, what does and does not constitute a misunderstood the staff guidance about it is not possible to have the text of a clear and conspicuous disclosure. the necessity of properly labeling disclosure appear in different text. As Several commenters asserted that the hyperlinks to convey the ‘‘importance, with a text-only consumer review, the proposed definition was overly nature, and relevance of the Commission would consider a prescriptive and not sufficiently information’’ to which the hyperlinks disclosure at the beginning of such a flexible.116The Commission disagrees lead. The staff guidance said that, to be text-only testimonial to ‘‘stand out.’’ On and reiterates that the definition effective, the label of the hyperlink visual platforms with superimposed contains basic, common-sense might need to give the essence of the text, it is quite possible and reasonable principles, such as requiring visual disclosure, with the hyperlink leading to require that the text of a disclosure disclosures in a size consumers can see to the details.120Even had these ‘‘stand out.’’ and audible disclosures at a volume qualifications been absent, the One commenter asserted that being they can hear. The definition merely Commission is not bound by the 2013 ‘‘unavoidable’’ and being ‘‘easily provides a baseline and provides a great staff business guidance, which is noticed’’ are ambiguous concepts.125 deal of flexibility in what a disclosure currently under review in light of an The Commission disagrees. should say and how it appears. The evolution of views over time regarding ‘‘Unavoidable’’ means that a consumer basic, enumerated requirements are online disclosures and avoidability.121 cannot avoid a disclosure such as by necessary for a disclosure to be One commenter asked whether a failing to click on a link or by failing to effective. disclosure in the first line of a product scroll. ‘‘Easily noticeable’’ is a simple Two commenters objected to the review would be considered and objective standard evaluated from requirement that internet disclosures be unavoidable.122For the purposes of this the perspective of a reasonable ‘‘unavoidable,’’ an objective standard rule, the Commission would consider consumer. that depends on whether consumers such a disclosure to be unavoidable. A Two commenters asserted that it could have avoided the disclosure, different commenter expressed concern would be difficult to make clear and which, per the definition is the case that the requirement that a disclosure conspicuous disclosures required by the when ‘‘a consumer must take any ‘‘stand out’’ would require new proposed rule on a small screen.126 action, such as clicking on a hyperlink formatting techniques for companies They did not explain why that would be or hovering over an icon, to see’’ the hosting reviews and preclude a the case, and the Commission does not disclosure.117The commenters do not disclosure from being in the review believe that compliance with the rule’s believe that a disclosure has to be itself.123For the purposes of this rule, disclosure requirement should be unavoidable for it to be effective; they difficult on handheld devices. 118Id. One commenter asserted that, because 112Id. 119Fed. Trade Comm’n, .com Disclosures: How to of the proposed definition of clear and 113See Diction (def. 2), Merriam-Webster.com Make Effective Disclosures in Digital Advertising at conspicuous, ‘‘[t]here is no need for the Dictionary, https://www.merriam-webster.com/ 10 (Mar. 2013), https://www.ftc.gov/system/files/ FTC to determine whether the resulting dictionary/diction (last visited July 5, 2024) documents/plain-language/bus41-dot-com- (defining ‘‘diction’’ as the ‘‘choice of words disclosures-information-about-online- speech is rendered deceptive, untrue, or especially with regard to correctness, clearness, or advertising.pdf. inaccurate.’’127The Commission effectiveness’’). 120Id. at 11. (‘‘Although the label itself does not disagrees. The only substantive 114See Syntax (defs. 1a, 1b), Merriam- need to contain the complete disclosure, it may be provision for which the definition is Webster.com Dictionary, https://www.merriam- necessary to incorporate part of the disclosure to webster.com/dictionary/syntax (last visited July 5, indicate the type and importance of the information relevant is §465.5. A business would 2024) (defining ‘‘syntax’’ as the ‘‘the way in which to which the link leads.’’) not violate that provision merely by linguistic elements (such as words) are put together 121See Press Release, Fed. Trade Comm’n, FTC having a disclosure that is not clear and to form constituents (such as phrases or clauses)’’ Looks to Modernize Its Guidance on Preventing conspicuous. Rather, the business and as ‘‘the part of grammar dealing with this’’). Digital Deception (June 3, 2022), https:// would have to engage in conduct that 115ANA Cmt. at 11. www.ftc.gov/news-events/news/press-releases/2022/ 116IAB Cmt. at 14; U.S. Chamber of Commerce, 06/ftc-looks-modernize-its-guidance-preventing- would be unfair or deceptive in the Cmt. on NPRM at 7–8 (Sept. 29, 2023), https:// digital-deception. absence of a clear and conspicuous www.regulations.gov/comment/FTC-2023-0047- 122Trustpilot Cmt. at 14. The same commenter disclosure (e.g., a corporate officer 0087 (‘‘Chamber of Commerce Cmt.’’); National also raised concerns about the applicability of the Retail Federation, Cmt. on NPRM at 10 (Sept. 29, definition to ratings and aggregate ratings. Id. That 2023), https://www.regulations.gov/comment/FTC- is issue is discussed below in the discussion of the 124Id. at 11. 2023-0047-0090 (‘‘NRF Cmt.’’). corresponding substantive rule provision. See infra 125ANA Cmt. at 11. 117IAB Cmt. at 14; Chamber of Commerce Cmt. section IV.E.6 of this document. 126IAB Cmt. at 14; NRF Cmt. at 11. at 8. 123NRF Cmt. at 10. 127ANA Cmt. at 11.
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68043 giving a consumer endorsement without the word ‘‘employee.’’ Whether ‘‘#ad’’ communication makes an endorsement disclosing that they are an insider). As would be an adequate disclosure would in only its visual or audio portion, then discussed below, the Commission is depend on the specific context. It could it should be sufficient for a disclosure finalizing proposed §465.5 with a be adequate at the beginning of a social to appear in the same format as the modification to clarify to clarify that the media post by the testimonialist, but it claim that requires the disclosure. On provision is limited to conduct that would likely be inadequate in a the other hand, if an endorsement is would violate section 5 of the FTC television ad or magazine ad featuring conveyed in both the audio and visual Act.128The same commenter also the testimonialist. Because the only portions of a communication, then the surmised, based on the similarity of the provision for which the definition is disclosure should be made in both the definition of ‘‘clear and conspicuous’’ to relevant is §465.5, which addresses the audio and visual portions. Consumers the definition of the same phrase in the failure to disclose insider relationships, can watch a video with the sound off or Endorsement Guides, that the the disclosure could be as simple as the listen to it without looking at the screen. Commission intends that the examples testimonialist describing a product as The Commission is changing the used in the Endorsement Guides would ‘‘my company’s’’ or ‘‘my wife’s relevant language to, ‘‘[i]n any also be examples of violative behavior company’s.’’ communication made through both under the rule.129That is not the case. A commenter asserted that visual and audible means, such as a The Endorsement Guides address a disclosures ‘‘utilizing a social media television advertisement, the disclosure broader range of conduct than the rule. platform’s built-in disclosure tool must be presented in at least the same Of the three examples in the should be . . . at least sufficient enough means as the representation(s) requiring Endorsement Guides that illustrate to avoid the risk of penalties under the the disclosure.’’ This change makes the whether disclosures are clear and FTC’s rulemaking authority.’’134As it rule less restrictive while still conspicuous, two of them address has previously said, the Commission accomplishing the Commission’s goal of issues—the payment of influencers and supports development of effective, built- ensuring that consumers are fully implied typicality—not covered by the in disclosure tools but is concerned that informed. A different trade association rule.130The third example involves a some of the existing tools lead to noted that the ‘‘simultaneous disclosure disclosure that individuals appearing in inadequate disclosures that are too requirement is confusing and would a television ad and giving testimonials poorly contrasting, fleeting, or small, or benefit from examples of sufficient are paid actors.131Such conduct would may be placed in locations where they simultaneous disclosure.’’138Because not be covered by the rule unless the do not catch the user’s attention.135 the Commission is not finalizing the underlying testimonials were fake or Whether a business could be subject to simultaneous disclosure requirement false. civil penalties for social media posts by contained in the proposed rule, it is not One commenter, a trade association, insiders who utilized a social media providing further guidance on the stated that it was ‘‘unclear if the platform’s built-in disclosure tool would meaning of simultaneous. Commission has considered any social depend on whether a court would find The second trade association also media platform constraints with respect that the business met the knowledge asked ‘‘if a social media influencer posts to the length of posts (e.g., character and standard of section 5(m)(1)(A) of the a video and discloses verbally in the time limits),’’ and asked (1) whether and FTC Act. video that they have a brand how hashtags can meet the ‘‘clear and A trade association’s comment ambassador relationship with the conspicuous’’ requirement, (2) whether expressed concerns about the proposed retailer/brand, is it sufficient to display ‘‘‘#Ad’ is a sufficient visual disclosure requirement that ‘‘[i]n any in the text accompanying the posted of a material relationship,’’ and (3) that communication made through both video some written disclosure’’ or the Commission ‘‘provide more visual and audible means, such as a would the disclosure ‘‘need to be examples, including appropriate use of television advertisement, the disclosure embedded or flash across the video hashtags in disclosures, in its final must be presented simultaneously in itself.’’139The rule does not address or rule.’’132Another trade association both the visual and audible portions of apply to an influencer’s disclosure of a requested in its comment that the the communication even if the brand ambassador relationship. The Commission provide ‘‘visual examples representation requiring the disclosure rule’s only disclosure requirements are of ‘insider’ endorsement disclosures that is made in only one means.’’136The in §465.5 and apply to company the Commission finds acceptable.’’133 commenter said that ‘‘it is unnecessary insiders. Whether a testimonial in a The Commission believes it is not and duplicative to require video social media post by a company insider difficult to comply with the rule’s endorsements that include visual and requires a superimposed textual disclosure requirements in the social audio components to include both disclosure depends on whether there is media context. Depending upon their visual and audio disclaimers,’’ and an endorsement communicated by the wording and appearance, hashtags can ‘‘requiring an additional visual visual portion of the post. If there is an be clear and conspicuous for purposes disclaimer, on top of a disclaimer that endorsement in the visual portion, there of the rule. In a social media post an endorser may easily include via would need to be a disclosure in the promoting a brand, it might be sufficient audio, is cumbersome, and restricts visual portion. If the endorsement is to prominently disclose an employee companies’ marketing capabilities.’’137 communicated only in the audio portion relationship via a hashtag beginning On reflection, in the context of this of the post, there would not need to be with the brand name and followed by rulemaking and as to the relationships a disclosure in the visual portion. of company insiders, if a
0094 (‘‘RILA Cmt.’’). 136NRF Cmt. at 11. 138RILA Cmt. at 5. 133NRF Cmt. at 10. 137Id. 139Id.
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68044 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations submitted by the consumer or purported reviews, such as Yelp’’ and whether ‘‘it fake. Just because some reviews are consumer and that is published to a include[s] any website where reviews unreliable does not suggest that reviews website or platform dedicated in whole are possibly posted, like Reddit?’’145 are generally unreliable. The or in part to receiving and displaying The commenter continued, ‘‘Would a Commission declines to adopt this such evaluations.’’ The proposed website be excluded if only a very small recommendation. definition also noted that, for the portion of the website contained To conform with the Office of the purposes of the rule, consumer reviews consumer evaluations?’’146The Federal Register’s drafting requirements, include consumer ratings regardless of commenter asserted that ‘‘[a]ll fake the Commission is changing a reference whether they include any text or reviews and ratings that are used to to ‘‘this Rule’’ to ‘‘this part.’’151 narrative. The Commission has market a product or service should be determined to finalize the definition of captured in the . . . Rule—no matter e. Consumer Testimonial this term—which is used in §§465.2 where they are posted.’’147The The proposed rule defined ‘‘consumer through 465.6—with a minor, technical definition is not limited to consumer testimonial’’ as ‘‘an advertising or change. reviews on websites that are dedicated promotional message (including verbal A comment from a review platform entirely to posting such reviews. It statements, demonstrations, or supported the proposed definition, would also cover reviews on a portion depictions of the name, signature, calling it ‘‘particularly clear and of a website, no matter how small a likeness, or other identifying personal holistic.’’140 portion, that is dedicated to receiving characteristics of an individual) that A comment from an individual and displaying such reviews, such as a consumers are likely to believe reflects asserted that the ‘‘definition of reviews page or the review sections of the opinions, beliefs, or experiences of ‘consumer’ implies an individual who product pages on a retailer’s website. a consumer who has purchased, used, or purchased the product for their own The definition would not, however, otherwise had experience with a use’’ and that when a ‘‘product is cover consumer statements about product, service, or business.’’ The provided by the company seeking a products or services on a website or Commission is finalizing the definition review, for the purposes of it being portion of a website, such as Reddit, of the term—which is used in §§465.2 reviewed, the reviewer is arguably not a that is not dedicated to receiving and and 465.5—as originally proposed. consumer.’’141The Commission displaying reviews. Such free-floating A trade association commenter disagrees that a ‘‘consumer’’ is consumer statements are outside of the expressed concern that consumers necessarily a purchaser. For purposes of generally understood context in which seeing a clearly dramatized television the rule, a consumer is a person who content is submitted and published as commercial might unreasonably believe purchased, used, or otherwise had reviews. Under some circumstances, that the actors’ scripted lines actually experience with a product, service, or such statements might be considered reflected their opinions, beliefs, or business. ‘‘consumer testimonials,’’ such as when experiences and could therefore be A trade association commenter an advertiser has paid for them. considered consumer testimonials.152It suggested deleting the definition’s A comment from a review platform suggested clarifying the definition by element that a consumer review be raised two issues with the ‘‘consumer inserting ‘‘reasonably in the ‘‘published.’’142It said that a review’’ definition.148It said that ‘‘[b]are circumstances’’ after ‘‘that consumers ‘‘consumer review should still be ratings provide no context, making them are likely to believe.’’153The considered a ‘review’ before it is virtually useless for other consumers or Commission agrees that it would not be publicly displayed by a website or to businesses that might use consumer reasonable for viewers to consider ‘‘an platform.’’143Although that may be true feedback to improve their services’’ and obviously fictional dramatization’’ to be for some purposes, the Commission suggested that ‘‘the Commission an endorsement.154The Commission declines to make that change. A differentiate between reviews and does not, however, believe it is consumer review that is submitted to a ratings.’’149The fact that bare ratings do necessary to modify the definition. The website or platform but never published not provide context does not mean that concept of ‘‘reasonable consumers’’ does not in and of itself deceive consumers do not rely on them or on from FTC jurisprudence155is consumers, although the failure to aggregate ratings that include bare incorporated into the concept of publish a review may be deceptive ratings. The Commission does not see a consumers being likely to believe pursuant to paragraphs (a)(1) and (b) of reason to distinguish between reviews something.
§465.7. Paragraphs (a)(1) and (b) of and ratings for the purposes of the rule, The same public interest research §465.7 are worded in a way that does and the commenter did not provide center that commented, as discussed not limit their application to published such a reason. The same commenter above, that the Commission should reviews, because they relate to also expressed ‘‘concern[ ] with the broaden the definition of ‘‘celebrity suppressed reviews. definition’s use of the word testimonials’’ to explicitly include non- A comment from a consumer ‘purported[,]’ . . . which has a negative natural persons (such as businesses and advocacy organization suggested connotation that feeds into the false deleting the portion of the definition narrative that consumer reviews are that refers to publication to a website or inherently unreliable’’ and suggested 151The Commission is making this change throughout the rule, including in §§465.2(a), (b), platform ‘‘dedicated in whole or in part replacing ‘‘purported’’ with different and (c), 465.4, 465.5(a), 465.6, 465.7, 465.8, and to receiving and displaying such language.150The definition simply 465.9. evaluations.’’144It asked whether the recognizes and accounts for the 152NFIB Cmt. at 2–3. definition would ‘‘only apply to reviews undisputed fact that some reviews are 153Id. at 4. on a website ‘dedicated’ to posting 154See Endorsement Guides, 16 CFR 255.0(g)(2). 145Id. 155See, e.g., Fed. Trade Comm’n, FTC Policy Statement on Deception, 103 F.T.C. 174, 176–77 140Trustpilot Cmt. at 8. 146Id.
f. Indicators of Social Media Influence and efficient approach that avoids adopts the definition of ‘‘purchase a having to modify the rule when such consumer review’’—a term which is The proposed rule defined ‘‘indicators metrics change. The Commission has no used in §465.2, Fake or False Consumer of social media influence’’ as ‘‘any reason to believe that its approach will Reviews, Consumer Testimonials, or metrics used by the public to make result in substantial disputes in its Celebrity Testimonials—largely as assessments of an individual’s or cases. proposed, with two modifications entity’s social media influence, such as For the reasons explained in this described below. followers, friends, connections, section, the Commission is finalizing An individual commenter wrote, subscribers, views, plays, likes, reposts, the definition of ‘‘indicators of social ‘‘[r]egarding payment for reviews, the and comments.’’ For the following media influence’’ to mean any metrics use of . . . discounts on future reasons, the Commission adopts the used by the public to make assessments purchases from the business should be definition of ‘‘indicators of social media of an individual’s or entity’s social specifically prohibited as well.’’166A influence’’—a term which is used in media influence, such as followers, review platform commenter suggested §465.8, Misuse of Fake Indicators of friends, connections, subscribers, views, ‘‘that the Commission list additional Social Media Influence—largely as plays, likes, saves, shares, reposts, and examples of . . . what the Commission proposed, with one modification comments. considers ‘value.’’’167Specifically, it described below. suggested adding ‘‘gift certificates,’’ A comment from a consumer g. Officers ‘‘services,’’ ‘‘discounts,’’ ‘‘coupons,’’ advocacy organization suggested The proposed rule defined ‘‘officers’’ and ‘‘contest entries.’’168Such explicitly including ‘‘Saves’’ and as ‘‘including owners, executives, and examples of value were covered by the ‘‘Shares’’ within the definition of managing members of a business.’’ The proposed definition, which applies to indicators of social media Commission is finalizing the definition ‘‘something of value’’ provided in influence.’’158The commenter of this term—which is used in §§465.2 exchange for a consumer review’’ but, explained that the number of times that and 465.5. for purposes of clarification, the social media posts are saved or shared A review platform commenter said Commission is adding these examples of serves as indicators of social media that including ‘‘managing members’’ in value in the final definition. The review influence and that both ‘‘Saves’’ and the definition of ‘‘officers’’ ‘‘could platform commenter also suggested ‘‘Shares’’ are offered for sale on the suggest that managers are officers.’’163 adding ‘‘other incentives,’’169which the internet.159Because the NPRM The commenter also suggested that the Commission thinks is unnecessary, proposed to define the term as ‘‘any definition of ‘‘officers’’ ‘‘should be given that the list is only exemplary and metrics used by the public to make refined to only include ‘senior preceded by the words ‘‘such as.’’ assessments of an individual’s or Another review platform commenter management members’ of a business,’’ entity’s social media influence,’’ suggested using language explicitly thereby creating ‘‘a clearer distinction ‘‘Saves’’ and ‘‘Shares’’ were already stating that the listed examples of between those in a position of covered by the definition as originally ‘‘value’’ are not exhaustive.170The leadership versus lower-level proposed. However, merely for the Commission believes that, because the employees, or staff that may have the purpose of clarification, the phrase ‘‘such as’’ precedes the list of title ‘manager’ without any practical Commission is adding them to the listed examples, this is already sufficiently level of control and power to exert examples of indicators. The same clear from the language of the influence over others.’’164 commenter also suggested that the definition.
indicators.’’161The commenter managers and is therefore not limiting continued that ‘‘whether a given metric 166John Christofferson, Cmt. on NPRM (Aug. 16, is ‘used by the public to make the definition of ‘‘officers’’ to ‘‘senior 2023), https://www.regulations.gov/comment/FTC- management members.’’ A new 2023-0047-0025.
assessments of an individual’s or definition of ‘‘managers’’ is discussed 167Yelp Cmt. at 5. below.165 168Id.
157EPIC Cmt. at 3. 170Trustpilot Cmt. at 8.
158NCL Cmt. at 3. 162Id. at 5. 171The Commission is also replacing the term 159Id. at 3–6. 163Trustpilot Cmt. at 12. ‘‘goods’’ with the word ‘‘products’’ in the final 160Id. at 6–8. 164Id. definition of the phrase ‘‘purchase a consumer 161Yelp Cmt. at 4–5. 165See infra Section IV.A.3.b of this document. review’’ (final §465.1(m)). VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68046 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations of value, such as money, gift certificates, Commission’s original proposal. Aside comment from a review platform products, services, discounts, coupons, from this minor, clarifying modification, suggested that the Commission expand contest entries, or another review, in the Commission has determined that it the definition to include threats based exchange for a consumer review. will finalize the definition of the term— on form contracts that violate the which is used in §§465.2 and 465.5— Consumer Review Fairness Act
i. Reviewer as originally proposed. (‘‘CRFA’’).180Given that such form The proposed rule defined ‘‘reviewer’’ contracts are already prohibited by the
j. Substantially Different Product creator of a review of possible legal The Commission is partially adopting The proposed rule defined proceedings.’’176A comment from State the commenter’s suggestion by adopting ‘‘substantially different product’’ as a Attorneys General suggested changing language that is loosely based upon product that differs from another ‘‘unjustified’’ to ‘‘unfounded, Federal Rule of Civil Procedure 11(b)(2) product in one or more material groundless, or unreasonable’’ in order to and (3).185However, the Commission is attributes other than color, size, count, provide a more objective legal standard not adopting the phrase ‘‘extending, or flavor. The defined term appeared in for evaluating the types of legal threats modifying, or reversing existing law or proposed §465.3, Consumer Review or that are not permitted.177The establishing new law’’ because it is Testimonial Reuse or Repurposing, Commission agrees in part with this highly doubtful that companies would which the Commission is no longer recommendation. As a clarification of threaten consumers by asserting that, what it intended, the Commission is while no lawsuit is warranted under planning on finalizing.174Given that the changing ‘‘unjustified’’ to ‘‘unfounded existing law, they will bring a lawsuit Commission has decided not to proceed or groundless.’’ Specifically, this change anyway and try to change existing law. with proposed §465.3 at this time, it is avoids the unintended, potentially Instead, the Commission chooses to not including a definition of broader scope of the term ‘‘unjustified,’’ clarify the definition by changing ‘‘substantially different product’’ in the which is also freighted with subjective ‘‘threat to file a baseless legal action’’ to final rule.
k. Testimonialist reflect objective legal standards. For or other legal contentions unwarranted The proposed rule defined similar reasons, the Commission is not by existing law or based on factual adding ‘‘unreasonable,’’ a term which is contentions that have no evidentiary ‘‘testimonialist’’ as ‘‘the person giving or unnecessary and not as precise in this support or will likely have no purportedly giving a consumer particular situation as ‘‘unfounded or evidentiary support after a reasonable testimonial or celebrity testimonial.’’ groundless.’’ opportunity for further investigation or None of the comments received The State Attorneys General comment discovery.’’ addressed the definition of also recommended that the definition A review platform commenter was testimonialist. As already discussed in include ‘‘a threat to enforce an concerned that the proposed definition’s section IV.A.2.b of this document, the agreement that is void, voidable, or ‘‘wording opens the door to bad actors Commission is substituting the word unenforceable.’’178It said that the word being able to claim defamation on ‘‘individual’’ for the word ‘‘person’’ ‘‘unjustified’’ may be insufficient to weakly justified grounds and to seek to wherever the word appeared in the address merchants arguing that their game the system by deliberately legal threats were justified by their non- constructing legal terms which can then 172Yelp Cmt. at 4.
flexibility by removing the listed attributes 175Transparency Company Cmt. at 14. 181Consumer Review Fairness Act of 2016 altogether. TINA Cmt. at 6; Amazon Cmt. at 9–10; Chamber of Commerce Cmt. at 6–7; RILA Cmt. at 176NFIB Cmt. at 4. §2(b)(1), 15 U.S.C. 45b(b)(1). 3; NRF Cmt. at 7–8; IAB Cmt. at 8.; ANA Cmt. at 177State Attorneys General, Cmt. on NPRM at 2– 182Consumer Reports Cmt. at 10. 15–16; NRF Cmt. at 8. Other commenters asked 3 (Sept. 29, 2023), https://www.regulations.gov/ 183Family First Life Cmt. at 16. questions about how the definition would apply to comment/FTC-2023-0047-0100 (‘‘State AGs Cmt.’’). 184Id. an updated version of a product or to different 178Id. at 2. 185See Fed. R. Civ. P. 11(b)(2) and (3). scenarios. Magana Cmt.; NADA Cmt. at 5. 179Id. at 3. 186Trustpilot Cmt. at 17–18. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68047 concern, especially given its inclusion fraudulent in nature’’ or ‘‘retailers particularly problematic,194noting that of language from Federal Rule of Civil sharing reviews with third-party someone ‘‘may have the title ‘manager’ Procedure 11(b)(2) and (3), which is platforms such as Google.’’189Within without any practical level of control intended to avoid such misuse of the both §§465.2 and 465.5, however, and power to exert influence over court system. In any event, the ‘‘disseminate’’ applies only to others. For example, it is possible in a Commission is deleting ‘‘such as an testimonials, not to consumer reviews. business for a person to have the title action for defamation that challenges One of the basic canons of statutory and ‘manager’ while holding a relatively truthful speech or matters of opinion’’ regulatory construction is that words are junior position and without having any because this example is unnecessary to be understood in their ordinary, employees that directly report to and possibly confusing in this context. everyday meanings—unless the context them.’’195Proposed and final §465.5(c) For the reasons explained in this indicates that they bear a technical address ‘‘managers’’ soliciting or section, the Commission is adopting the sense.190In §§465.2 and 465.5, the demanding consumer reviews from proposed definition of an ‘‘unfounded Commission intended for the term to employees or agents. In this context, the or groundless legal threat’’ with have its ordinary, everyday meaning— Commission’s intent was for the term clarifying changes. The final definition that is, to spread or to convey ‘‘manager’’ to be limited to those who provides that an ‘‘unfounded or something, rather than the proposed supervise others. Thus, the Commission groundless legal threat’’ is a legal threat definition.191Accordingly, the is adopting a definition for the term based on claims, defenses, or other legal Commission declines to add the ‘‘manager’’ to make this clarification, contentions unwarranted by existing proposed definition. which will ensure that §465.5(c) is not law or based on factual contentions that interpreted as more restrictive than the have no evidentiary support or will b. Manager Commission intended.196 likely have no evidentiary support after The term ‘‘manager’’ appeared in A business commenter that operates a reasonable opportunity for further proposed §465.5, Insider Consumer in the insurance-marketing space investigation or discovery. Reviews and Consumer Testimonials, explained that independent-contractor 3. Proposed Additional Definitions and was undefined. Due to the insurance agents who build their own In Question 7 of the NPRM, the clarifying changes to §465.2 that are agencies are referred to as ‘‘managers’’ Commission asked what additional discussed in further detail below, the and asked that the definition of definitions, if any, are needed. In term is now included in both final ‘‘managers’’ expressly carve out Questions 14 and 18 of the NPRM, the §465.5 and final §465.2, Fake or False ‘‘managers in the insurance marketing Commission asked whether it should Consumer Reviews, Consumer space’’ or at least clarify that managers define the terms ‘‘managers’’ and Testimonials, or Celebrity Testimonials. are those ‘‘who are employed by the ‘‘relatives,’’ respectively. As discussed One business commenter noted that it company.’’197As similar situations may below, various commenters suggested is unnecessary to define ‘‘manager.’’192 arise in other contexts, the Commission that the Commission define the An industry organization wrote in its is adopting the commenter’s latter following terms and phrases that appear comment that the failure to define the recommendation, and clarifying that in the proposed rule: ‘‘dissemination,’’ term ‘‘manager’’ ‘‘raises concerns about managers are employees of the ‘‘manager,’’ ‘‘relative,’’ and ‘‘purchase or the number of a firm’s employees businesses. impacted.’’193A review platform procure fake indicators.’’ One For the reasons explained in this commenter said that using the term commenter suggested that the section, the final rule adopts a ‘‘manager’’ without any definition is Commission define ‘‘review hosting’’ definition for the term ‘‘manager.’’ The and exclude it from the scope of final rule defines the term ‘‘manager’’ as §465.2.187 189Id. at 3–4. The Commission elsewhere an employee of a business who addresses whether §465.2 applies to a business supervises other employees or agents a. Dissemination allowing reviews to be posted or published on its web page or to retailers sharing reviews with third- and who either holds the title of a The term ‘‘disseminate’’ appears in party platforms. See infra Section IV.B.5 of this ‘‘manager’’ or otherwise serves in a both proposed and final §§465.2 and document. managerial role. 465.5. A comment from a trade 190See, e.g., Kouichi Taniguchi v. Kan Pac. association stated that the Commission Saipan, Ltd., 566 U.S. 560, 566 (2012); Tanzin v. c. Relative Tanvir, 592 U.S. 43, 48 (2020) (‘‘Without a statutory should define ‘‘disseminate’’ ‘‘within definition, we turn to the phrase’s plain meaning The term ‘‘relative’’ appeared in Proposed §465.2(b) to include only the at the time of enactment.’’); Lamar, Archer & Cofrin, proposed §465.5, Insider Consumer affirmative posting or intentional LLP v. Appling, 584 U.S. 709, 715 (2018) (‘‘Because Reviews and Consumer Testimonials. It the Bankruptcy Code does not define the words distribution of reviews, where a ‘statement,’ ‘financial condition,’ or ‘respecting,’ we was undefined in the proposed rule. company has actual knowledge that the look to their ordinary meanings.’’). Two commenters suggested that the reviews are false or fraudulent in 191Disseminate, Dictionary.com, LLC, https:// Commission define the term ‘‘relative.’’ nature.’’188The commenter continued www.dictionary.com/browse/disseminate (last by saying that ‘‘disseminate’’ should visited July 5, 2024) (defining ‘‘disseminate’’ as ‘‘to A comment from a review platform said scatter or spread widely, as though sowing seed; that a plain reading of ‘‘relative’’ could ‘‘not include passive actions such as promulgate extensively; broadcast; disperse’’); cover ‘‘an extremely broad range of allowing a review to be posted or Disseminate, Merriam-Webster.com Dictionary, people’’ and ‘‘is likely to extend to published on a company’s web page, https://www.merriam-webster.com/dictionary/ unless the company has actual disseminate (last visited July 5, 2024) (defining persons who may not be biased since ‘‘disseminate’’ as ‘‘to spread abroad as though they are in reality not close to the knowledge that the review is false or sowing seed’’ or ‘‘to disperse throughout’’);
a stepbrother’s child from a previous A retailer submitted a comment Numerous individual commenters marriage, or friends that are considered suggesting that ‘‘review hosting’’ be wrote about the importance of authentic family.’’200The commenter continued defined and excluded from the scope of reviews or testimonials and that fake or that ‘‘[l]arge companies creating §465.2.206The commenter suggested false ones should be prohibited.209A the following definition: technology company commenter wrote monitoring programs for testimonials that it ‘‘would welcome rules to prohibit need some clarity about what relatives Review hosting includes but is not limited will be captured under the Rule.’’201 to activity associated with maintaining a fake reviews and place stronger repository of consumer reviews and obligations on businesses who host As discussed below, the Commission testimonials for display such as: offering them to better protect consumers.’’210 believes that some rule provisions review submission functionality, collecting A celebrity commenter wrote that he should be limited to ‘‘immediate and moderating reviews, organizing and had ‘‘received more than 100 emails relatives.’’202The Commission is displaying reviews, aggregating reviews into from consumers who have been induced adding a definition of an ‘‘immediate star ratings, and providing guidance to to purchase fake products through the relative,’’ which clarifies that the term consumers about how to leave reviews where mis-use of . . . [his] image and the refers to a spouse, parent, child, or no incentive is offered.207 images of other Shark Tank sibling. In the final rule, the term As discussed below, the Commission ‘sharks.’’’211 ‘‘immediate relative’’ is used in did not intend for its proposal to apply A business commenter suggested §§465.2(c) and 465.5(c). to simply hosting consumer reviews.208 explaining the ‘‘financial consequence The Commission is therefore, for the of fake reviews,’’ such as whether it is d. Purchase or Procure Fake Indicators purpose of clarification, adopting a ‘‘∼$50,000 per fake review.’’212The The phrase ‘‘purchase or procure fake definition of the term ‘‘consumer review maximum civil penalty is currently indicators of social media influence’’ is hosting’’ in order to exclude mere $51,744 per violation, but courts must used in proposed and final §465.8, review hosting from certain provisions take into account the statutory factors Misuse of Fake Indicators of Social of the rule. The Commission is not set forth in section 5(m)(1)(C) of the FTC Media Influence. The phrase was adopting the commenter’s proposed Act and may impose much lower per- undefined in the proposed rule. definition because it included activities violation penalties.213Ultimately, courts that go beyond the core of mere review will also decide how to calculate the A consumer advocacy commenter hosting and because it begins with the number of violations in a given case. stated that leaving the terms ‘‘purchase’’ phrase ‘‘include but is not limited to,’’ and ‘‘procure’’ undefined ‘‘leaves 1. Common Language in §465.2(a), (b), which would allow it to include an ambiguity regarding which types of and (c)
incentives are restricted,’’ and suggested The final rule defines ‘‘consumer review Proposed §465.2 consisted of three defining the phrase ‘‘purchase or paragraphs, each of which sought to hosting’’ as providing the technological procure fake indicators of social media address unfair or deceptive conduct by means by which a website or platform influence’’ to mean ‘‘to provide allows consumers to see or hear the something of value, such as money, consumer reviews that consumers have 209See, e.g., William Hardy, Cmt. on NPRM (July goods, or another indicator of social 31, 2023), https://www.regulations.gov/comment/ submitted to the website or platform.
media influence (i.e.[,] a ‘like’), in FTC-2023-0047-0002; Eric Beback, Cmt. on NPRM The exclusion of ‘‘consumer review (Aug. 1, 2023), https://www.regulations.gov/ exchange for a fake indicator of social hosting’’ from certain sections of the comment/FTC-2023-0047-0005 (‘‘Beback Cmt.’’); media influence.’’203The Commission rule is discussed below. Hippensteel Cmt.; Anderson Cmt.; Nathan Wilson, declines to adopt the commenter’s Cmt. on NPRM (Aug. 2, 2023), https:// suggestion.204The definition proposed B. §465.2—Fake or False Consumer www.regulations.gov/comment/FTC-2023-0047- 0008; fred foreman, Cmt. on NPRM (Aug. 6, 2023), by the commenter would unnecessarily Reviews, Consumer Testimonials, or https://www.regulations.gov/comment/FTC-2023- narrow the types of actions that would Celebrity Testimonials 0047-0012; Ravnitzky Cmt. at 1; Fribance Cmt.; Ian be covered by the rule to an exchange. Proposed §465.2 addressed fake or wolk, Cmt. on NPRM (Aug. 15, 2023), https:// www.regulations.gov/comment/FTC-2023-0047- In the final rule, the Commission false consumer reviews, consumer 0020; Edborg Cmt.; Anonymous 5, Cmt. on NPRM intends for the term ‘‘procure’’ to bear testimonials, and celebrity testimonials. (Aug. 18, 2023), https://www.regulations.gov/ its ordinary, everyday meaning—that is, Based on the following, the Commission comment/FTC-2023-0047-0030; Anonymous 1 Cmt.; Steven Osburn, Cmt. on NPRM (Aug. 22, 2023), has determined to finalize these https://www.regulations.gov/comment/FTC-2023- 198Trustpilot Cmt. at 12. 0047-0033 (‘‘Osburn Cmt.’’); Ludlam Cmt.; Janette 199Id. 205See Procure (def. 1), Merriam-Webster.com Ponticello, Cmt. on NPRM (Sept. 5, 2023), https:// 200Chamber of Commerce Cmt. at 7. Dictionary, https://www.merriam-webster.com/ www.regulations.gov/comment/FTC-2023-0047- 201Id. dictionary/procure (last visited July 5, 2024) 0042; Hannah Abbott, Cmt. on NPRM at 1 (Sept. 20, 202See infra Section IV.E.2 of this document. (establishing that the word ‘‘procure’’ means, 2023), https://www.regulations.gov/comment/FTC- 203Consumer Reports Cmt. at 4. among other things, ‘‘to get possession of 2023-0047-0051 (Abbott Cmt.). 204Commenters also expressed concern about or (something)’’ or ‘‘to obtain (something) by particular 210Pasabi, Cmt. on NPRM at 2 (Sept. 29, 2023), sought guidance on the meaning of the term care and effort’’). https://www.regulations.gov/comment/FTC-2023- ‘‘procure’’ as used in proposed §465.2(c), but they 206Amazon Cmt. at 7. As discussed below, other 0047-0103. did not expressly suggest that the Commission commenters also argued that §465.2 should not 211Mark Cuban, Cmt. on NPRM (Sept. 25, 2023), define the term. The use of the term ‘‘procure’’ in apply to merely hosting reviews. See infra section https://www.regulations.gov/comment/FTC-2023- §465.2 is discussed below in the context of that IV.B.5 of this document. 0047-0066. substantive provision. See infra Section IV.B.4 of 207Id. at 7. 212Transparency Company Cmt. at 9. this document. 208See infra section IV.B.5 of this document. 213See 15 U.S.C. 45(m)(1)(C). VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68049 prohibiting specified types of reviews or experiences of the reviewers and misrepresentations. The commenter testimonials: (1) by someone who ‘‘does testimonialists are prevalent. went on to question ‘‘what constitutes not exist,’’ (2) by someone ‘‘who did not The same trade association and an ‘actual experience,’’’ asking whether use or otherwise have experience with another one expressed concern that the a person who saw a label had actual the product, service, or business that is ‘‘prohibition on all reviews that are experience with it and whether a person the subject’’ of it, or (3) ‘‘that materially authored by individuals that [sic] ‘do who tasted an item purchased at a misrepresents, expressly or by not exist’ or have not used the product restaurant but did not visit the implication, the [person’s] . . . would prohibit a wide swath of non- restaurant had actual experience.222The experience with the product, service, or deceptive speech, including for proposed provision did not use the term business.’’ For the purpose of the example, any satirical reviews that a ‘‘actual experience,’’ and the persons in following discussion, references to ‘‘fake business authors, creates, sells, the commenter’s posited hypotheticals or false’’ reviews or testimonials cover purchases, disseminates, or did have legitimate experience with the these three types of reviews or procures.’’218As discussed in the product or service but should not testimonials. NPRM, the Commission’s intent was to prohibit misrepresentations resulting misrepresent that experience as more A trade association asserted that the from reviews or testimonials by than it was. The commenter also said Commission lacked sufficient evidence someone who does not exist or who did that ‘‘it is unclear if the . . . element— of prevalence of reviews and not use or otherwise have experience materially misrepresenting the testimonials that ‘‘materially with the product, service, or experience with the product or misrepresent[] . . . the reviewer’s or business.219The Commission is unsure service—relates to the experience or an testimonialist’s experience.’’214The of the extent to which there are satirical opinion about the product or trade association asserted that some of reviews that could run afoul of the service.’’223It relates to the person’s the cases cited by the Commission also provision as proposed. Nonetheless, ‘‘experience’’ with the product or involved ‘‘actual fake reviews’’ and upon a review of the comments, the service, that is, what actually happened therefore should not count as evidence Commission now recognizes that absent when they used or otherwise of prevalence.215The Commission an express reference to material experienced it and not simply their disagrees: a fake or fabricated review misrepresentations, the provision could ‘‘opinion’’ of it. The same commenter misrepresents the purported reviewer’s be interpreted to prohibit other asked whether ‘‘an actor portraying an experience (e.g., that the reviewer used potentially non-deceptive speech, such actual reviewer’’ is misrepresenting the product and what their experience as the use of virtual influencers.220To was). The commenter also asserted that avoid this unintended consequence, the their experience as long as it is ‘‘clear five of the cases cited by the Commission is clarifying that §465.2 is that it is an actor portrayal.’’224The Commission to establish prevalence limited to prohibiting material provision does not prohibit using an ‘‘provide no additional details about the misrepresentations. As finalized, the actor to portray a real testimonialist. unfair or deceptive act or practice at prohibitions in §465.2 are expressly An individual commenter who raised issue aside from bare allegations that the limited to reviews and testimonials the same concern about whether actors consumer testimonials in the case ‘‘materially misrepresent[ing], expressly could portray real testimonialists225 involved misrepresentations of the or by implication . . . that the reviewer went on to express concerns that the consumer’s experience,’’ and therefore or testimonialist exists; . . . that the actor ‘‘shouldn’t misrepresent who the are insufficient to establish reviewer or testimonialist used or had original person was,’’ such as by prevalence.216However, the quoted experience with the product, service, or misrepresenting ‘‘the effectiveness/ representations in each of the business that is the subject of the review health benefits of [a] product by hiring Commission’s complaints makes clear or testimonial; or . . . the reviewer’s or a very fit in shape person.’’226The the nature of the misrepresentations.217 testimonialist’s experience with the Commission has issued guidance stating Furthermore, even if a Commission product, service, or business that is the that ‘‘use of an endorsement with the complaint does not provide all details subject of the review or testimonial.’’ image or likeness of a person other than about a specific misrepresentation, that A different trade association raised the actual endorser is deceptive if it does not mean that it cannot serve as several concerns about the common misrepresents a material attribute of the evidence of prevalence. The language of proposed §465.2. It asserted Commission thus has a strong basis for that the provision ‘‘would prohibit the endorser.’’227Nevertheless, the its conclusion that reviews and use of a dead person’s endorsement Commission does not intend for §465.2 testimonials misrepresenting the because arguably that person does not to address such misrepresentations. exist.’’221The Commission does not A consumer organization’s comment 214IAB Cmt. at 3. interpret a person who ‘‘does not exist’’ requested that the Commission 215Id. to include a person who died after ‘‘explicitly indicate that fake . . . 216Id. at 4 & n.12. making an endorsement, but that ratings are an independent and separate 217Complaint at 8–11, 17–18, FTC v. NextGen concern should be resolved by the new violation from deceptive narrative Nutritionals, LLC, No. 8:17–cv–2807 (M.D. Fla. filed language regarding material reviews.’’228The Commission believes Nov. 20, 2017) (testimonials in ads made specific quantified claims of weight loss and blood pressure that making this distinction is reduction); In re Esrim Ve Sheva Holding Corp., 132 218IAB Cmt. at 6; NRF Cmt. at 6. unnecessary and declines to make this F.T.C. 736, 737 (2001) (testimonial made specific 219NPRM, 88 FR 49373. change.
quantified claims about increased mileage and 220A virtual influencer is a computer-generated decreased harmful pollutants); In re Computer Bus. fictional character that can be used for a variety of Servs., Inc., 123 F.T.C. 75, 78 (1997) (endorsers marketing-related purposes, but most frequently for 222Id. made specific quantified earnings claims); In re social media marketing, in lieu of human 223Id. Twin Star Prods., Inc., 113 F.T.C. 847, 849–51, 853– influencers. See, e.g., Koba Molenaar, Discover the 224Id.
54 (1990) (endorsements made regarding a weight- Top 12 Virtual Influencers for 2024—Listed and loss product, a baldness treatment, and an Ranked!, Influencer MarketingHub (Mar. 29, 2024), 225Beback Cmt. impotency treatment); In re National Sys. Corp., 93 https://influencermarketinghub.com/virtual- 226Id. F.T.C. 58, 61–62 (1979) (testimonials about jobs influencers/. 227See Endorsement Guides, 16 CFR 255.1(g). obtained by graduates of respondents’ schools). 221ANA Cmt. at 12. 228TINA Cmt. at 8. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68050 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 2. §465.2(a) that writes or creates fake reviews or A consumer organization commented testimonials for its own products or that, by limiting §465.2(b) to a business Proposed §465.2(a) would have made services. For this reason, the posting reviews or disseminating or it a violation for a ‘‘business to write, Commission declines to adopt the causing the dissemination of create, or sell a consumer review, commenter’s suggestion. testimonials about ‘‘the business or one consumer testimonial, or celebrity testimonial’’ that is fake or false. An individual commenter asked of its products or services,’’ the An individual commenter noted that whether the prohibition covers ‘‘people Commission’s proposal limits liability the prohibition ‘‘is too specific and it who leave reviews in good faith’’ if to the business itself ‘‘instead of would be easy for a business to find an ‘‘they were getting paid for it.’’234 including other . . . creators or alternative method not prohibited by the Neither §465.2(a) nor any section of the disseminators of deceptive reviews and rule.’’229The commenter posited an rule imposes liability on individual testimonials.’’238In response to the example: ‘‘a business could have consumers who write honest reviews, commenter’s concern, the Commission someone next to them tell them their even if they are paid for doing so. notes that those creating or disseminating deceptive reviews and review and someone could transcribe it, Another individual commenter testimonials could be liable under technically the business did not create, requested that civil penalties be §465.2(a).
make, or sell anything and thus would imposed ‘‘on the company for soliciting A trade association asked whether a not be in violation.’’230If a business is the reviews, rather than on the reviewer, business ‘‘‘disseminates’ reviews for its paying an individual to transcribe a fake unless the reviewer knowingly is products merely by . . . placing them in or false review, it is creating or making leaving fake reviews.’’235Under advertising/marketing materials.’’239 the review, and would therefore have §465.2(a), an individual who is in the Section 465.2(b) applies only to the violated §465.2(a). Accordingly, the business of writing, creating, selling, or dissemination of testimonials, but if a Commission declines to modify the brokering reviews could be liable for business includes consumer reviews in prohibition in response to the creating consumer reviews that are fake its advertising or marketing materials, commenter’s concern. or false. That individual could only be those reviews become ‘‘testimonials’’ A trade association submitted a subject to civil penalties if they did so and are covered.
comment asking the Commission to with actual knowledge or knowledge Another commenter requested that ‘‘confirm that when a real consumer fairly implied on the basis of objective the Commission ‘‘clarify the limited authors the review, the business cannot circumstances that they were engaging applicability of ‘to disseminate or cause be said to have written or created it, and in an act or practice that is unfair or the dissemination’ in proposed thus . . . section [465.2(a)] could not deceptive and is prohibited by the §465.2(b) so the definition does not apply.’’231The Commission is unsure rule.236 wrongly apply to third parties that host what the commenter means by a ‘‘real An individual commenter expressed or license reviews.’’240The phrase ‘‘to consumer authors the review.’’ The concern that ‘‘competing parties could disseminate or cause the dissemination’’ provision would apply if, for example, potentially create fake reviews on applies only to testimonials and not to a business employs a ‘‘real consumer’’ another party in order to give the consumer reviews, so it could not apply to write fifty reviews of a product under impression that the party is in violation to third parties that host or license different names. of the’’ rule.237Although such reviews. The only situation in which A comment from a retailer that misconduct is possible, the target of §465.2(b) applies to consumer reviews publishes reviews said that ‘‘review such misconduct would not be liable is when a business purchases a brokers and other bad actors . . . under §465.2(a), based on how it is consumer review. coordinate the high-volume writing, worded. For example, the target would
buying, and selling of fake reviews’’ and not have been the one who created, that the rule should apply to those wrote, or sold the review, nor would the Proposed §465.2(c) would have made ‘‘approaching customers, instructing target have purchased the review. The it a violation for a business to ‘‘procure them on how to create fake reviews and competitor who engaged in such a consumer review for posting on a avoid detection, and connecting them misconduct might be liable for third-party platform or website, about with bad actors operating [fake] deceptive or unfair conduct under the the business or one of its products or accounts.’’232Brokers of fake reviews FTC Act. services,’’ which ‘‘the business knew or would generally fall under the should have known’’ was fake or false. provision’s prohibition against selling a 3. §465.2(b) Several commenters questioned the consumer review, given that such Proposed §465.2(b) would have made scope and ‘‘vagueness’’ of the undefined brokers are generally being paid to it a violation for a business to ‘‘purchase term ‘‘procure’’ in proposed provide fake reviews. a consumer review’’ or ‘‘disseminate or §465.2(c).241A trade association wrote A trade association commenter cause the dissemination of a consumer that ‘‘the Commission should explain suggested clarifying that ‘‘business’’ in testimonial or celebrity testimonial’’ that a retailer does not ‘procure a §465.2(a) ‘‘refers to a business that about ‘‘the business or one of its consumer review for posting on a third- helps to create or sell reviews or products or services’’ which ‘‘the party platform or website’ simply by testimonials.’’233Although the business knew or should have known’’ requesting that previous customers paragraph does apply to such was fake or false. submit reviews, and then allowing businesses, it also applies to a business submitted reviews to be posted on the retailer’s own website or sharing 234Wilson Cmt.
230Id. 236See 15 U.S.C. 45(m)(1)(A) (establishing that 231IAB Cmt. at 6. the recovery of civil penalties requires a showing 238TINA Cmt. at 6 n.23. 232Amazon Cmt. at 6. of ‘‘actual knowledge or knowledge fairly implied 239NRF Cmt. at 5. 233Computer & Communications Industry on the basis of objective circumstances that such act 240CCIA Cmt. at 3. Association, Cmt. on NPRM at 3 (Sept. 29, 2023), is unfair or deceptive and is prohibited by such 241NRF Cmt. at 4; ANA Cmt. at 12; IAB Cmt. at https://www.regulations.gov/comment/FTC-2023- rule’’). 4; Amazon Cmt. at 7. 0047-0110 (‘‘CCIA Cmt.’’). 237Slezak Cmt. at 1. 242NRF Cmt. at 4. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68051 Commission did not intend to cover with the product, service, or business not be liable for sharing consumer such activities. Instead, the Commission that is the subject of the review or reviews unless it would have been liable intended to cover a much more limited testimonial.’’ By ‘‘generalized for displaying those same reviews on its set of activities: the procurement of fake solicitations,’’ the Commission means to own website. and false reviews from company exempt from §465.2(b) and (c) Two comments raised the issue of insiders. The Commission is therefore solicitations sent to large groups of hosting both reviews and testimonials.
revising §465.2(c) by limiting it to a customers, such as those who purchased A trade association commenter business procuring consumer reviews a particular item or who became expressed concern that the Commission ‘‘from its officers, managers, employees, customers during a given time period, should ‘‘avoid sweeping in companies or agents, or any of their immediate where specific customers are not chosen such as online retailers that host relatives.’’ based on the likelihood that they will consumer reviews and testimonials and A trade association’s comment express a particular sentiment. In engage in activities such as organizing, questioned the phrase ‘‘its products or contrast, solicitations made only to moderating, aggregating, and prompting services’’ in the context of what was customers whom the business believes the submission of reviews and proposed §465.2(c).243It asked whether to be happy customers would not be testimonials.’’250Another trade the term would apply to all of the ‘‘generalized solicitations’’ and would association made a very similar products sold by a department store, an therefore be subject to §465.2(b) and (c). comment and ‘‘urge[d] the FTC to online marketplace, or a consignment As the Commission said in the NPRM, confirm that liability under this section business.244The Commission recognizes §465.2 does not ‘‘apply to any reviews would require the company to do more that the phrase ‘‘its products or that a platform simply publishes and than host reviews/testimonials.’’251As services’’ was ambiguous. In order to that it did not purchase.’’ In other for reviews, §465.2 will not prohibit an address this inadvertent ambiguity, the words, the Commission did not intend online business that hosts reviews from Commission is making clarifying for §465.2 to apply to platforms that prompting the submission of reviews changes by replacing the phrase ‘‘its simply host third-party content and from the general public or from products or services’’ with the phrase does not believe that the section can be organizing, moderating, or aggregating ‘‘the products or services it sells’’ in interpreted otherwise. Nonetheless, them. Nonetheless, certain unfair or §465.2(b) and (c), as well as in other numerous commenters expressed deceptive conduct that involves places where it appears in the rule.245 concern over whether the section prompting the submission of reviews or The revised language captures what the covered the mere hosting of third-party moderation could violate §465.4 or Commission originally intended and content.246A number of industry §465.7(b), respectively.252As for would apply to products sold by a commenters and an individual testimonials, it is unclear what hosting department store, an online commenter asked the Commission to scenarios the commenters are marketplace, or a consignment business. expressly exempt those who host contemplating. The Commission is not consumer reviews created by a third 5. §465.2(d) party.247Three industry comments adding an exemption for ‘‘merely Upon consideration of the comments asked the Commission to create a safe hosting testimonials’’ because there is received, the Commission is adding harbor for review hosting when the no provision in the rule that applies to paragraph (d) in §465.2 to clarify the company has reasonable processes in testimonial hosting because testimonials scope of §465.2(b) and (c). The place to identify and remove fake are, by definition, advertising or Commission recognizes that, when a reviews.248Consistent with its promotional messages. A business that business sends a broad solicitation to statement in the NPRM, the Commission puts testimonials on its own website is customers to post customer reviews, one is adding §465.2(d)(2) to provide an ‘‘disseminating’’ them and is not merely or more recipients might also be explicit exemption for ‘‘merely engaging ‘‘hosting’’ them. When such employees of the business. If any such in consumer review hosting’’ from the testimonials are fake or false, the employee then posts reviews, one might scope of §465.2(b) and (c). business should face potential liability consider those reviews to have been A trade association noted that, in the under this paragraph. On the other ‘‘procured’’ from the employee. ‘‘case of reviews being shared between hand, a business that has on its website Similarly, the Commission recognizes retailers and third-party platforms,’’ ‘‘it a community forum in which that broad, incentivized solicitations to would be unfair to immunize the search consumers can comment about the the general public or past customers to platform from liability for the review business and the products or services it post about a product on social media shared by the retailer, but not to sells could be merely hosting the could be considered ‘‘causing the immunize the retailer for the review community forum. A comment in the created by the potential bad actor.’’249 community forum touting one of the dissemination’’ of testimonials. It would However, a retailer or other entity will business’s products, which was posted not be reasonable to expect a business by a consumer who was not to know whether such resulting reviews or testimonials were fake or false, and 246One industry commenter expressed a general incentivized to do so and who has no concern that was not tied to a specific provision other connection to the company, is not the Commission did not intend to cover ‘‘that the Proposed Rule imposes liability on a testimonial in the first place, so it those reviews in this section of the companies for the dissemination and/or display of proposed rule. Therefore, the fake reviews that clashes with Section 230 of the would not fall under §465.2(b). The Commission is adding §465.2(d)(1), Communications Decency Act.’’ TechNet Cmt. at 3. same analysis would apply to a business As discussed below, the Commission is including that hosted a section on its website which clarifies that §465.2(b) and (c) do exemptions for mere consumer review hosting in not apply to ‘‘generalized solicitations §§465.2 and 465.5. See infra section IV.B.5 of this to purchasers to post reviews or post document. 250IAB Cmt. at 4. testimonials about their experiences 247See, e.g., NRF Cmt. at 5–6; IAB Cmt. at 6; 251ANA Cmt. at 12–13. Amazon Cmt. at 7–9; CCIA Cmt. at 3; Abbott Cmt. 252Prompting the submission of consumer 248TechNet Cmt. at 2; IAB Cmt. at 5; NRF Cmt. reviews that must be positive in order to obtain an 243Id. at 5. at 7. A trade association also requested a ‘‘safe incentive could violate §465.4. Moderation of 244Id. at 5–6. harbor’’ but did not tie it to any specific provision consumer reviews that results in the suppression of 245See §§465.5(a), (b), and (c), 465.6, and of the proposed rule. NADA Cmt. at 4. some of them based upon their ratings or their 465.7(b) of the rule. 249NRF Cmt. at 6. negative sentiment could violate §465.7(b). VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68052 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations where consumers could answer consumer reviews and testimonials, (2) association commenter recommended questions posed by other consumers. avoids unfairly imposing liability on ‘‘that the Commission define ‘knew,’ as A business organization commenter unwitting, blameless business transgressors, used in . . . §465.2, as ‘having actual said the Commission should ‘‘make and (3) conveniently aligns with the FTC’s knowledge,’ and remove the ‘should existing ‘‘has good reason to believe’’ clear [that] Section 465.2 does not apply have known’ language.’’263 standard for similar purpose of application of to platforms or retailers that display Additionally, two commenters FTC Act Section 5 to the use of endorsements ratings even if they prompt review and testimonials in advertising.257 advocated for a standard higher than submissions or aggregate star ratings of ‘‘should have known’’ but lower than However, several commenters submitted reviews.’’253Paragraphs (b) actual knowledge. With respect to objected to the imposition of civil and (c) of §465.2 do not apply to mere activities such as ‘‘purchasing’’ a penalties based upon a ‘‘should have consumer review hosting, even if the review, they said that businesses should known’’ standard, believing that business prompts review submissions or be held responsible for ensuring the standard would be too onerous.258For aggregates star ratings. reviews are authentic but recommended example, an industry organization said The commenter continued by saying a ‘‘knew or consciously avoided’’ that proposed §465.2(b) and (c) are that ‘‘the Commission must clearly standard.264One of the commenters ‘‘problematic because [they] place[] the indicate that the Rule provision would asserted that the proposed ‘‘should have onus on the business to have knowledge not apply to any website displaying a known’’ standard ‘‘is vague and does of the author’s state of mind as to consumer review or testimonial that not provide adequate specificity about whether their actual experience was they did not purchase or procure,’’ the sorts of actions businesses should expressed. . . , ani mpossible task for arguing that ‘‘Section 230 [of the take to ensure that they will not be held anyone but the’’ author.259The industry Communications Decency Act] . . . liable for not detecting that a review organization also claimed that the risk broadly immunizes providers of an they purchased was fake.’’265The of a civil penalty will ‘‘likely . . .
interactive computer service from commenter said a ‘‘consciously compel businesses to drastically limit liability for presenting third party avoided’’ knowing standard would the consumer reviews or testimonials content.’’254If a business creates fake or allow for liability when a business takes they seek out or even allow on their false reviews or testimonials and no steps to respond to receiving websites.’’260Under section 5(m)(1)(A)
displays them on its website, it is not repeated complaints raising red flags of the FTC Act, 15 U.S.C. 45(m)(1)(A), presenting third-party content. It could about the authenticity of a particular however, the Commission can seek civil be liable for such reviews or purchased review.266 penalties for a rule violation only by testimonials under §465.2(a). The As part of the NPRM, the Commission showing that a defendant had ‘‘actual commenter made a similar argument also inquired whether, instead of the knowledge or knowledge fairly implied with respect to the applicability of ‘‘should have known’’ standard, the on the basis of objective circumstances §465.2(b) to a website that displays a Commission should adopt a ‘‘knew or that such act is unfair or deceptive and fake or false testimonial and thus causes could have known’’ standard. Only two is prohibited by such rule’’ (hereinafter its dissemination.255Section 465.2(b) commenters addressed that proposed shortened to ‘‘actual knowledge or does apply if such testimonials are standard. An individual commenter said knowledge fairly implied’’). A lower about the business or one of the that such a standard would knowledge standard in a Commission products or services it sells. Such rule—such as the ‘‘knew or should have ‘‘ambiguously expand the proposed testimonials are advertising, not third- known’’ standard found within certain Rule’s prosecutorial scope and possibly party content covered by section 230 of sections of the proposed rule—does not open unsuspecting businesses to the Communications Decency Act (47 override the higher standard found in financial penalties for violations they U.S.C. 230). section 5(m)(1)(A) of the FTC Act. The had no inkling of having committed in the moment.’’267Another individual 6. Knowledge Standard Commission has not suggested commenter, who incorrectly thought the otherwise in the course of this Like proposed §465.2(b) and (c), final proposed rule provided a private right rulemaking.
§465.2(b) and (c) are limited to of action, said that such a standard Other commenters objected similarly, situations in which businesses ‘‘knew or ‘‘provides scienter never used in saying that ‘‘knew or should have should have known’’ that they were consumer law’’ and the ‘‘courts could known’’ is too low as a knowledge engaging in the conduct that was potentially become overwhelmed with threshold and that the standard should prohibited. Commenters had varied an influx of claims.’’268 be actual knowledge, but did not tie reactions to this standard, with some their concerns to the imposition of civil Other commenters advocated for a finding it appropriate, others finding it penalties.261For example, some of the lower standard than ‘‘knew or should too high, and others finding it too low. comments expressing concern about a have known.’’ An individual commenter A corporate commenter noted that, for did not think that ‘‘knew or should have ‘‘knew or should have known’’ standard the purpose of §465.2(b) and (c), known’’ was appropriate because it appeared to focus primarily on the ‘‘‘[s]hould have known’ needs to be the would make it ‘‘very difficult to prove’’ standard’s supposed applicability to, standard.’’256Similarly, an individual violations and recommended that the and harsh impact on, websites hosting commenter recommended that the FTC Commission require ‘‘businesses to be reviews.262As another example, a trade adopt the ‘‘knew or should have able to show they used reasonable known’’ standard for purposes of 257Poole Cmt. at 2.
§465.2(b) and (c): 258IAB Cmt. at 5–6; NRF Cmt. at 2–5; NADA Cmt. disagreed, asserting that the ‘‘knew or should have because it: (1) sufficiently effectuates a C t m 3 t – . 4 a ; t C 2 h . amber of Commerce Cmt. at 2–3; TechNet k § n 4 o 6 w 5. n 2 ’ ’ w s i t l a l n ‘‘ d n a o r t d u t n h d e u C l o y m bu m r i d s e s n io r n e v p i r e o w po p s l e a d tf f o o r r m s.’’ consumers’ shared interest in reducing the Travel Tech Cmt. at 4. 259TechNet Cmt. at 2.
prevalence of unfair or deceptive online 263NRF Cmt. at 3. 260Id.
255Id. 262Amazon Cmt. at 7–8; ANA Cmt. at 12–13; NRF 267Poole Cmt. on at 1. 256Transparency Company Cmt. at 11. Cmt. at 2–5. One trade association commenter 268Albert Cmt. at 3. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68053 diligence through policies and appropriate, equitable balance between that the following actions should be procedures to prove that the[] reviews protecting consumers and holding considered knowledge that a review is are legitimate.’’269A consumer marketers accountable for deceptive fake or false: ‘‘failure to meaningfully organization said in its comment that conduct while not overly burdening police’’ for suspicious review activity, ‘‘there is no need for a knowledge or marketers that engage in the responsible ‘‘inducements to provide reviews intent requirement under this Rule’’ as use of reviews and testimonials. without clearly instructing the reviewer ‘‘Section 5 of the FTC Act does not Two trade associations’ comments to clearly disclose material conflicts,’’ otherwise require the Commission to said that if ‘‘the Commission . . . ‘‘materially incentivizing reviews where prove knowledge or intent when imposes a ‘should have known’ it’s impossible to convey material enforcing against entities engaging in standard, the Commission must provide conflicts (e.g., providing a five-star deceptive practices.’’270It continued greater clarity about what sorts of review with no accompanying narrative that ‘‘the Commission can and should indicators of inauthenticity would on TripAdvisor),’’ and ‘‘failure to take consider knowledge and intent in provide companies with sufficient meaningful steps to confirm the deciding the equities of bringing any notice to trigger liability.275They both existence of the purported celebrity or enforcement action.’’271 said, ‘‘Without that guidance and faced meaningfully document the celebrity’s After reviewing and considering the with the risk of significant civil penalty purported experience with the product comments received, the Commission exposure for failing to stop the actions or service.’’279The Commission believes that the most appropriate of undiscovered third parties, many encourages businesses to have endorser standard for imposing liability under businesses would likely be deterred oversight programs, and whether a §465.2(b) and (c) is the ‘‘knew or should from using consumer reviews or company has and follows such a have known standard.’’ As discussed testimonials at all.’’276The Commission program could impact the exercise of above,272those paragraphs were not has already addressed the knowledge prosecutorial discretion. The intended to apply to consumer review standard found in section 5(m)(1)(A), Commission does not intend, however, hosting and §465.2(d)(2) now contains which applies to the imposition of civil for companies to be liable under this an explicit exemption for consumer penalties. In the discussion of §465.2(b) section of the rule based merely on the review hosting.273Thus, the ‘‘knew or and (c) below, the Commission provides absence of an oversight program or on should have known’’ language in further guidance as to what is intended these other suggested bases. §465.2(b) and (c) will not have a harsh by ‘‘knew or should have known.’’ A corporate commenter said that impact on review platforms, as some of Several other commenters discussed ‘‘how a business ‘should have known’ the commenters suggested. Eliminating general views about the application of that a reviewer does not exist is not the knowledge standard altogether, the ‘‘knew or should have known’’ apparent,’’ and posited that, under a however, may indeed have an overly standard. For example, an individual ‘‘should have known’’ standard, harsh impact on businesses in some commenter said that ‘‘[a] business ‘‘perhaps [a] business may be under a circumstances, and the idea garnered cannot always reasonably know that a duty to reach out to the reviewer, but it almost no public support. For example, testimonial contains testimony that is is unclear how many resources the it would be unreasonable to hold a fake or false, if the influencer expresses business must expend to attempt to company liable for publishing a to them that it is true.’’277The contact the reviewer.’’280First, as noted, testimonial when it had no reason to §465.2(d)(2) exempts businesses merely Commission agrees with this assertion.
know that the testimonial A comment from a public interest engaging in consumer review hosting misrepresented the testimonialist’s research center said that the ‘‘lack of an from §465.2(b) and (c). Another key experience. The Commission sees no adequate endorser oversight program limitation here is the exemption for reason why the standard should be should be a per se violation of the ‘know generalized solicitations under higher than ‘‘knew or should have or should have known’ standard as that §465.2(d)(1). That exemption means known.’’ The ‘‘knew or should have is tantamount to the company that businesses can send such known’’ standard—which the deliberately avoiding knowing.’’278A solicitations to their customers without Commission has used in other consumer organization commenter said creating any investigative obligation for rules274—thus best achieves the resulting reviews under §465.2(b) or (c), even if such reviews have been should know that the manufacturer does not have 269Annie Horgan, Cmt. on NPRM at 1–2 (Sept. 22, a reasonable basis for the claim’’); 16 CFR 436.7(d) ‘‘purchased.’’281 2023), https://www.regulations.gov/comment/FTC- (franchise sellers must notify prospective With respect to ‘‘purchased’’ reviews 2023-0047-0058. franchisees of any material changes ‘‘that the seller under §465.2(b)the rule’s ‘‘knew or 270Consumer Reports Cmt. at 4. knows or should have known occurred’’). should have known’’ standard does not 271Id. at 4–5. An individual commenter 275IAB Cmt. at 5–6; ANA Cmt. at 13. An impose a general duty to reach out to disagreed, stating that ‘‘the complete removal of a individual commenter said that the Commission the reviewers or investigate whether knowledge requirement in favor of a strict liability should ‘‘provide some clear and objective criteria or approach would almost guarantee situations of indicators for identifying fake reviews, such as the each resulting review is fake or false. unwarranted punishment under the proposed rule.’’ use of bots, scripts, templates, or multiple accounts, While each case will depend on its Poole Cmt. at 3. or the lack of verifiable purchase or experience, or specific facts, it is possible that a 272See supra section IV.B.5. of this document. the inconsistency with other reviews or business may possess clear indications 273The final rule would therefore not require a information’’ and this ‘‘would help businesses and business that is merely hosting consumer reviews consumers to distinguish between genuine and fake that purchased reviews are likely to be on its platform to prove that the reviews it is reviews.’’ Ravnitzky Cmt. at 1. fake or false, in which case a failure to hosting are legitimate. 276IAB Cmt. at 5–6; ANA Cmt. at 13. As investigate further may trigger liability 274Other Commission rule provisions with a explained above, these concerns are unwarranted under the ‘‘should have known’’ ‘‘knew or had reason to know’’ requirement include given that the ‘‘should have known’’ standard has §460.8 of Labeling and Advertising of Home no bearing here on the imposition of civil penalties, Insulation (commonly known as the R-Value Rule), for which the Commission must prove that a 279Consumer Reports Cmt. at 5. which prohibits non-manufacturers of home defendant met the higher knowledge standard of 280Family First Life Cmt. at 6. insulation from relying on R-value data provided by section 5(m)(1)(A) of the FTC Act. 281Paying for or giving other incentives in the manufacturer if they ‘‘know or should know’’ 277Taylor V, Cmt. on NPRM at 2 (Sept. 22, 2023), exchange for consumer reviews expressing a the data is false or not based on proper tests. 16 CFR https://www.regulations.gov/comment/FTC-2023- particular sentiment regarding the product, service, 460.8; see also 16 CFR 460.19(e) (non- 0047-0062 (‘‘Taylor V. Cmt.’’). or business that is the subject of the review would manufacturers are liable only if they ‘‘know or 278EPIC Cmt. at 3. violate §465.4 of the rule. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68054 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations standard. For example, a business that should have a reasonable basis to ‘‘manipulation’’ for advertising hires a third party to provide free conclude, based on inquiry or purposes,290failing to disclose publicly samples of its products to consumers in otherwise, that the text is truthful for certain information about posted order to generate reviews, without more, the testimonialist. A testimonialist reviews,291or failing to employ may have no reason to investigate the asking for the product should cause a reasonable measures to root out fraud resulting reviews. However, a business business to question whether the and deceptive reviews.292A review may be on notice that the resulting testimonialist used the product. If a platform suggested imposing reviews are likely fake or false if they business knows that a testimonialist is requirements on social media are submitted too quickly after purchase using a competing product, it should companies and internet service or many of them are submitted in a very inquire into whether a testimonial for its providers to address the sale of fake short period of time or refer to the own product is truthful. For example, a reviews,293and a trade association wrong product. As for §465.2(c), which business should investigate whether a proposed that the Commission require applies only to reviews by insiders, a celebrity testimonial for its new reviewers to identify themselves and possible reason for knowing that such smartphone is false if the testimonial that social media sites hosting reviews reviews are likely fake or false could be claims the celebrity exclusively uses the verify reviewers’ identities.294As that an insider sent emails to a manager smartphone, but the social media post explained above, the Commission’s over time that together showed that the containing the testimonial indicates that intent from the outset of this rulemaking insider was using multiple accounts to the celebrity posted it using a competing was to focus on clearly unfair or submit reviews to the same website. smartphone brand. deceptive conduct involving reviews A company that is in the business of A review platform said in its and testimonials. This intent is reflected identifying fake consumer reviews comment that, ‘‘if procuring fake in, as explained above, the addition of described ways that a business reviews is the action of a single, rogue a definition of the term ‘‘consumer purchasing or procuring a consumer employee trying to help the business review hosting’’ and the explicit review should know that the review is they work for, on a practical level it may exclusion of such mere hosting from the fake or false. These indications include be difficult for a business to have coverage of certain rule provisions. This the named reviewer not being a knowledge of’’ it.285The commenter focus should not be taken to signal that customer, the content of the review suggested that the Commission consider third-party platforms do not bear being vague or odd, many reviews ‘‘whether it is in fact disproportionate significant responsibility for combatting arriving at once, and the use of for knowledge and liability to be fake reviews. unnatural language or ‘‘keyword attributed to a business because of the An individual commenter stuffing.’’282A review platform actions of a well-intentioned rogue recommended ‘‘requir[ing] proof of commenter gave similar ways that a employee.’’286Whether a business will purchase of [a] product for a consumer business could identify fake reviews, be held responsible under the rule for a to leave a review.’’295Another such as ‘‘the review text describes a rogue employee under a ‘‘knew or individual commenter would have the product or service that is not offered by should have known’’ standard will be a Commission hold businesses that the business, the review clearly fact-intensive inquiry. While a business recruit, direct, and compensate references the wrong business name, or may not be aware of every employee’s influencers responsible for the perhaps if a review . . . acknowledges activities, it should be pay attention to influencers’ false or fake testimonials.296 that the reviewer has never shopped red flags. Assuming that the facts are A third commenter asked that the there.’’283Although, as previously such that the business should have Commission ‘‘ensure there is a way for stated, each case depends on its specific known of the rogue employee’s actions, anyone who is believed to have violated facts, these various indications may whether the business would also be reviewing policies [to have] a chance to indeed suggest that one or more subject to civil penalties would depend reinstate their ability to leave purchased or insider reviews are likely on whether a court finds that the fake or false, in which case a failure to business met the actual knowledge or www.regulations.gov/comment/FTC-2023-0047- reasonably investigate them may trigger knowledge fairly implied standard of 0082. liability under the ‘‘should have section 5(m)(1)(A) of the FTC Act. 290Wilhelmina Randtke, Cmt. on NPRM at 1 known’’ standard. (Sept. 26, 2023), https://www.regulations.gov/ With respect to testimonials, there 7. Other Proposals comment/FTC-2023-0047-0068. may be red flags that should indicate to Some commenters suggested that the 291Fake Review Watch Cmt. at 2–3. 292Consumer Reports Cmt. at 3.
a business that a testimonial is likely Commission impose additional 293Trustpilot Cmt. at 3, 7.
fake or false, and, thereby, would serve requirements. Many commenters 294ADA Cmt. at 2. as indicia of the fact that the business suggested that third-party platforms 295Albert Cmt. at 4; see also Yanni Kakouris, should have known that the featuring reviews should be held Cmt. on NPRM at 1, 3 (Sept. 22, 2023), https:// testimonials that it disseminated were responsible for certain conduct, such as www.regulations.gov/comment/FTC-2023-0047- fake or false. For example, the for: failing to report businesses that they 0055. The commenter also expressed concerns that ‘‘violators are too difficult to track,’’ asserted that Commission alleged that Google asked suspect are posting fake reviews,287the civil penalties would somehow deter consumers iHeartMedia, Inc. radio personalities to ‘‘lack of identification verifications,’’288 from posting honest, negative comments about a record product testimonials for a not posting notices reminding business, and misunderstood the purpose and use smartphone using a standard script consumers that there is no guarantee of of civil penalties, thinking that a large portion of civil penalties would go to businesses maligned by written for Google and refused to the veracity or accuracy of customer false comments. Id. at 1–2. A review platform provide the radio personalities with the reviews,289engaging in review commenter said that the proposed rule ‘‘upholds product when requested.284If a business legitimate consumer speech by ensuring that, provides the text for a testimonial, it 285Trustpilot Cmt. at 9–10. ‘ t p o r r o e p v o ie s w ed s § b y p u .2 rc d h o a e s s e r n s o o t r l i v m er i i t f l i e e g d i t p im ur a c t h e a r s e e v r i s e ’ w ’’ s 286Id. and ‘‘by preserving anonymous reviews.’’ 282Transparency Company Cmt. at 11. 287Anonymous 3 Cmt. Tripadvisor LLC, Cmt. on NPRM at 4–5 (Sept. 29, 283Trustpilot Cmt. at 10. 288Foster Cmt. at 2. 2023), https://www.regulations.gov/comment/FTC- 284Complaint at 2–5, In re Google, LLC, Nos. C– 289Frieling Cmt. at 2; see also Anonymous 6, 2023-0047-0092 (‘‘Tripadvisor Cmt.’’). 4783 and C–4784 (F.T.C. Feb. 8, 2023). Cmt. on NPRM (Sept. 29, 2023), https:// 296Taylor V. Cmt. at 2. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68055 reviews.’’297A consumer organization rulemaking regarding the provision, it reviews, and then only to reviews that recommended making clear that ‘‘it is a will address the comments at that time. appear on a website or portion of a deceptive practice to aggregate fake website dedicated to receiving and
C. §465.3—Consumer Review or eliminating this practice.’’304 responded to Question 12 of the NPRM Testimonial Reuse or Repurposing Three individual commenters by stating that §465.4 ‘‘should mistakenly thought that proposed unequivocally prohibit explicit Proposed §465.3 sought to address a §465.4 banned paid or incentivized conditions only,’’ because this would business using or repurposing a customer reviews and were opposed to ‘‘provide[] a clear standard for consumer review written or created for such a ban. One of them said the businesses and reviewers to follow,’’ one product so that it appears to have proposed provision would ‘‘ban reviews and ‘‘the lack of clarity in how the been written or created for a which are made by those who have been Proposed Rule would prohibit ‘implied substantially different product. It also provided an item,’’ that ‘‘[g]enerally the conditions’ [would] stifle[] businesses’ sought to cover businesses that caused writer includes a list of sponsors on, or ability to encourage and to entice such use or repurposing.
300See, e.g., IAB Cmt. at 7–8; ANA Cmt. at 14; 305Alex Rooker, Cmt. on NPRM (Aug. 15, 2023), Chamber of Commerce Cmt. at 5–6; Trustpilot Cmt. https://www.regulations.gov/comment/FTC-2023- 308NPRM, 87 FR 49389. at 10; Consumer Reports Cmt. at 5–6; Amazon Cmt. 0047-0019. 309Transparency Company Cmt. at 12. at 10; CCIA Cmt. at 3; NRF Cmt. at 7–8; Ravnitzky 306Frieling Cmt. at 2. 310Family First Life Cmt. at 8–9.
Cmt. at 2. 307Anonymous 7, Cmt. on NPRM (Aug. 15, 2023), 311Id. at 10–11. 301See supra sections I.C. and IV.A.2.j of this https://www.regulations.gov/comment/FTC-2023- 312In re AmeriFreight, Inc., 159 F.T.C. 1626, document. 0047-0021. 1627–30 (2015).
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68056 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations they should ‘‘be creative and try to make explicitly and implicit conditioning of discussed above, by the trade your review stand out for viewers to compensation or other incentives.’’317A association asking consumers to say read.’’313 second consumer organization how much they ‘‘love’’ something or Two trade associations gave examples commenter said that ‘‘[i]mplied how much fun they had are excellent of what they asserted were innocuous conditions may be just as salient as examples of implied conditions. requests for reviews that could be express conditions’’ and quoting The Commission has decided to considered as implying that reviews Aronberg v. FTC, 132 F.2d 165, 167 (7th clarify that the rule prohibits businesses need to be positive in order to receive Cir. 1942), said that, ‘‘[i]n interacting from providing incentives conditioned an incentive. One said that its members with businesses, ‘[t]he ultimate on the writing or creation of consumer will sometimes automatically contact impression upon the mind of the reader reviews expressing a particular customers saying, ‘‘Tell us how much arises from the sum total of not only sentiment, regardless of whether the you loved [product] for 10% off your what is said but also of all that is conditional nature of the incentive is next purchase!’’ and that such a request reasonably implied.’’’318The express or implicit. For this purpose, could ‘‘be read to violate this Section of Commission agrees with both of these the Commission is adding the phrase the Proposed Rule—even if a negative commenters. ‘‘expressly or by implication’’ in §465.4 review would still entitle the consumer Advocating for limiting the provision to clarify that, although the incentive to the incentive or bonus.’’314The other to express conditions, a trade needs to be conditioned on the writing commenter wrote that, if the association acknowledged that the or creation of consumer reviews Commission says that ‘‘a business may NPRM clarified that the provision does expressing a particular sentiment in not implicitly seek positive reviews in not cover review gating,319the mere order for conduct to violate §465.4, the exchange for incentives, then the rule solicitation of positive reviews, or condition may be implicit. could apply to such offers as, ‘Tell us incentivized reviews (except for those Three commenters argued that the how much you loved your visit to John’s required to express a particular Commission should allow the Steakhouse and get a $5 coupon’ or ‘Tell sentiment), but argued that, compensation or incentives addressed your friends about all the fun you had ‘‘[r]egardless, the Proposed Rule still in §465.4 as long as they are disclosed at Jane’s Arcade for a chance to win could be read to prohibit such in the resulting reviews. For example, prizes,’’’ and asserted that such requests behavior—i.e., when a Company solicits the first commenter wrote, ‘‘A are justified because businesses ‘‘prefer a review that it has reason to believe reasonable consumer can easily to use these enthusiastic and positive will be positive.’’320The Commission understand that when a reviewer is messages when seeking reviews, as does not consider this statement to be a incentivized or compensated, the opposed to less inspiring messages like, fair reading of the provision. Just content they produce may be skewed in ‘Write a review and save 10% next because a business engages in review a more positive light. A mere disclaimer time.’’’315The problem with the gating or otherwise expects reviews to is sufficient to stave off enthusiastic and positive messages be positive does not mean there is either misrepresentation.’’323This statement suggested by these commenters is that an express or implied requirement that may be correct for some incentivized consumers receiving them could reviews need be positive to obtain an reviews when there is no express or reasonably take the message that their incentive. The Commission notes that, implied condition for those reviews to reviews must be positive and although §465.4 does not cover ‘‘review express a particular sentiment. For such enthusiastic in order to obtain the gating,’’ review gating can nonetheless reviews, an adequate disclosure that reward. As the second commenter violate section 5 of the FTC Act.321 incentives were provided in exchange noted, there are perfectly acceptable, A review platform commenter said for the review may be able to cure a albeit less ‘‘inspiring,’’ alternatives. The that prohibiting an ‘‘implied condition misleading impression that the reviews second commenter also said that ‘‘a to express a particular sentiment could were independent and unbiased. reasonable consumer would infer that a create a number of gray areas’’ and However, such a disclosure does not business prefers positive reviews, and ‘‘encouraged the FTC to provide reveal to consumers the requirement so even a neutral request such as, ‘Write guidance and examples to that reviews be positive. In addition, a review and receive a discount off your businesses.’’322The examples, even if an individual review disclosed next purchase,’ might be construed as that it resulted from incentives requiring impliedly requesting a positive 317Consumer Reports Cmt. at 6. the review to be positive, such a review.’’316The Commission disagrees. 318TINA Cmt. at 10. An individual commenter disclosure would not be effective in The fact that businesses prefer positive described the pressure they felt to leave a positive instances where a consumer relies on review of a car dealership in order to receive a gift reviews is not a basis on which to the overall average star rating and does card and said that proposed ‘‘§465.4 should . . .
conclude that consumers would address both explicit and implied conditions of not read all individual reviews. interpret any such ‘‘neutral request’’ as incentivization.’’ Anonymous 8, Cmt. on NPRM at Furthermore, the Commission believes containing an implied condition that 3–5 (Sept. 22, 2023), https://www.regulations.gov/ that, if incentives are conditioned on comment/FTC-2023-0047-0061.
reviews must be positive to receive the reviews expressing a particular 319As the Commission explained in the NPRM, offered discount. ‘‘Review gating occurs when a business asks past sentiment, many resulting reviews will A consumer organization said in its purchasers to provide feedback on a product and not be merely misleading but false. For comment that, ‘‘[w]hen a reviewer feels then invites only those who provide positive example, the offer of an incentive in feedback to post online reviews on one or more pressured to express a certain exchange for a positive review may lead websites.’’ See NPRM, 88 FR 49379.
sentiment, regardless of how that some reviewers to create positive 320NRF Cmt. at 9. The commenter went on to ask pressure was generated, the net result is that ‘‘the Rule be revised to only prohibit reviews even when they had a negative a deceptive review,’’ and that there companies from ‘. . . provid[ing] compensation or experience with the product, service, or should be ‘‘no distinction made between other incentives in exchange for . . . consumer business. No disclosure can adequately reviews explicitly required to express a particular cure a false review.324 sentiment, whether positive or negative. . . .’’’ 313Id. at 1628. (emphasis in original). Id.
consistent with the Commission’s for reviewers.’’331These requests are would have applied to testimonials, but approach in this section, the Guides beyond the scope of this rulemaking but not consumer reviews. It would have provide that ‘‘[s]uch reviews are are addressed in the Endorsement prohibited a business from deceptive even if the payment is Guides, which provide that unexpected disseminating or causing the disclosed because their positive nature material connections such as incentives dissemination of a consumer testimonial is required by, rather than being merely given in exchange for customer reviews about the business or one of the influenced by, the payment.’’328 without any requirement as to the products or services by one of its The third commenter taking this sentiment of the reviews must be officers, managers, employees, or agents, position suggested that it should be disclosed clearly and conspicuously.332 or any of their relatives, if that acceptable to use a disclosure like, ‘‘We The Commission continues to believe testimonial failed to have a clear and asked customers to tell us how much that this principle from the conspicuous disclosure of the they loved their visit to John’s Endorsement Guides is an appropriate testimonialist’s relationship to the Steakhouse, and here’s what some of expression of what incentivized review business or to the officer, manager, them said! (customers who submitted practices would or would not violate employee, or agent, and if the business reviews received a $5 coupon).’’329The knew or should have known of that scenario the commenter describes does section 5 of the FTC Act. In any event, relationship. Proposed §465.5(c) would not involve consumer reviews. It there is no basis on the current have applied to consumer reviews, but involves consumer testimonials, which rulemaking record for the Commission not testimonials, and would have been are not covered by §465.4. Further, it is to conclude that all incentivized limited to when an officer or manager of unlikely that one could make such a reviews should be prohibited or that all a business solicits or demands a disclosure in the context of consumer incentivized reviews should require a consumer review about the business or reviews, given how reviews are usually disclosure.
Cir. 2010) (‘‘A statement that studies prove a practice is beyond the scope of this services, only referenced disclosure of the officer’s product cures a certain disease, followed by a rulemaking. but not the manager’s relationship to the business. disclaimer that the statement is opinion and the The Commission clearly intended that proposed product actually does not cure the disease, leaves §465.5(a) require disclosure of the manager’s an overall impression of nonsense, not clarity.’’). 330Anonymous 3 Cmt; Yelp Cmt. at 5–6. relationship as well. See NPRM, 88 FR 49379 325Endorsement Guides, 16 CFR 255.5(b)(2), (3), 331Ravnitzky Cmt. at 1. (‘‘Proposed §465.5(a) would prohibit an officer or manager of a business from writing or creating a (7), (8), (9), and (11). 332Endorsement Guides, 16 CFR 255.5(a) & consumer review or consumer testimonial about the 326Hammacher Schlemmer Cmt. at 3–4. (b)(6)(ii).
340Transparency Company Cmt. at 13. 345Amazon Cmt. at 11. other more distant familial 341Family First Life Cmt. at 13. 346Id.
342Id. 347IAB Cmt. at 9. 349Id. at 11; TechNet Cmt. at 3. 343Id. at 3. 348NRF Cmt. at 9. 350Trustpilot Cmt. at 5–6. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68059 relationships,’’ that ‘‘even immediate 3. Agents rule.’’358As the commenters used the family relationships (parents, children, A trade association objected to the word ‘‘distributing,’’ the Commission siblings) are not always closely held’’ inclusion of the undefined term assumes that these comments pertain to because ‘‘adult siblings are not ‘‘agents’’ in proposed §465.5(b) and (c) the liability of businesses under necessarily in each other’s day-today and suggested its removal. The §465.5(b), which prohibits businesses lives,’’ and that ‘‘it would be more commenter said that ‘‘it is not clear from ‘‘disseminating or causing the appropriate to substitute the term . . . what individuals would be considered dissemination of consumer ‘members of the same household’ as that ‘agents’ of the business’’ and the testimonials’’ by insiders without would suggest individuals that have meaning of the term ‘‘agent’’ could disclosures. The testimonials covered by regular contact with an employee.’’351A ‘‘dramatically expand the scope of the §465.5 are, by definition, a business’s business organization wrote in its compliance programs that businesses advertising or promotional messages, so comment that the term ‘‘relative’’ is too will likely need to create in order to the Commission does not consider them vague and that ‘‘[i]t is unclear whether mitigate their risks under this section’’ to be third-party content. The section which ‘‘would be particularly important covers such testimonials when the rule applies to third cousins, the for small businesses.’’354The disseminated by the business itself, by spouses of a stepbrother’s child from a Commission intends for the term its officers or managers, or in response previous marriage, or friends that are ‘‘agents’’ in this rule to apply only to to solicitations or demands from its considered family,’’ concluding that those agents that promote the company officers or managers. With respect to the ‘‘[l]arge companies creating monitoring or its products, such as representatives commenters’ concern that businesses programs for testimonials need some of advertising agencies, public relations will be liable even when they had no clarity about what relatives will be firms, and review management firms. As knowledge that the content violated the captured under the Rule.’’352A second discussed below, given the clarifications rule, the Commission discusses below trade association said in its comment of and limitations to §465.5(b)(1) and the appropriate application of the that ‘‘relatives’’ of ‘‘any company (c)(1), the Commission has no reason to ‘‘knew or should have known’’ employee should not be considered believe that the inclusion of ‘‘agents’’ standard. ‘insiders’’’ because ‘‘[i]n most cases, will ‘‘dramatically expand the scope of A retailer’s comment expressed such family members would have no the compliance programs.’’355 ‘‘significant concerns with this section if incentive to post a fake review.’’353 the FTC intends to apply it to
employees or agents.
352Chamber of Commerce Cmt. at 7. 356NRF Cmt. at 10. 361See NPRM, 88 FR 49374–75. 353NRF Cmt. at 9. 357Amazon Cmt. at 11. 362IAB Cmt. at 10. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68060 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations the facts show that the business had to purchasers for them to post anonymous, or use pseudonyms, and actual knowledge or knowledge fairly testimonials about their experiences include general phrases indicating their implied of the violation. A business will with the product, service, or business.’’ relationship to the business, such as not violate the rule—much less be The Commission has also added ‘‘my employer’s product,’’ ‘‘my subject to civil penalties—merely §465.5(b)(2)(ii), which exempts ‘‘merely company’s,’’ or ‘‘my spouse’s because employees write consumer engaging in consumer review hosting’’ company.’’ reviews without disclosing their from §465.5(b)(1). Thus, an unsolicited
clarification in §465.5(b)(2)(i); 367The Commission has slightly modified this 371Consumer Reports Cmt. at 8.
specifically, that §465.5(b)(1) ‘‘does not clause, changing ‘‘did not instruct the prospective reviewer to disclose clearly and conspicuously that 372Trustpilot Cmt. at 5, 8.
apply to generalized review solicitations relationship’’ to ‘‘did not instruct that prospective 373NRF Cmt. at 9. reviewers disclose clearly and conspicuously their 374Family First Life Cmt. at 15. 363See supra section IV.B.2 of this document. relationship to the business’’ for purposes of clarity. 375NADA Cmt. at 3; Amazon Cmt. at 11. 364NADA Cmt. at 6. 368See infra section IV.E.5 of this document. 376Amazon Cmt. at 11. 365Trustpilot Cmt. at 13. 369TechNet Cmt. at 3. 377Id.
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68061 businesses that fail to discover and When they demand that employees or demand from another employee or remedy reviews or testimonials by agents seek reviews from their relatives, board member (or relative of an employees, managers, officers, agents, or the officers or managers should instruct employee or board member) a consumer any of those individuals’ relatives that the employees or agents to ask their review about the business or one of its lack disclosures.’’378The commenter immediate relatives to make disclosures. products or services;’’ and (5) continued, ‘‘[r]egardless of the The officers and managers should also ‘‘employees of a business should not be knowledge standard the Commission take remedial steps when they know or permitted to provide star or numerical imposes, the final rule must provide should know that resulting insider reviews that count toward an aggregate greater guidance on what sorts of reviews appeared without a disclosure. or average rating, even if their conflict scenarios would give rise to liability The Commission does not expect an of interest is otherwise disclosed in an under this section.’’379 officer or manager to scour every review accompanying narrative review.’’382 The Commission chooses to retain the of the business for possible insider Some of these proposals go beyond the proposed ‘‘knew or should have reviews appearing without a disclosure. scope of this rulemaking. Based on its known’’ standard in §465.5(b)(1) and There may be red flags, however, that policy expertise, the Commission (c)(1)(ii)(c). First, the Commission notes should cause officers or managers to declines to make any of these changes again that it cannot obtain civil inquire further. An example that is at at this time. The Commission notes, penalties under section 5(m)(1)(A) of the least applicable to smaller companies is however, that some may, in certain FTC Act for a rule violation unless it a review without a disclosure by situations, involve unfair or deceptive proves that a defendant had actual someone the soliciting officer or acts or practices that violate section 5 of knowledge or knowledge fairly implied manager recognizes as having the same the FTC Act. that the act or practice is unfair or last name as an employee whom the deceptive and is prohibited by the rule. officer or manager told to obtain reviews F. §465.6—Company-Controlled Review With respect to §465.5(b)(1), the from relatives. Another example is an Websites or Entities provision applies only to testimonials employee sending a soliciting officer or Proposed §465.6 sought to prohibit a that the business disseminates or causes manager a link to the resulting review, business from representing, expressly or to be disseminated, i.e., it applies to the in which case the officer or manager by implication, that a website, business’s own advertising and should take the time to see if that review organization, or entity that it controls, promotional activities. As noted above, has a disclosure. By taking ‘‘remedial owns, or operates provides independent §465.5(b)(1) does not apply to steps,’’ the Commission means that the reviews or opinions about a category of unsolicited social media posts by officer or manager should request that businesses, products, or services employees or to social media posts that the reviewer delete the review or add a including the business or one or more result from generalized solicitations. clear and conspicuous disclosure to it. of its products or services. Based on the The Commission does not expect that a
378IAB Cmt. at 9. 380Anonymous 3 Cmt. 385Chamber of Commerce Cmt. at 6. 379Id. at 10. 381TINA Cmt. at 6 and 8. 386Id.
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68062 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations organization similarly said that, ‘‘as operate.’’392Assuming that the the true core business was selling the written, . . . [proposed §465.6] would commenter is referring to retailers respondent’s or defendant’s own make it illegal for companies to host any hosting independent consumer reviews products.396Focusing on the ambiguous reviews whatsoever so long as some of on a site they operate or control, then term ‘‘core services’’ would likely open the reviews touch on a category of this is permissible under §465.6. If the the door to manipulation and evasion of business, products, or services the retailer’s website misrepresents that it the prohibition. The commenter further company provides’’ and would prohibit provides independent reviews or noted that it would also be ‘‘useful to ‘‘customer review forums on sites such opinions by experts or organizations, clarify what ‘independent reviews or as Home Depot and Amazon.’’387A then the retailer could be liable under opinions’ means.’’397In this context, retailer said that ‘‘the plain text of . . . §465.6. the term ‘‘independent’’ merely refers to [proposed §465.6 would] sweep[] in Two commenters asked the explicit or implicit claims that reviews more conduct that is neither deceptive Commission to adopt a safe harbor or opinions are not coming from a nor unfair—for example, where provision for disclosures of the business that offers any of the products Company A provides customer reviews relationship between the business and or services being reviewed or evaluated. authored by others to Company B, the provider of the purportedly A business organization commenter without disclosing an ownership independent reviews or opinions.393 suggested that the Commission not relationship.’’388A trade association The Commission’s modifications finalize §465.6 because ‘‘the fraudulent wrote that proposed §465.6 ‘‘could be address this request effectively by nature of reviews on purportedly applied to prohibit retailers from providing that businesses do not violate independent websites would likely be representing that any consumer reviews §465.6 if they are not materially covered by . . . [§§] 465.2 and 465.5 of or opinions featured on their own misrepresenting independence. The the . . . Rule.’’398Those sections are websites are independent, even if they Commission believes that contradictory limited to consumer reviews and are.’’389A retailer commented that disclosures cannot cure a false express consumer or celebrity testimonials and proposed §465.6 is ‘‘overly broad and claim, such as a false express claim of do not apply to reviews, seals, or other would prohibit a business from using a independence. If a false claim of opinions by purportedly independent related entity from [sic] testing or independence is merely implied, experts, organizations399or other comparing products in good faith and whether a disclosure is adequate to cure entities. Therefore, §465.6 is not publishing those results, even if the it will depend on the net impression of duplicative of either §465.2 or §465.5. company clearly disclosed that the test the website or advertisement, i.e., or comparison was done by an whether it materially misrepresents G. §465.7—Review Suppression affiliate.’’390A review platform asked in independence even with the disclosure. Proposed §465.7 sought to prohibit its comment that the Commission clarify A trade association commented that two different types of consumer review that the section would not ‘‘[i]t would be helpful to make it clear suppression. that . . . §465.6 only applies to ‘‘unintentionally lead[] to review sites websites or entities whose core service 1. §465.7(a)
being unable to host reviews of their is providing reviews or opinions.’’394 Proposed §465.7(a) sought to prohibit own company or sector.’’391The The term ‘‘core service’’ is ambiguous, anyone from using an unjustified legal Commission recognizes and agrees with and it is not clear how one would threat or a physical threat, intimidation, the above concerns and is making two determine whether it applies to reviews or false accusation in an attempt to responsive modifications to narrow final or opinions provided by a given website prevent a consumer review or any §465.6 in a way that better reflects the or other entity. False material claims portion thereof from being written or Commission’s intent. The Commission that a website or entity provides created or to cause a consumer review is excluding ‘‘consumer reviews’’ from independent reviews or opinions would or any portion thereof to be removed. the scope of final §465.6 and changing still be deceptive even if such reviews Based on the following, the Commission the prohibition against ‘‘represent[ing]’’ or opinions are not the website’s or is finalizing §465.7(a) with several to a prohibition against ‘‘materially entity’s core service. The NPRM cited a revisions for the purpose of clarity.400 misrepresent[ing].’’ A trade association commented that number of cases in which businesses A number of commenters supported ‘‘many retailers host product reviews on created purportedly independent seals the provision.401The NPRM asked their online shopping websites and or badges that they then awarded to whether it is ‘‘appropriate that . . . make no direct claims that the reviews their own products; the awarding of §465.7(a) focuses on the specific types are independent’’ and asked the such seals or badges was clearly not of listed threats or activities,’’ and two Commission to ‘‘make clear that it is their core business.395The NPRM also permissible for retailers to host product cited cases involving purportedly 396Id. reviews on a site they control and independent review websites, and, 397CCIA Cmt. at 3. although such review websites might 398Chamber of Commerce Cmt. at 6. have appeared to be a ‘‘core service,’’ 399‘‘Endorsements by organizations, especially 387Consumer Reports Cmt. at 9. expert ones, are viewed as representing the 388Amazon Cmt. at 12. The commenter suggested judgment of a group whose collective experience that the Commission ‘‘clarify the regulatory 392RILA Cmt. at 7. exceeds that of any individual member.’’ language to make clear that it covers only reviews 393Hammacher Schlemmer Cmt. at 6–7 Endorsement Guides, 16 CFR 255.4(a). authored by the owner company or its agents.’’ Id. (proposing that the Commission adopt §465.6 with 400One modification is changing ‘‘Rule’’ to The Commission is not adopting this approach the addition of the following clause: ‘‘unless the ‘‘part.’’ because §465.6 is not limited to websites with business discloses that there is a relationship or 401Anonymous 10, Cmt. on NPRM (Aug. 3, 2023), reviews. It also applies to organizations or entities affiliation between the business and the website, https://www.regulations.gov/comment/FTC-2023- that misrepresent that they provide independent organization, or entity that it controls, owns, or 0047-0009; TT in PA, Cmt. on NPRM (Aug. 9, 2023), reviews or opinions (e.g., seals) about a category of operates and why the reviews or opinions are https://www.regulations.gov/comment/FTC-2023- businesses, products, or services including the ‘independent’, including the steps that the business 0047-0016 (‘‘TT in PA Cmt.’’); Kurt Braun, Cmt. on business or one or more of the products or services takes to ensure objectivity or independence in NPRM (Aug. 17, 2023), https:// it sells. obtaining such reviews or opinions.’’ (emphasis www.regulations.gov/comment/FTC-2023-0047- 389NRF Cmt. at 11–12. omitted)); Frieling Cmt. at 4. 0026; Superguest Cmt.; Tripadvisor Cmt. at 5–6; 390Hammacher Schlemmer Cmt. at 5. 394CCIA Cmt. at 3. Consumer Reports Cmt. at 9–10; State AGs Cmt. at 391Trustpilot Cmt. at 5. 395NPRM, 88 FR 49375. 2.
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68063 business commenters responded that it accusations should ‘‘allow breathing provision should be strengthened by is.402One of the commenters said that room for First Amendment free speech also covering attempts to force a ‘‘[t]his narrow approach protects concerns, such as requiring a guilty consumer review or a portion thereof to consumers, all while ensuring clarity for mental state from the maker of an be changed or edited.415Proposed businesses and avoiding the pitfall of accusation before culpability §465.7(a) would have prohibited certain ambiguity in the . . . Rule.’’403 attaches.’’410It recommended adding acts made in an attempt to, among other However, as already noted above, based ‘‘knowing that it is false or with reckless things, ‘‘cause a consumer review or any on the comments and on the proposed disregard as to its truth or falsity.’’411A portion thereof to be removed.’’ The definition for the phrase ‘‘unjustified second trade association asserted that Commission believes that, in most legal threat,’’ the Commission is proposed §465.7(a) was ‘‘not narrowly cases, changing or editing a review adopting a definition for the phrase tailored to serve a compelling state would necessarily require removing a ‘‘unfounded or groundless legal threat,’’ interest because it applies regardless of portion of it. Accordingly, the instead of a definition of the phrase the magnitude of the alleged error or Commission is clarifying that final ‘‘unjustified legal threat,’’ as originally intent or state of mind of the business §465.7 applies to such modifications of proposed.404 that makes the false statement.’’412In reviews by adding ‘‘whether or not that A trade association commenter noted order to illustrate its point, the second review or a portion thereof is replaced that ‘‘‘intimidation’ means threat of the trade association also posited a scenario with other content,’’ immediately after use of force’’ so it ‘‘duplicates ‘physical involving false accusations by a ‘‘cause a consumer review or any threat’’’ and should be deleted.405A restaurant owner in a private portion thereof to be removed.’’ review platform commenter questioned conversation with a disgruntled why the ‘‘proposed text is limited to patron.413The owner in the A trade association’s comment asked ‘physical threats’’’ and said that non- hypothetical did not know the that the ‘‘Rule be clarified to emphasize physical threats, such as verbal threats accusations were false and did not act that it does not prohibit companies from in the form of abusive or coercive recklessly. In response to these contacting customers who post negative language, should not be tolerated and comments, final §465.7(a) adopts the reviews to resolve the reported should be acted against.’’406A phrase ‘‘a public false accusation in issues.’’416The commenter was consumer group’s comment said that response to a consumer review that is concerned that ‘‘sensitive customers ‘‘[t]he term ‘intimidation’ seems made with the knowledge that the could argue that such communication sufficiently broad to cover most types of accusation was false or made with from the Company (no matter how threats not otherwise covered by ‘legal’ reckless disregard as to its truth or innocuous) amounts to or ‘physical’ threats.’’407The falsity,’’ rather than the phrase ‘‘false intimidation.’’417The Commission does Commission disagrees with the first accusation,’’ as originally proposed. not believe that a company engages in commenter because, in this context, This change resolves the commenters’ intimidation by merely contacting ‘‘intimidation’’ means things other than concerns regarding the accuser’s state of customers to resolve reported issues or legal or physical threats. Intimidation mind, clarifies the Commission’s intent simply asking satisfied customers to can include abusive communications, that the provision applies only to public update their reviews. Specifying that a stalking, character assassination, and accusations, and provides greater consumer’s concerns will be addressed sexual harassment when those things clarity, thereby making compliance less only if the consumer changes or are used to intimidate, that is to force burdensome. In response to the concern removes a truthful negative review may someone into or deter someone from about subjectivity, the Commission be an unfair or deceptive act or practice taking some action by inducing fear.408 notes that courts can make objective that has the effect of distorting or Three commenters voiced concerns determinations of whether a given otherwise misrepresenting what about the fact that proposed §465.7(a) accusation is false. One of these consumers think of a marketer’s included ‘‘false accusation[s]’’ as a type commenters also asserted broadly that products,418but that issue is beyond the of conduct that could amount to review §465.7(a) ‘‘regulates ‘pure speech,’ not scope of this rulemaking. suppression. A review platform noted conduct, because it applies to the use of A consumer organization’s comment that the determination of whether an words to convey a message’’ and that said that, ‘‘[j]ust as businesses may use accusation is false ‘‘introduces an speech is not commercial speech if it threats or intimidation to prevent a element of subjectivity,’’ and that it does not propose a commercial consumer from leaving a negative would ‘‘be preferable to ground this in transaction.414This assertion has no review, they may use similar tactics to a legal basis, such as defamation.’’409A basis in First Amendment law and is an ensure receipt of a positive review,’’ trade association wrote that ‘‘a overly limited articulation of what statement by a business about a counts as commercial speech. When a thus concluding that §465.7(a)’s consumer review or the consumer business makes a public false accusation ‘‘prohibitions . . . should also apply to making a review may sometimes be in in response to a consumer review in an compelled creation of positive order,’’ and a prohibition on false attempt to cause the review to be reviews.’’419Although compelling the removed, the speech at issue is clearly creation of positive reviews through commercial speech because it is threats or intimidation may be an unfair 402Transparency Company Cmt. at 14; Family First Life Cmt. at 15. intended to promote the product, or deceptive act or practice, the 403Family First Life Cmt. at 15. service, or business that was the subject 404See supra section IV.A.2.l of this document. of the negative consumer review. 415Yelp Cmt. at 7; CCIA Cmt. at 4. 405NFIB Cmt. at 4. Two commenters, a review platform 416NRF Cmt. at 12. 406Trustpilot Cmt. at 17. and a trade association, said that the 417Id. 407Consumer Reports Cmt. at 10. 418See Endorsement Guides, 16 CFR 255.2(d). 408See Intimidate (def. 3), Dictionary.com, LLC, 419Consumer Reports Cmt. at 9. Although it does https://www.dictionary.com/browse/intimidate (last 410NFIB Cmt. at 4.
2. §465.7(b)
this document. Another modification discussed above is changing ‘‘person’’ to ‘‘individual.’’ See 428Amazon Cmt. at 12.
supra section IV.A.2.b of this document. As it has 429Transparency Company Cmt. at 14. 432NPRM, 88 FR 49376. done elsewhere in the rule, the Commission is 430IAB Cmt. at 11. 433Yelp Cmt. at 7–8. limiting the misrepresentations prohibited to 431Id. 434Id. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68065 reviews.’’435The Commission did not if they were to sort or filter the reviews location, etc.).’’445As long as the policy intend for proposed §465.7(b) to cover differently. Another trade association’s is applied to all reviews equally, those the use of consumer reviews in comment said that ‘‘the Rule should could be legitimate reasons for marketing materials. Specifically, explicitly allow retailers to sort reviews suppressing reviews. proposed §465.7(b) was only intended by objective measures unrelated to the A trade association commented that to cover misrepresentations about the positivity of the review, where the one of the listed, acceptable reasons for body of reviews in a ‘‘reviews’’ section sorting method is disclosed.’’440As suppressing reviews is too limited. of a website or platform—that is, a modified, §465.7(b) does not prohibit Specifically, it said that ‘‘libelous’’ portion of a website or platform the sorting or organization of reviews, so reviews would not cover reviews with dedicated in whole or in part to the proposed modification is an oral component that were receiving and displaying consumer unnecessary. ‘‘slanderous,’’ and it thus recommended reviews—and not misrepresentations Four industry commenters argued that using the word ‘‘defamatory.’’446The about whether a highlighted review is there are legitimate reasons for Commission intended to cover all ‘‘representative.’’ The Commission is suppressing consumer reviews beyond defamatory consumer reviews, not just clarifying this by changing ‘‘displayed those listed in proposed §465.7(b).441 written ones, and the Commission is on its website or platform’’ to One of these commenters, a retailer, making that clarification. ‘‘displayed in a portion of its website or gave examples of other legitimate Another one of the listed, acceptable platform dedicated in whole or in part reasons for suppressing a review: reasons for suppressing reviews was to receiving and displaying consumer ‘‘describing violence, encouraging that ‘‘the seller reasonably believes the reviews.’’ The Commission notes illegal activities or misuse of the review is fake.’’ A review platform however, that the use of non- product, incorporating hyperlinks that commented that it is important that this representative consumer reviews in could jeopardize customer online safety, criteria ‘‘cannot be used by a business marketing could be deceptive in or using a language not supported by the to seek to censor consumer reviews violation of section 5 of the FTC Act.436 website.’’442Three of the industry based on a valid experience’’ and said A trade association asked that the commenters said that, by limiting that, without information about the Commission ‘‘clarify what it means for review suppression to the listed reasons, reviewer, the reviewer’s location, and a review to be ‘‘suppressed (i.e., not the provision violated the First the reviewer’s other reviews, ‘‘it can be displayed).’’437The trade association Amendment and section 230 of the difficult to accurately identify fake said that ‘‘[m]any businesses that Communications Decency Act,443and reviews.’’447One individual commenter operate websites that display consumer all four asked the Commission to clarify wrote that this ‘‘is overbroad and gives reviews will organize those reviews in that the listed reasons are not sellers leeway to suppress reviews at reasonable ways to help consumers exhaustive.444The Commission agrees their discretion so long as they claim a navigate what might be a large corpus of that there are legitimate reasons for belief that said reviews were fake.’’448 varying consumer commentary’’ and suppressing reviews beyond those listed The commenter recommended ‘‘revising that, ‘‘[i]f a business takes reasonable and is clarifying that the listed criteria this provision to add specificity and steps to organize their reviews, those for review suppression are non- identify the parameters of what a fake reviews should not be considered exhaustive examples. review looks like.’’449A seller does not ‘suppressed.’’’438The Commission Proposed §465.7(b) provided that risk liability if the suppression occurs agrees that organizing reviews does not suppression was not violative ‘‘so long for a reason other than the review’s qualify as suppressing reviews. The as the criteria for withholding reviews rating or negative sentiment. The Commission notes, however, that are applied to all reviews submitted provision’s phrase ‘‘such as’’ recognizes organizing reviews in a way that makes without regard to the favorability of the that it is proper to suppress reviews for it difficult for consumers to know about review.’’ The Commission is clarifying legitimate reasons. For this specific or find negative reviews could be an that the criteria must be applied to all enumerated exception, ‘‘the seller [only unfair or deceptive act or practice in reviews equally. Additionally, to be needs to] reasonabl[y] believe[] the violation of section 5 of the FTC Act. consistent with the above clarification review . . . [to be] fake.’’ Thus, if there The commenter also asked that the regarding sentiment, the Commission is are indicia that would lead a reasonable Commission change ‘‘not displayed’’ to changing ‘‘without regard to the person to believe that the review is fake, ‘‘not displayed or accessible.’’439The favorability of the review’’ to ‘‘without the seller would meet this exception. Commission is instead clarifying its regard to sentiment.’’ A different, listed acceptable reason original intent by changing ‘‘not An individual commenter asked for suppressing reviews was ‘‘content displayed’’ to ‘‘not displayable,’’ so that whether a company could ‘‘have a that is discriminatory with respect to the provision only covers reviews that policy of not posting reviews that race, gender, sexuality, ethnicity, or consumers will be unable to view even mention other products’’ or suppress a another protected class.’’ The review that is ‘‘patently false (wrong Commission is changing ‘‘protected 435NRF Cmt. at 12. company, wrong product, wrong class’’ to ‘‘intrinsic characteristic’’ in 436An individual commenter said it would be order to more closely echo the language helpful to have rule language ‘‘around a business being allowed to highlight specific testimonial 440NRF Cmt. at 13. in the CRFA on which the reason is reviews on their website as long as there is a 441IAB Cmt. at 11; Technet Cmt. at 3; Amazon based.450 disclaimer or prominent indication that the page Cmt. at 12; NRF Cmt. at 13. does not represent all reviews for the business.’’ 442Amazon Cmt. at 12. A different commenter Anonymous 3 Cmt. The rule does not prohibit such gave the example of a snowstorm ‘‘obstruct[ing] the 445Anonymous 4 Cmt. ‘‘highlighting’’ of specific reviews or testimonials, delivery of a package to a buyer who could claim 446NFIB Cmt. at 5. but the creation of a safe harbor for such failure to deliver on time.’’ TechNet Cmt. at 3. The 447Trustpilot Cmt. at 18. highlighting is beyond the scope of the rule. In Commission does not agree that this is a legitimate 448Madeline D’Entrmont, Cmt. on NPRM at 1 addition, the Commission believes that the wording reason for suppressing consumer reviews. (Sept. 22, 2023), https://www.regulations.gov/ of the proposed disclosure is likely inadequate. 443IAB Cmt. at 12; Amazon Cmt. at 12; NRF Cmt. comment/FTC-2023-0047-0064. 437IAB Cmt. at 11. at 13. 449Id.
FTC Act.452 deceptive465and showcasing or A consumer organization expressed In connection with proposed curating reviews might deceptively concern that proposed §465.7(b) §465.7(b), several commenters represent that the reviews presented are ‘‘allows businesses to suppress reviews recommended that the Commission representative or typical of the reviews when they contain ‘harassing,’ ‘abusive,’ impose additional consumer review- received. Based on its policy expertise, or ‘obscene’ content, which are highly related requirements. An individual the Commission declines to address any subjective terms likely to be interpreted commenter asked the Commission to of these practices in this rulemaking at broadly by businesses that have a clear ‘‘require businesses to display consumer this time. interest in suppressing reviews that may reviews in a fair and transparent harm their public perception.’’453The manner, such as by allowing consumers H. §465.8—Misuse of Fake Indicators of commenter suggested that, ‘‘to preserve to choose how they want to sort or filter Social Media Influence the public benefit of reviews that reviews, and by disclosing any criteria Proposed §465.8(a) sought to prohibit contain instances of objectionable or algorithm that they use to rank or anyone from selling or distributing fake content,’’ the Commission could ‘‘allow highlight reviews.’’459Another indicators of social media influence that businesses to redact such content but individual commenter said that can be used by persons or businesses to require them to leave the remainder of ‘‘companies . . . should be required to misrepresent their influence or the review along with any maintain and periodically disclose importance for a commercial purpose.
corresponding score or numerical rating records of review suppression,’’ which Proposed §465.8(b) sought to prohibit available for public consumption.’’454 would, at a minimum, ‘‘contain the anyone from purchasing or procuring Appropriate redaction of portions of number of reviews suppressed at each fake indicators of social media influence consumer reviews may be difficult or rating level and an associated to misrepresent their influence or infeasible in some instances. The justification.’’460A review platform importance for a commercial purpose.
Commission declines to impose such a recommended the Commission expand Based on the following, the Commission requirement at this time. the scope of the rule to (1) prevent has determined to finalize these The State Attorneys General asked in reviews from ‘‘being misquoted and prohibitions with certain their comment that the Commission manipulated via quoting select parts of modifications.466 ‘‘delete[] the phrase ‘based upon their reviews,’’ and (2) require that the ratings or their negativity’ at the end of criteria on which consumer reviews are Several commenters raised concerns the first sentence.’’455The State selected for showcasing (e.g., on a about the meaning of the term ‘‘fake’’ in Attorneys General’s reasoning for this website carousel) be made clear.461A the context of indicators of social media request was that the language is consumer organization commented that influence. A trade association asked, unnecessarily limiting and superfluous’’ consumers should be able to assume ‘‘Does ‘fake’ only mean that the likes because ‘‘a company seeking to suppress that the reviews that they see on a and followers were created by bots or negative reviews could potentially business’s website are representative of through fake accounts? If a social media succeed by offering reasons that are the reviews the business receives, and if influencer were to recommend that their proxies for negativity’’ and ‘‘any ‘‘a business wishes to curate reviews, followers also follow another business’ legitimate suppression should already the business should have the burden to social media account, would that also be be sufficiently covered by the robust transparently communicate the fact and ‘procuring’ of ‘fake’ indicators of social carve-outs set forth in §465.7(b)(1).’’456 nature of the curation to consumers.’’462 media influence? . . . If the FTC means The Commission declines to make that One individual commenter asked that to capture a specific category of ‘likes,’ change, as the enumerated ‘‘carve-outs’’ the proposed rule be ‘‘extended to ‘follows,’ or other metrics that do not do not exhaustively identify every include penalties for Pay-to-Play reflect any real opinions, findings, or legitimate reason for suppressing platforms that engage in practices such experiences with the marketer or its reviews. as manipulating ratings and suppressing products or services, it should make that A business organization asserted that negative reviews for businesses that proposed §465.7(b) ‘‘implies a ‘gross 463Anonymous 11, Cmt. on NPRM (Aug. 16, feedback score’ must be disclosed along 2023), https://www.regulations.gov/comment/FTC- 457TechNet Cmt. at 3. 2023-0047-0022.
451RILA Cmt. at 4. 459Ravnitzky Cmt. at 2. 465Endorsement Guides, 16 CFR 255.0(g)(1) and 452Endorsement Guides, 16 CFR 255.2(e)(8)(ii). 460Rob Levy, Cmt. on NPRM at 2 (Sept. 22, 2023), 255.1(b). 453Consumer Reports Cmt. at 10. https://www.regulations.gov/comment/FTC-2023- 466One modification is changing ‘‘Rule’’ to 454Id. 0047-0057. ‘‘part.’’ Another modification, discussed above, is 455State AGs Cmt. at 4. 461Trustpilot Cmt. at 18. changing ‘‘persons’’ to ‘‘individuals.’’ See supra 456Id. 462Consumer Reports Cmt. at 11. section IV.A.2.b of this document. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68067 intention more clear.’’467A retailer additionally require that the seller or ‘subscribe’ to an account, artificially asked for ‘‘confirmation . . . that this purchaser act ‘with knowledge that the inflating the popularity of that provision would not apply where indicators of influence are fake.’’’472 account.’’475The Commission declines companies award legitimate indicators The Commission recognizes that to make this change. It is not the of influence to certain users upon someone could think that they were creation of the bot or fake account, satisfaction of objective criteria, even if paying for a promotional campaign to itself, that the rule makes illegal, but the those individuals are later discovered to increase their followers but, use of the bot or fake account to follow have circumvented or abused those unbeknownst to the purchaser, the another user, watch another user’s criteria.’’468A second trade association entity offering the campaign was lying videos, or create other fake indicia of said that, ‘‘[w]hen . . . indicators are and just providing fake followers. It is social media influence. The same awarded based on legitimate criteria, also possible that a company might commenter said the Commission should they serve this informative and non- bestow a legitimate indicator of social ‘‘remove the word ‘fake’ from the Rule deceptive purpose’’ and the ‘‘innovative media influence, like a seal, that the to clarify that it covers the purchase or companies that develop these indicators company does not know is based upon procurement of any social media of influence should not be punished if or derived from fake indicators of social engagement . . . from both real and fake bad actors try to abuse the processes,’’ media influence. The Commission is accounts unless those incentives can be so the Commission ‘‘should . . . clarify therefore narrowing the provision by disclosed to people who can view the that this section applies to true ‘fake’ adding ‘‘that they knew or should have engagement.’’476The use of indicators of social media known to be fake’’ to both §465.8(a) and incentivized indicia of social media influence.’’469In response to these (b). influence is not necessarily deceptive in comments, the Commission is clarifying A trade association’s comment all cases, and it is beyond the scope of what it intended as ‘‘fake indicators of asserted that ‘‘the Commission failed to this rulemaking. social media influence.’’ For this meet the prevalence requirement’’ Finally, a trade association and a purpose, the final rule includes a because ‘‘the evidence the Commission retailer suggested changing the definition of the phrase ‘‘fake indicators . . . cited in the NPRM . . . all relate[s] prohibition in §465.8(a) from selling or of social media influence’’ in §465.1(h), to the use of actual ‘fake’ indicators of distributing fake indicators that ‘‘can be which defines the phrase as indicators influence that the seller or purchaser used’’ by persons to misrepresent their of social media influence derived from knew were fake.’’473The Commission influence to those that ‘‘are used’’ by bots, purported individual accounts not believes that, with the addition of the persons to misrepresent their associated with a real individual, definition of ‘‘fake indicators’’ and the influence.477The trade association said accounts created with a real individual’s knowledge requirement, it has that ‘‘[a]pplying this section to personal information without their sufficiently addressed the commenter’s indicators of social media influence that consent, hijacked accounts, or that concerns. ‘can be’ used for this purpose, but are otherwise do not reflect a real A trade association expressed concern not, would mean that the rule prohibits individual’s or entity’s activities, that the provision would ‘‘hold[] conduct that is not deceptive.’’478Such opinions, findings, or experiences. If a retailers vicariously liable for the fake indicators are not physical social media influencer were to actions of independent endorsers,’’ that products that people collect and then recommend that their followers also is, the influencers and other endorsers use later as desired. Instead, their follow another social media account, that they hire.474That was not the existence is premised on and limited to any resulting followers of the second Commission’s intention. The situations in which they appear account would not be ‘‘fake.’’ If a distribution of fake indicators of social deceptively on a social media site. company awards legitimate indicators of media influence was intended to mean Therefore, any person or business that influence to certain users upon the distribution to individuals or obtains fake indicators of social media satisfaction of objective criteria businesses who could use the indicators influence is misrepresenting their social reflecting the influence of the users, the to misrepresent their influence, not media influence. While some company would not be selling ‘‘fake’’ causing the dissemination of social individuals may not be doing so for a indicators, even if bad actors were able media by users of such fake indicators, commercial purpose, those individuals to deceive the company. e.g., by hiring influencers who happen are excluded from the rule’s scope. Three commenters addressed the to have fake followers. The Commission Further, a person or entity that is in the section’s lack of a knowledge is clarifying this intent by adding a business of selling or distributing fake requirement. A retailer commenter definition of ‘‘distribute fake indicators indicia of social media influence is wrote that ‘‘a business could be in of social media influence’’ in §465.1(g). engaging in commerce, and it is violation of this provision even if it Although no commenter specifically unreasonable to posit that no buyers innocently sold or procured a fake raised the issue in the context of §465.8, would use such indicia to misrepresent indicator, without knowledge or any the Commission is adding the concept their social media influence for a indication that the indicator was fake,’’ of materiality to both §465.8(a) and (b) commercial purpose. The Commission which it said ‘‘is patently in terms of the scope of therefore declines to make the suggested unreasonable.’’470A second retailer misrepresentations covered therein, so modification. similarly ‘‘recommend[ed] that the rule as to be consistent with other parts of
the seller/buyer knows the indicators A consumer organization said in its Proposed §465.9 provided that the are fake.’’471A trade association comment that the Commission ‘‘should provisions of the rule are separate and suggested ‘‘revising this section to clarify that ‘procure’’’ in §465.8(b) severable from one another and that, if ‘‘includes the creation of automated bot any provision is stayed or determined to 467ANA Cmt. at 17–18. or other fake accounts that ‘follow’ or 468Amazon Cmt. at 13. 475Consumer Reports Cmt. at 11.
470Hammacher and Schlemmer Cmt. at 7. 473Id. at 12. 477IAB Cmt. at 13; Amazon Cmt. at 13. 471Amazon Cmt. at 13. 474NRF Cmt. at 13. 478IAB Cmt. at 13. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68068 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations be invalid, the remaining provisions analysis, the high-cost compliance Finally, a business offering third-party shall continue in effect. The scenario assumed an average review fraud detection tools offered Commission did not receive any compliance burden of 8 hours of research that it claimed showed that the comments regarding proposed §465.9. attorney time for firms with greater than rule would generate benefits of $180.83 The Commission is changing ‘‘shall 500 employees. This average is billion and that the benefits would continue in effect’’ to ‘‘will continue in consistent with some firms, especially outweigh the costs 100:1.482These effect’’ which is more precise. With that the largest ones in industries more estimates are similar to those of the clarification, the Commission is reliant on reviews and testimonials, Commission. finalizing §465.9. choosing to make more extensive
V. Final Rule Rule programs. In addition, the Commission For the reasons described above, the has narrowed the rule and clarified the The Commission believes that the Commission has determined to adopt rule requirements as described in final rule will substantially improve its the provisions of §§465.1, 465.2, and section IV of this document. For these ability to combat certain specified, 465.4 through 465.9 with clarifying or reasons, the Commission continues to clearly unfair or deceptive acts or limiting modifications. The Commission believe the high-cost scenario likely practices involving consumer reviews or declines to finalize proposed §465.3 overestimates compliance costs, and testimonials. Although such unfair or regarding consumer review or chooses to not modify its estimate of deceptive acts or practices are already testimonial reuse or repurposing.
VI. Final Regulatory Analysis Under scenario, but it does present a Act, the rule will increase deterrence of Section 22 of the FTC Act sensitivity analysis below that assesses such conduct by allowing courts to what effect systematic underestimation impose civil penalties against the Under section 22 of the FTC Act, the of compliance costs would have on the violators. In addition, the final rule will Commission, when it promulgates any rule’s net benefits to the public. allow the Commission to seek court final rule for a ‘‘rule’’ as defined in One individual commenter asserted orders requiring violators to compensate section 22(a)(1), must include a ‘‘final that the benefits the Commission consumers for the harms caused by their regulatory analysis.’’ 15 U.S.C. 57b– estimated in the NPRM did not justify unlawful conduct. The Commission 3(b)(2). The final regulatory analysis the estimated compliance costs because believes that the rule will accomplish must contain (1) a concise statement of the same results could be obtained using these goals without significantly the need for, and objectives of, the final the FTC’s existing section 5 burdening honest businesses and that rule; (2) a description of any alternatives authority.480As explained in detail in the rule will provide significant benefits to the final rule which were considered this final regulatory analysis, the to consumers and honest competitors. by the Commission; (3) an analysis of Commission believes that the final rule The final rule will allow courts to the projected benefits, any adverse will increase deterrence of unfair or impose civil penalties under section economic effects, and any other effects deceptive acts or practices involving 5(m)(1)(A) of the FTC Act, 15 U.S.C. of the final rule; (4) an explanation of consumer reviews and testimonials 45(m)(1)(A), against those who engage the reasons for the determination of the relative to relying on its existing in the deceptive or unfair conduct that Commission that the final rule will authority and that the net benefits of the the final rule prohibits. The ability to attain its objectives in a manner rule justify its promulgation. obtain civil penalties is important consistent with applicable law and the reasons the particular alternative was A second individual commenter because it can be difficult to quantify chosen; and (5) a summary of any claimed that it was unreasonable to consumer losses that stem from the use significant issues raised by the assume that the rule would eliminate of unfair or deceptive consumer reviews comments submitted during the public the entire loss to consumers, in terms of and testimonials. Without civil comment period in response to the choosing products optimally, from the penalties, persons who engage in such preliminary regulatory analysis, and a impact of bad information in false conduct might avoid monetary summary of the assessment by the reviews. The commenter asserted that consequences for their unlawful Commission of such issues. 15 U.S.C. deterrence would be only partial conduct simply because there is 57b–3(b)(2)(A)–(E). because some circumstances would insufficient evidence to link their The Commission received several make it difficult to identify such unlawful conduct to quantifiable losses comments that included elements that reviews.481The Commission believes suffered by consumers. And if there are the Commission identified as that its estimate of the benefits of no monetary consequences, potential specifically in response to the reducing manipulated reviews is wrongdoers have little incentive to preliminary regulatory analysis. Two appropriate, as discussed further below. refrain from engaging in unlawful trade associations asserted that However, the Commission presents practices. Because the final rule will compliance costs would be higher than additional sensitivity analysis below allow courts to impose civil penalties estimated by the Commission. These that assesses the effect of systematic for violations, it provides the deterrence associations stated that the risk of overestimation of the degree to which necessary to incentivize compliance statutory penalties would lead many of the rule would fix review manipulation, with the law, even in cases where it is their members to engage in compliance and determines that, even conceding difficult to quantify consumer harm. activities beyond those assumed for the that point, the quantified net benefits In addition, the final rule is necessary high-cost compliance scenario in the are highly positive. to allow the Commission to recover NPRM.479In the preliminary regulatory redress more efficiently to redress system/files/ftc_gov/pdf/ consumer harm resulting from the 479NRF Cmt. at 2–3, 13–14; IAB Cmt. at 5, 15. r311003iabpetition20240212.pdf. As noted above, unfair or deceptive use of reviews or IAB also raised this issue in the context of the the presiding officer at that hearing found that IAB testimonials. In 2021, the U.S. Supreme informal hearing discussed above in section I of this had not shown that compliance costs would be Court in AMG Capital Management, LLC document. See, e.g., Petition by Interactive more than minimal. Advertising Bureau to Designate Disputed Issues of 480Camp-Martin Cmt. at 2–3. Material Fact (Feb. 12, 2024), https://www.ftc.gov/ 481Slezak Cmt. at 3. 482Transparency Company Cmt. at 6–9. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68069 v. FTC483ruled that section 13(b) of the Commission’s past cases challenging In the analysis below, the FTC Act484did not authorize the unfair or deceptive consumer reviews or Commission describes the anticipated Commission to seek court orders testimonials involved rule violations impact of the rule. Where possible, the requiring wrongdoers to return money that would allow the Commission to Commission quantifies the benefits and unlawfully taken from consumers seek monetary relief under section costs. If a benefit or cost is quantified, through unfair or deceptive acts or 19(a)(1). With the final rule, however, the Commission indicates the sources of practices or give up the unjust gains the Commission will be able to use the data relied upon. If an assumption they earned from engaging in such section 19(a)(1) to obtain redress for is needed, the analysis makes clear unlawful conduct. The AMG ruling has consumer losses attributable to which quantities are being assumed. made it significantly more difficult for violations of the rule. The Commission measures the benefits the Commission to return money to and costs of the rule against a baseline Overall, outlawing egregious review injured consumers, particularly in cases in which no rule has been promulgated and testimonial practices in the final that do not involve rule violations.485 by the Commission. For the remainder rule expands the Commission’s Since AMG, the primary means for the of section VI, and in the interest of enforcement toolkit and allows it to Commission to return money brevity, the term ‘‘reviews’’ collectively deliver on its mission by stopping and unlawfully taken from consumers is refers to both reviews and testimonials. deterring harmful conduct and, in some section 19 of the FTC Act, 15 U.S.C. cases, making American consumers Quantifiable benefits stem from 57b, which provides two paths for whole when they have been harmed. consumer welfare improvements and consumer redress. The longer path, The unfair or deceptive acts or practices consumer time savings. With the rule, under section 19(a)(2), typically requires involving reviews and testimonials reviews will be more accurate overall, the Commission to first conduct an encompassed by this final rule are leading consumers to purchase higher- administrative proceeding to determine prevalent and harmful to consumers and quality products or products that are whether the respondent violated the honest businesses. Thus, the unlocking better-matched to their preferences. The FTC Act; if the Commission finds that of additional remedies through this rule will also lead to more trustworthy the respondent did so, the Commission rulemaking—particularly, the ability to aggregate review ratings (e.g., star issues a cease-and-desist order, which obtain civil penalties against violators ratings), leading some consumers to might not become final until after the and redress for consumers or others spend less time scrutinizing reviews to resolution of any resulting appeal to a injured by the conduct—will allow the determine their validity. Quantifiable Federal court of appeals. After the Commission to more effectively police costs primarily reflect the resources conclusion of the administrative and deter harmful review and spent by businesses to review the rule proceeding (and any appeal), the testimonial practices that plague and to take any preemptive or remedial Commission must initiate an action in Federal court to obtain monetary relief consumers and honest businesses. steps to comply with its provisions. Because the rule is an application of under section 19 and, in that action, the B. Anticipated Costs and Benefits of the preexisting law under section 5 of the Commission must prove that the Final Rule FTC Act, the Commission expects these violator engaged in objectively compliance costs to be minimal.
fraudulent or dishonest conduct.486In As discussed below, the Commission A period of ten years is used in the effect, the section 19(a)(2) pathway has determined that the rule’s benefits baseline scenario because FTC rules are requires the Commission to file two greatly outweigh its costs. The rule subject to review every ten years.488 separate actions to obtain monetary promotes accuracy in reviews and Quantifiable aggregate benefits and costs relief. testimonials by prohibiting certain are summarized as the net present value The more efficient path to monetary unfair or deceptive acts or practices over this ten-year period in Table 1.1.
relief is under section 19(a)(1), which involving reviews and testimonials. The discount rate reflects society’s allows the Commission to recover Thus, this rule will help the vast preference for receiving benefits earlier redress in one Federal court action for majority of American consumers who rather than later; a higher discount rate violations of a Commission rule relating rely on such reviews and testimonials to is associated with a greater preference to unfair or deceptive acts or make better-informed purchase for benefits in the present. The present practices.487Only a small portion of the decisions. The rule prohibits (1) the value is obtained by multiplying each creation, sale, purchasing, or year’s net benefit by a discount factor 483141 S. Ct. at 1352. procurement from insiders of fake or 48415 U.S.C. 53(b). false reviews, and (2) buying of reviews raised to the power of the number of 485See ANPR, 87 FR at 67425, 67425 n.1 years in the future the net benefit conditioned on the reviews expressing (discussing AMG Cap. Mgmt.). accrues.
3% Discount Rate................................................................................................................................. $67.40 $269.55 7% Discount Rate................................................................................................................................. 57.03 230.44 Total One-Time Costs ................................................................................................................................. 0.87 0.00 Net Benefits:
3% Discount Rate................................................................................................................................. 66.53 269.55 7% Discount Rate................................................................................................................................. 56.16 230.44
1. Estimated Benefits of the Final Rule When making purchase decisions, is essentially the only means for consumers typically have incomplete imposing civil penalties in most cases This section describes the beneficial information on product quality and involving such practices. Civil penalties impact of the rule, provides quantitative attributes. Searching for additional are not available for conduct that estimates where possible, and describes information is costly. Consumers incur violates section 5(a)’s prohibition on benefits that are only assessed costs—including time and effort costs— unfair or deceptive acts or practices— qualitatively. The quantifiable estimates to seek, evaluate, and integrate rather, a violation of an FTC rule is reflect benefits stemming from the incoming information. Online platforms necessary to impose civil penalties decrease in online review manipulation where past users share information under section 5(m)(1)(a). Civil penalties on third-party platforms or company about their experiences can significantly act as a deterrent to fraud and deception websites, which covers most of the lower search costs. in connection with reviews.491 prohibitions contained in the rule. This Researchers have also demonstrated To obtain redress without alleging a analysis does not calculate benefits from that consumer reviews create value for rule violation, the Commission must the other aspects of the rule—that is, the consumers beyond a reduction in search typically first determine in an prohibitions on fake or false celebrity costs. Consumers are better able to learn administrative proceeding that the testimonials, company-controlled of a product’s quality and attributes respondent violated the FTC Act, entities that deceptively purported to when there is free-flowing, non- successfully defend that determination provide independent opinions, review manipulated commentary from past in any appeal to a Federal court of suppression, and the misuse of fake consumers. Consumer reviews lead to appeals, and then initiate a second indicators of social media influence— ‘‘better’’ decisions by increasing the action in Federal district court under because of the limited quantitative level of information available prior to section 19(a)(2) in which the research in these areas. Some of these purchase and reducing uncertainty. By Commission must prove that the benefits are likely to be substantial. The the same token, the academic literature conduct at issue is ‘‘one which a quantified benefits are presented by also documents that manipulated or reasonable man would have known benefit category, rather than stemming fake reviews lead to reductions in under the circumstances was dishonest from a specific provision of the rule, consumer welfare by leading consumers or fraudulent.’’492Although these because the relevant provisions have the to buy low-quality products or requirements are likely to be satisfied in otherwise make suboptimal purchase same end goal—that is, to improve the cases involving the conduct covered by decisions.490 information available to consumers by A secondary benefit is deterrence of reducing the level of review 491In October 2021, the Commission authorized the specified review practices. The rule manipulation. Therefore, it is difficult to a Notice of Penalty Offenses concerning disentangle the benefits stemming from endorsement practices that the FTC determined to each provision. 490See, e.g., Chrysanthos Dellarocas, Strategic be unfair or deceptive in prior administrative cases, Manipulation of Internet Opinion Forums: including falsely claiming an endorsement by a Existing academic literature in Implications for Consumers and Firms, 52(10) third party; misrepresenting whether an endorser is Mgmt. Sci., 1577–93 (2006), https://www.jstor.org/ economics, marketing, computer an actual, current, or recent user; and failing to stable/pdf/20110630.pdf; Michael Anderson & science, and other fields documents the Jeremy Magruder, Learning from the Crowd: disclose an unexpected material connection with an importance of online reviews; Regression Discontinuity Estimates of the Effects of endorser. See, e.g., Press Release, Fed. Trade specifically that the number of online an Online Review Database, 122(563) Econ. J., 957– Comm’n, FTC Puts Hundreds of Businesses on 89 (2012); Michael Luca & Georgios Zervas, Fake It Notice about Fake Reviews and Other Misleading reviews and aggregate ratings are Till You Make It: Reputation, Competition, and Endorsements (Oct. 13, 2021), https://www.ftc.gov/ extremely important for consumer Yelp Review Fraud, 62(12) Mgmt. Sci., 3412–27 news-events/news/press-releases/2021/10/ftc-puts- purchase decisions. It is widely (2016), https://dash.harvard.edu/handle/1/ hundreds-businesses-notice-about-fake-reviews- documented that the presence of online 22836596; Jonathan Zinman & Eric Zitzewitz, other-misleading-endorsements. The notice allows reviews improves consumer welfare via Wintertime for Deceptive Advertising?, 8(1) Am. the agency to seek civil penalties pursuant to Econ. J. Applied, 177–92 (2016), https:// reductions in both search costs and the www.aeaweb.org/articles?id=10.1257/ section 5(m)(1)(B) of the FTC Act against a company level of information asymmetry that app.20130346; Imke Reiners & Joel Waldfogel, that received the notice and then engages in exists prior to purchase.489 Digitization and Pre-purchase Information: The conduct that the Commission previously Causal and Welfare Impacts of Reviews and Crowd determined to be unfair or deceptive. 15 U.S.C. Ratings, 111(6) Am. Econ. Rev., 1944–71 (2021), 45(m)(1)(B). 489See, e.g., Dina Mayzlin, Promotional Chat on https://www.aeaweb.org/articles?id=10.1257/ 49215 U.S.C. 57b(a)(2). Depending on the the Internet, 25(2) Mktg. Sci., 155–63 (2006). aer.20200153. egregiousness of the misconduct and the harm it is causing, the Commission also may seek preliminary injunctive relief in Federal court. 15 U.S.C. 53(b).
VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68071 the rule, it would take substantially which consumers consult online pet care), totaling $384.05 billion for more time and resources, and would reviews. U.S. e-commerce sales by retail both sectors.499About half of hotel significantly delay any redress to firms totaled $1.119 trillion in 2023.495 revenue is generated by business consumers, compared to a single The Commission assumes that all online travelers, who might rely less on online Federal court action alleging a rule retail sales had some form of user- reviews than leisure travelers do.500In violation, in which the court adjudicates generated commentary (e.g., on third- addition, pre-paid hotel bookings and both whether the defendant violated the party review platforms or on company vacation rentals booked online are rule and, if so, the appropriate amount websites), and that this commentary already accounted for in the e- of monetary relief to award.493 factored into consumers’ purchase commerce sales figure described above. Given the prevalence of unfair or decisions for these goods. Furthermore, some consumers may be deceptive conduct involving reviews Online reviews are also important for loyal customers of local salons and and testimonials, the Commission will commerce that is not conducted online, other personal services, regardless of have no shortage of bad actors to including for revenues earned by the these businesses’ online reputations. For investigate; it can invest the extra hospitality industry and by other these reasons, the Commission assumes resources freed up by the final rule into services. Sales for businesses classified that a subset of accommodation and more investigations and actions with as ‘‘Food Services and Drinking Places’’ personal services revenues is affected by respect to consumer reviews or by the U.S. Census totaled $980.15 consumer reviews. Similar to the testimonials. In sum, the potential billion in 2022, which includes revenue calculation for the food and drinking consumer-redress benefits of the rule are from restaurants and bars.496The places industry, the Commission significant: the Commission can put a Commission assumes that consumers assumes that twenty-five percent of total stop to more inarguably unfair or rely on reviews for only a portion of accommodation and personal care deceptive consumer reviews, return these sales. Some consumers— services revenue is impacted by more money to consumers, and obtain particularly those living in rural parts of consumer reviews (twenty-five percent that redress more quickly. the country and in smaller cities—may of $384.05 billion, or $96.01 billion). have a small set of familiar food and The total estimated revenue for services a. Consumer Welfare Benefits From drink establishments available to them, impacted by consumer reviews is Better-Informed Purchase Decisions making online reviews less influential $341.05 billion (the sum of $245.04 The study containing the most direct to their decision to patronize a billion and $96.01 billion). Combining estimate of welfare losses from review particular one. Moreover, prior research the revenue estimates described above manipulation finds that the presence of has found that online reviews do not yields $1.461 trillion in estimated sales fake reviews leads consumers to lose impact revenues of chain restaurants.497 of goods or services for which $0.12 for every dollar spent in an Accordingly, the Commission assumes consumers incorporate reviews into experimental setting.494The study that consumers rely on reviews for their decision-making. considers a limited number of kinds of twenty-five percent of the total revenue Quantitative estimates of the review manipulation, which notably generated in the food services and incidence of fake or false reviews vary does not include suppression of drinking places sector (twenty-five by source.501Nevertheless, at least three negative reviews or misrepresenting the percent of $980.15 billion, or $245.04 prior studies examining the degree of independence of reviews, which might billion).498 review manipulation as a proportion of mean that $0.12 is an underestimate of Online reviews are also important for businesses or products (rather than as a the effect of the rule. However, the sales in other service sectors. In 2022, proportion of reviews) contain similar study also measures the effect of total revenue was $316.35 billion for the findings. According to these studies, complete elimination of inflated star accommodations sector (which includes approximately ten percent of products ratings and false written narratives, hotels and vacation rentals), and total or businesses have some manipulated which might mean that $0.12 is an revenue was $67.70 billion for personal overestimate of the effect of the rule. services (including beauty salons, barber 499See U.S. Census Bureau, Service Annual Thus, the Commission believes that a shops, health clubs, and non-veterinary Survey (SAS), supra note 496 (listing total 2022 reasonable proxy for the effect of the revenue of $316,350,000,000 for NAICS Code 721 and listing total 2022 revenue of $67,698,000,000 rule’s elimination of much review 495See U.S. Census Bureau, Quarterly Retail E- for NAICS Codes 812111 through 812199 and manipulation is that consumers will Commerce Sales 4th Quarter 2023, Feb. 20, 2024, NAICS Code 81291. gain an estimated $0.12 for every dollar https://www2.census.gov/retail/releases/historical/ 500See Linchi Kwok, Will Business Travel spent on goods whose online reviews ecomm/23q4.pdf. Spending Return to the Pre-Pandemic Level Soon?, 496U.S. Census Bureau, Service Annual Survey Hospitality Net, Sept. 22, 2022, https:// included fake or false ones. (SAS), Jan. 30, 2024, https://www.census.gov/ www.hospitalitynet.org/opinion/4112075.html. To estimate consumer welfare benefits programs-surveys/sas.html (listing total revenue of 501These estimates range from the single digits to from better-informed purchase $980,153,000,000 for NAICS Code 722 in 2022, the over twenty percent. See Tripadvisor, 2023 Review decisions, the Commission first most recent year with data). Transparency Report, https://www.tripadvisor.com/ estimates the total amount of sales for 497See Michael Luca, Reviews, Reputation, and TransparencyReport2023 (last visited July 5, 2024) Revenue: The Case of Yelp.com, Harvard Bus. Sch. (finding that 4.4 percent of review submissions Working Paper 12–016 (2016). were fraudulent); Trustpilot, Transparency Report 493See, e.g., Press Release, Fed. Trade Comm’n, 498Twenty-five percent is likely a reasonable 2024, https://assets.ctfassets.net/b7g9mrbfayuu/ Marketers of Ab Force Weight Loss Device Agree to estimate based on the difference in revenues for 7p63VLqZ9vmU2TB65dVdnF/6e47d9ee81c145b5 Pay $7 Million for Consumer Redress (Jan. 14, new restaurants and established restaurants. A e3d1e16f81bba89a/Trustpilot_Transparency_ 2009), https://www.ftc.gov/news-events/news/press- study conducted by Toast, Inc., found that new Report_2024.pdf (last visited July 5, 2024) (stating releases/2009/01/marketers-ab-force-weight-loss- restaurants earn approximately $112,000 in average that its software removed 6 percent of reviews due device-agree-pay-7-million-consumer-redress revenue per year. Justin Guinn, What is the Average to being fake); Yelp, 2023 Yelp Trust & Safety (describing a 2009 settlement of a follow-on section Restaurant Revenue for a New Restaurant?, https:// Report (Feb 28, 2024), https://trust.yelp.com/trust- 19(a)(2) action against Telebrands Corp. that was pos.toasttab.com/blog/on-the-line/average- and-safety-report/2023-report (stating that 16 brought after the conclusion of litigation over a restaurant-revenue (last visited July 5, 2024). This percent of submitted reviews were marked as ‘‘not 2003 administrative complaint alleging violations of is approximately twenty-five percent of average recommended’’ by Yelp’s software); Devesh Raval, section 5). revenue for restaurants overall ($486,000, according Do Gatekeepers Develop Worse Products? Evidence 494See Jesper Akesson et al., The Impact of Fake to the website Eat Pallet, see Shari Mason, How from Online Review Platforms, (Feb. 27, 2023), Reviews on Demand and Welfare, National Bureau Much Do Restaurants Make in a Day? Solved, May https://deveshraval.github.io/reviews.pdf (Working of Economic Research Working Paper 31836, Nov. 24, 2024, https://eatpallet.com/how-much-do- Paper) (finding that the share of hidden (likely fake) 2023, https://www.nber.org/papers/w31836. restaurants-make-in-a-day). Yelp reviews is as high as 47 percent). VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd 68072 Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations consumer reviews.502Thus, a basic using price differentials of review- The Commission estimates annual approximation of total e-commerce sales manipulated products versus others. welfare gains by applying the $0.12 involving some review manipulation is Because products with online review estimate, described above, to the ten percent of $1.119 trillion, or $111.9 manipulation have price points that are estimated amount of U.S. sales that are billion. Similarly, a basic approximation approximately 19 percent of the average likely to have some manipulated of review-dependent service industry price of goods sold online (according to consumer reviews, yielding an annual sales involving some review research using data from Amazon),504a estimate of welfare gains in the range of manipulation is ten percent of $341.05 more conservative estimate of review- $6.64 billion (12 percent of $55.36 billion, or $34.1 billion.
10 ................................................................................................. $17.52 $230.36 $196.91 1.9 ................................................................................................ 6.64 67.40 57.03 b. Consumer Time Savings From consumer reviews. This in turn will shop online more than once a week, Increased Reliability of Summary lead some consumers to spend less time twenty percent shop online once a Ratings scrutinizing individual reviews to detect week, twenty-three percent shop online red flags commonly found in once every two weeks, twenty-five The rule’s prohibitions against manipulated reviews (e.g., spelling and percent shop online once a month, and deceptive and unfair consumer review grammar mistakes, generic highly the remainder do so every few acts and practices would increase the positive or negative statements, and lack months.507Different age groups of reliability of consumer reviews. The of detail). Therefore, the rule is likely to online shoppers spend various amounts Commission assumes that this result in some amount of time savings of time reading reviews before making a improvement in the dependability of for consumers who consult online purchase decision. On average, younger reviews will lead consumers to place reviews before making purchases. consumers spend more time reading more trust in aggregate measures (e.g., Approximately eighty percent of reviews than older consumers.508This aggregate star ratings), which many Americans are online shoppers.506Of analysis does not incorporate time spent review settings use to summarize those who shop online, fourteen percent by consumers researching reviews of 502See Nan Hu et al., Manipulation of Online 504See Davide Proserpio et al., How Fake percent from 2020 to 2021) and grew 7.7 percent Reviews: An Analysis of Ratings, Readability, and Customer Reviews Do—and Don’t—Work, Harvard from 2021 to 2022. This analysis does not project Sentiments, 52(3) Decision Support Systems 674–84 Bus. Rev., Nov. 24, 2020, https://hbr.org/2020/11/ revenues for non-e-commerce industries because (Feb. 2012) (finding that 10.3 percent of books sold how-fake-customer-reviews-do-and-dont-work. The linear trends during recent years are unique to the on Amazon had manipulated reviews); Luca, Fake authors find that products sold on Amazon with pandemic and are unlikely to be accurate for future It Till You Make It: Reputation, Competition, and manipulated reviews are typically in the $15 to $40 Yelp Review Fraud, supra note 490 (finding that ten price range. The midpoint of this range ($27.50) years. percent of Boston restaurants had filtered 5-star represents 19 percent of the average product’s price 506See Pew Research Center, Online Shopping reviews on Yelp) (Table 3, row 4); Raval, Do ($142.74, according to one study see Semrush Inc., and E-Commerce, Dec. 19, 2016, https:// Gatekeepers Develop Worse Products? Evidence Amazon Pricing Study: The Most Expensive www.pewresearch.org/internet/2016/12/19/online- from Online Review Platforms, supra note 501 Products, Category Volatility, and Seasonal Price shopping-and-e-commerce. (finding that 9.7 percent of businesses with reviews Shifts, Mar. 22, 2022, https://www.semrush.com/ 507See Int’l Post Corp., Cross-Border E-Commerce or complaints with the Better Business Bureau are blog/amazon-pricing-study). of low quality, where fake reviews inflate ratings) 505E-commerce sales increased by 7.6 percent Shopper Survey 2022, Jan. 2023, https:// (Table III, column 3, row 1). from 2022 to 2023. See U.S. Census Bureau, www.ipc.be/-/media/documents/public/ 503See, e.g., Sherry He et al., The Market for Fake Quarterly Retail E-Commerce Sales 4th Quarter publications/ipc-shoppers-survey/ Reviews, 41(5) Mktg. Sci. 896 (2022), https:// 2023, supra note 495. Using growth in the past year onlineshoppersurvey2022.pdf. papers.ssrn.com/sol3/papers.cfm?abstract_ to predict future e-commerce sales results in a more 508See BrightLocal, Local Consumer Review id=3664992; Dina Mayzlin et al., Promotional conservative estimate than using a longer time Survey 2019, Dec. 11, 2019, https:// Reviews: An Empirical Investigation of Online frame. E-commerce sales experienced higher annual www.brightlocal.com/research/local-consumer- Review Manipulation, 104(8) Am. Econ. Rev. 2421– growth rates prior to 2021 (14 percent from 2018 review-survey-2019.
55 (2014). to 2019, 43 percent from 2019 to 2020, and 14 VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68073 restaurants, hotels, and other goods and concerned the purchase of multiple decreased frustration. The Commission services that are not purchased online products. This analysis assumes that the is not able to quantify these benefits. because of the limited amount of time listed in the survey results pertains Finally, some consumers may spend information available regarding to the purchase of a single product. It more time reading reviews if reviews are consumers’ total time spent on such also assumes that the implementation of less likely to be fake or otherwise activities. the rule will reduce the time spent manipulated. This increase in time According to the Bureau of Labor reading reviews by ten percent. spent reading reviews may offset any Statistics, the average hourly wage in Combining the above figures results in time savings from the increased 2023 was $31.48.509Recent research reliability of summary ratings. $2.49 billion in consumer time savings suggests that individuals living in the Therefore, the Commission presents per year, or a present value of $33.53 United States value their non-work time another scenario in Table 2.2 where billion to $39.19 billion over a 10-year at eighty-two percent of average hourly consumers do not gain any benefits from period, as described in Table 2.2.
earnings.510Thus, Americans overall time savings. However, as before, there value their non-work time at $25.81 per In addition, there are likely to be are likely to be additional benefits that hour on average. other utility-related benefits consumers are difficult to quantify (e.g., decreased The survey data does not specify receive when reading nonmanipulated frustration) that result from reading whether consumers were surveyed online reviews or consulting more more accurate reviews, likely yielding regarding the time spent reading accurate aggregate summary measures, positive net benefits related to reading reviews before the purchase of a single such as increased satisfaction (apart reviews even when consumers spend product or whether the question from purchasing decisions) and more time doing so. TABLE 2.2—ESTIMATED BENEFITS FROM TIME SAVINGS [2024–2033] Scenario 1—Improved Reliability of Aggregate Measures Reduces Overall Time Spent Reading Reviews Number of online shoppers, age 18–34a................................................................................................................................ 60,467,204 Average amount of time spent reading online reviews before making a purchase decision (in hours), age 18–34 ............. 0.336 Number of online shoppers, age 35–54a................................................................................................................................ 67,273,832 Average amount of time spent reading online reviews before making a purchase decision (in hours), age 35–54 ............. 0.231 Number of online shoppers, age 55+a ................................................................................................................................... 78,920,814 Average amount of time spent reading online reviews before making a purchase decision (in hours), age 55+ ................. 0.167 Total amount of time all online shoppers spend reading online reviews before making a purchase decision (in hours) ............................................................................................................................................................................ 48,991,116 Total amount of time U.S. online shoppers spend reading online reviews per year (in hours)b .................................... 1,728,406,578 Value of time for online shoppers (per hour) ................................................................................................................... $25.81 Percentage of time saved ................................................................................................................................................ 10% Total annual time savings ................................................................................................................................................ $4,461,017,378 Total 10-year (2024–2033) time savings, 3% discount rate (in billions) ......................................................................... $39.19 Total 10-year (2024–2033) time savings, 7% discount rate (in billions) ......................................................................... $33.53 Scenario 2—Increase in Time Spent Reading Reviews Offsets Time Savings from Improved Reliability of Summary Measures No quantifiable benefit ............................................................................................................................................................. $0 a80% of age-specific total U.S. population (Source: Pew Research Center, U.S. Census). bAdjusting for online shopping frequency (Source: International Post Corporation).
c. Benefits Related to Competition online reviews typically offer higher competitors in terms of visibility (e.g., quality goods and services. On the other via rankings or search results).513It Accurate online reviews have been hand, lower-quality firms often follows that by curbing the number of shown to improve competition. Several experience revenue losses with more fake, false, or manipulated reviews, the studies have found that online reviews online review activity.512 rule would benefit consumers by are particularly important for independent and newer firms.511 Relatedly, fake, false, and improving the competitive environment Ratings are more influential for these manipulated online reviews allow for legitimate firms selling higher- firms because consumers do not have companies to surpass competitors. One quality products (i.e., those who do not strong prior beliefs as to their quality. study found that it only takes 50 fake rely on review manipulation to sell their New entrants whose sales benefit from reviews for a seller to pass any of its goods). While the benefits resulting 509Bureau of Labor Statistics, May 2023 National Georgios Zervas, The Welfare Impact of Consumer independent hotels have declined substantially Occupational and Wage Estimates, Unites States, Reviews: A Case Study of the Hotel Industry, largely due to online reputation mechanisms). https://www.bls.gov/oes/current/oes_nat.htm https://economics.sas.upenn.edu/sites/default/files/ 512See Limin Fang, ‘‘The Effects of Online Review (listing mean hourly wage of $31.48 for all filevault/u475/tawelfare.pdf (Working Paper) Platforms on Restaurant Revenue, Consumer occupations). (finding that demand for independent hotels is Learning, and Welfare’’ 68(11) Mgmt. Sci. 7793– 510See Daniel S. Hamermesh, What’s to Know more sensitive to reviews on Tripadvisor); Brett 8514 (2022). About Time Use?, 30 J. of Econ. Survs. 198–203 Hollenbeck, Online Reputation Mechanisms and 513See Theodoros Lappas et al., The Impact of (2016), https://doi.org/10.1111/joes.12107. Fake Reviews on Online Visibility: A Vulnerability the Decreasing Value of Chain Affiliation, 55(5) J.
2. Estimated Costs of the Final Rule where businesses notify their employees large companies had some form of This section describes the costs of the rule, conduct a review of their online consumer review presence (e.g., associated with the rule, provides processes, and take any steps they deem on third-party business platforms such quantitative estimates where possible, important to ensure compliance. For as Yelp or Google Reviews, or on their and describes costs that are only firms that already comply with section own websites). It assumes that 74 assessed qualitatively. While the 5 of the FTC Act, these steps might be percent of the 34.75 million small Commission only quantifies benefits out of caution so as not to risk the companies (25.71 million companies) from reduced review manipulation and possibility of violating the rule. For had an online consumer review not the other rule provisions above, the example, some sellers may currently presence.515 Commission quantifies compliance flag and remove reviews on their With heightened compliance review, costs for all aspects of the rule. websites that they reasonably believe the Commission assumes that lawyers at are fake. While this practice would not large companies, whose time is valued a. Compliance Costs amount to a violation of the relevant at $70.08 per hour,516will spend eight The acts and practices prohibited by rule provision (§465.7(b)), the rule may hours conducting a one-time review of the rule are unfair or deceptive under lead some businesses to choose to take the rule and notifying employees whose section 5 of the FTC Act. The rule extra steps to verify the inauthenticity of role involves creating new product targets acts or practices that are clear such reviews before suppressing them. pages, managing the company’s social violations of section 5, and businesses A business may also decide to notify its media presence, and any other relevant that are already compliant will not employees of the rule. For example, if practices covered by the rule. It assumes experience any additional compliance certain employees are responsible for that small company owners, whose time costs as a result of the rule. Moreover, posting new product pages or managing is valued at $33.48,517and are less the FTC routinely provides guidance to the company’s social media presence, likely have formal compliance businesses on complying with FTC law, business owners may wish to notify programs, spend one hour doing the which will make the implications of the these employees to ensure compliance. same. rule easy to understand for a wide range Although cautious firms may elect to In addition, some companies may of businesses. Finally, in response to the conduct additional compliance review, spend time reviewing their automated comments, the Commission has both the rule would not require any processes to ensure that they comply narrowed and clarified the rule additional recordkeeping or notices with the rule. These costs, which requirements relative to the proposed beyond what is required by section 5 of companies might incur just once or on rule (see section IV of this document). the FTC Act. a recurring basis, are likely to be Accordingly, one of the scenarios For the heightened compliance review minimal. The Commission does not reflected in Table 3.1 assumes that scenario in Table 3.1, the Commission quantify these process-related costs businesses will spend a de minimis makes assumptions about the number of because, among other things, the amount of time interpreting the rule and businesses impacted and the number of Commission does not know the number make no changes to their current person-hours involved in compliance of firms that might undertake such a policies. activities. In 2021, there were review.
6.29 million total firms with at least one paid Reviews Study: How Many Reviews Do Local Salary, https://www.payscale.com/research/US/ employee) and U.S. Census Bureau, Nonemployer Businesses Need?, Oct. 31, 2018, https:// Job=Small_Business_Owner/Salary (last visited July 5, 2024) (reporting median base salary of $69,648 Statistics, https://www.census.gov/programs- www.brightlocal.com/research/google-reviews- for small business owners). We assume small surveys/nonemployer-statistics.html (listing 28.48 study/. business owners work 2,080 hours per year. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68075 TABLE 3.1—ESTIMATED COMPLIANCE COSTS—Continued 2024 Only Number of hours of rule review and related activities .................................................................................................................. 1 Subtotal (in millions) ...................................................................................................................................................................... $860.95 Total cost (in millions) ............................................................................................................................................................ $871.98 b. Other Impacts of the Rule results in net benefits of $230.44 billion rule in preventing review manipulation, using a discount rate of 7%. the present value of quantified net There are several other potential To examine the sensitivity of the net benefits under a 7% discount rate is effects from the rule. While the benefits conclusions to the possibility of $10.29 billion. Thus, even if the main proposed requirements are far from systematic underestimating of compliance cost estimates above are onerous, there is the possibility that compliance costs, the Commission underestimates and the main welfare some sellers may ‘‘overcorrect’’ in calculates costs and benefits in a benefits above are overestimates, the response to the penalties available for scenario where all labor costs turn out quantified net benefits are highly rule violations. For example, a firm may to be ten times larger than the parameter positive.
encounter an excess of fake, negative values in the heightened compliance One alternative to the final rule would reviews from a competitor. While review scenario. For both small and be to terminate the rulemaking and rely §465.7(b) permits the suppression of large companies, the number of hours of instead on the existing tools that the reviews that the seller reasonably rule review and related activities are Commission currently possesses to believes are fake, an overcautious seller increased by a factor of ten. All benefits combat the specified review and seeking to suppress fake reviews from and other cost parameters are testimonial practices, such as consumer competitors may choose to display no unchanged in this analysis. With these education and enforcement actions reviews whatsoever so as not to risk new parameters, compliance review will brought under sections 5 and 19 of the violating the rule. Alternatively, such a cost $8.72 billion in 2024, and the FTC Act. Failing to strengthen the set of firm may take no action towards present value of quantified net benefits tools available in support of the suspected fake reviews to avoid a will be equal to $48.31 billion using a Commission’s enforcement program possible rule violation. Both of these discount rate of 7%. Thus, while the against unfair or deceptive consumer hypothetical scenarios would likely hurt Commission believes compliance costs reviews or testimonials would deprive it the information environment for in the heightened compliance scenario of the net benefits outlined above.
consumers. The Commission believes are likely overestimates, even if they are that such unintended consequences of instead severe underestimates, the The Commission expects the rule are very unlikely, especially in quantified net benefits are highly unquantified benefits to outweigh light of how the rule has been clarified positive. unquantified costs for this rule. As and narrowed in response to the To examine the sensitivity of the net noted above, the benefits from several comments. benefits conclusions to the possibility of rule provisions are unquantified, while systematic overestimating of the the compliance costs of all rule C. Reasonable Alternatives and effectiveness of deterrence, the provisions are quantified. Thus, the Explanation of Why Particular Commission calculates costs and quantified net benefits of $56.16 billion Alternative Chosen benefits in a scenario in which the rule above likely underestimate the benefits The Commission has attempted to only partially eliminates the welfare to the public. Furthermore, these catalog and quantify the incremental losses to consumers caused by the estimates are robust to uncertainty. Even benefits and costs of the provisions various types of review manipulation assuming systematic underestimation of included in the final rule. Extrapolating covered by the rule. For this scenario, compliance costs and systematic these benefits over the 10-year the Commission instead assumes that overestimation of the rule effectiveness, assessment period and discounting to consumers will gain an estimated $0.04, the quantified net benefits are large and the present provides an estimate of the rather than $0.12, for every dollar spent positive. Therefore, this regulatory present value for total benefits and costs on goods whose online reviews analysis indicates that adoption of the of the rule, with the difference—net included fake or false ones, the rule will result in benefits to the public benefits—providing one measure of the minimum welfare improvement that outweigh the costs. value of regulation. reported for partial elimination of
In the NPRM, the Commission rule is section 18 of the FTC Act, 15 provided an IRFA, stating its belief that U.S.C. 57a, which authorizes the E. Description and Estimate of the the proposal will not have a significant Commission to promulgate, modify, and Number of Small Entities to Which the economic impact on small entities, and repeal trade regulation rules that define Rule Will Apply soliciting comments on its burden with specificity acts or practices in or The final rule could impact small estimate. In addition to publishing the affecting commerce that are unfair or entities that currently have, or might NPRM in the Federal Register, the deceptive within the meaning of section potentially, solicit consumer reviews or Commission announced the proposed 5(a)(1) of the FTC Act, 15 U.S.C. disseminate consumer testimonials. It rule through press and other releases. 45(a)(1). could also impact small entities that use The Commission received comments C. Issues Raised by Comments, the celebrity testimonials or have a social from small businesses and associations Commission’s Assessment and media presence. It is likely that the rule that represent small businesses. In order Response, and Any Changes Made as a will primarily affect businesses that sell to reduce compliance burdens on small Result products or services directly to businesses and other small entities, the consumers. For example, the rule is less Commission finalizes the proposed rule One individual commenter accepted likely to impact small entities that with some limiting modifications and the Commission’s estimated compliance manufacture niche raw materials for clarifications as described in section IV costs on small businesses but said it was other businesses or small agricultural of this document. unfair that ‘‘small companies with online reviews would bear almost all of 523Camp-Martin Cmt. at 2–3.
520Transparency Company Cmt. at 10. 525IAB Cmt. at 1–15. 521See 5 U.S.C. 605(b). 522See infra section VIII.F of this document. 526Id. at 2, 5–6, 8–9, 10. VerDate Sep<11>2014 18:24 Aug 21, 2024 Jkt 262001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\22AUR2.SGM 22AUR2 DORP32NR021KSD rellehmurdd Federal Register/Vol. 89, No. 163/Thursday, August 22, 2024/Rules and Regulations 68077 firms that do not sell directly to document, which should minimize (including verbal statements, consumers. Nevertheless, for a further any economic impact on small demonstrations, or depictions of the conservative estimate of total costs, the entities. In its IRFA, the Commission name, signature, likeness, or other Commission assumes that the rule will described an alternative to the proposed identifying personal characteristics of impact all industry classes of small rule, namely, to rely on the an individual) that consumers are likely entities. Commission’s previously existing tools, to believe reflects the opinions, beliefs, As described in section VI.B.2 of this such as consumer education and or experiences of a well-known document, there are approximately enforcement actions brought under individual who purchased, used, or
34.75 million small businesses in the sections 5 and 19 of the FTC Act, to otherwise had experience with a United States. Prior research has found combat the specified review and product, service, or business. that 74 percent of small businesses have testimonial practices. The Commission (c) Clear and conspicuous means that at least one Google review.527On the believes that promulgation of the rule a required disclosure is easily noticeable one hand, it is possible that, across all will result in greater net benefits to the (i.e., difficult to miss) and easily platforms (beyond Google reviews), a marketplace while imposing no understandable by ordinary consumers, higher percentage of small businesses additional burdens beyond what is including in all of the following ways: have consumer reviews or testimonials, required by the FTC Act. As described (1) In any communication that is celebrity testimonials, or a social media in further detail in section VI.B.1.c of solely visual or solely audible, the presence. On the other hand, it is likely this document, the rule will not only disclosure must be made through the that many of these firms do not interact result in significant benefits to same means through which the with reviews and such passive firms consumers but also improve the communication is presented. In any would not be affected by the rule. The competitive environment, particularly communication made through both Commission does not have the for small, independent, or new firms. visual and audible means, such as a appropriate data to refine this estimate. Therefore, the rule appears to be television advertisement, the disclosure Therefore, its best estimate is that no superior to this alternative for small must be presented in at least the same more than 25.71 million (74 percent × entities. means as the representation(s) requiring
34.75 million) small businesses will be the disclosure.
impacted by the rule. IX. Congressional Review Act (2) A visual disclosure, by its size, Pursuant to the Congressional Review contrast, location, the length of time it F. Description of the Projected Act (5 U.S.C. 801 et seq.), the Office of appears, and other characteristics, must Reporting, Recordkeeping, and Other Information and Regulatory Affairs has stand out from any accompanying text Compliance Requirements designated this rule as a ‘‘major rule,’’ or other visual elements so that it is The rule contains no reporting or as defined by 5 U.S.C. 804(2). easily noticed, read, and understood. recordkeeping requirements. Therefore, (3) An audible disclosure, including List of Subjects in 16 CFR Part 465 many law-abiding businesses are likely by telephone or streaming video, must to incur no additional compliance costs Advertising. be delivered in a volume, speed, and with the rule. ■For the reasons set forth above, the cadence sufficient for ordinary As described in section VI.B.2 of this Federal Trade Commission amends 16 consumers to easily hear and document, a cautious firm may elect to CFR Chapter I by adding part 465 to understand it. undertake additional compliance review read as follows: (4) In any communication using an due to the potential for civil penalties interactive electronic medium, such as for rule violations. If every small PART 465—RULE ON THE USE OF social media or the internet, the business impacted by the rule conducts CONSUMER REVIEWS AND disclosure must be unavoidable. A one hour of compliance review, each TESTIMONIALS disclosure is not clear and conspicuous firm would incur $33.48 of compliance if a consumer must take any action, Sec.
costs, which reflects the estimated such as clicking on a hyperlink or
hourly earnings of a small business 465.2 Fake or false consumer reviews, hovering over an icon, to see it. owner.528Therefore, under the consumer testimonials, or celebrity (5) The disclosure must use diction conservative estimate of heightened testimonials. and syntax understandable to ordinary compliance review for all small 465.3 [Reserved] consumers and must appear in each businesses, costs to small businesses 465.4 Buying positive or negative consumer language in which the representation would total $860.95 million (25.71 reviews. that requires the disclosure appears. million × $33.48). Because it is likely 465.5 Insider consumer reviews and (6) The disclosure must comply with consumer testimonials.
that only a minority of small businesses 465.6 Company-controlled review websites these requirements in each medium will elect to conduct optional or entities. through which it is received, including compliance review, total compliance 465.7 Review suppression. all electronic devices and face-to-face costs for these entities are likely to be 465.8 Misuse of fake indicators of social communications. significantly lower than this estimate. media influence. (7) The disclosure must not be
G. Description of Steps Taken To Authority: 15 U.S.C. 57a. inconsistent with, anything else in the Minimize Impact of the Rule on Small communication.
Entities §465.1 Definitions. (8) When the representation or sales In response to comments, the (a) Business means an individual who practice targets a specific audience, Commission has narrowed the rule and sells products or services, a partnership such as children, the elderly, or the clarified the rule requirements as that sells products or services, a terminally ill, ‘‘ordinary consumers’’ described in section IV of this corporation that sells products or includes members of that group. services, or any other commercial entity (d) Consumer review means a that sells products or services. consumer’s evaluation, or a purported 527See supra note 515.
(including verbal statements, their experiences with the product, demonstrations, or depictions of the (a) It is an unfair or deceptive act or service, or business; or name, signature, likeness, or other practice and a violation of this part for (2) Reviews that appear on a website identifying personal characteristics of a business to write, create, or sell a or platform as a result of the business an individual) that consumers are likely consumer review, consumer testimonial, merely engaging in consumer review to believe reflects the opinions, beliefs, or celebrity testimonial that materially hosting. or experiences of a consumer who has misrepresents, expressly or by purchased, used, or otherwise had implication: §465.3 [Reserved] experience with a product, service, or (1) That the reviewer or testimonialist §465.4 Buying positive or negative business. exists;
business who supervises other (3) The reviewer’s or testimonialist’s (b)(1) It is an unfair or deceptive act employees or agents and who either experience with the product, service, or or practice and a violation of this part holds the title of a ‘‘manager’’ or business that is the subject of the review for a business to disseminate or cause otherwise serves in a managerial role. or testimonial. the dissemination of a consumer
disclosure and failed to take remedial commercial purpose. based upon their ratings or their steps.
impossible. Unfair and deceptive Further, the Rule, consistent with the 1Save was defined in the proposed Rule to mean an attempt by a seller to present any additional negative option practices have been a final sentence of 15 U.S.C. 57a(a)(1)(B) offers, modifications to the existing agreement, persistent source of consumer harm for includes requirements prescribed for the reasons to retain the existing offer, or similar decades, saddling shoppers with purpose of preventing such acts or information when a consumer attempts to cancel a recurring payments for products and practices. negative option feature. Proposed Rule §425.2(f). 2See 16 CFR 1.11 (‘‘Commission’s Rules of services they never intended to The final Rule differs from the Practice’’ or ‘‘Commission Rules’’); cf.
purchase nor wanted to continue proposed Rule in two significant ways. Impersonation Rule, 89 FR 15072 (Feb. 29, 2024). buying. In the past, the Commission First, the proposed Rule would have 3See 16 CFR 1.16. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90477 affirmative action, as acceptance of an payment schedule. The contract thus material facts, fail to make adequate offer.4Negative option programs allows the consumer to pay the disclosures, bill consumers without generally fall into four categories: purchase price of the vehicle over time. their consent, or make cancellation prenotification plans, continuity plans, Consumers’ failure to pay amounts due difficult or impossible. Over the years, automatic renewals, and free trial (i.e., under an installment agreement may such problematic practices have free-to-pay or nominal-fee-to-pay) bring the total balance due, and may remained a persistent source of conversion offers. trigger halting performance, or provide consumer harm, saddling consumers Prenotification plans are the only the seller with other contractual rights. with recurring payments for products negative option practice currently A negative option, in contrast, merely and services they never intended to covered by the Commission’s current determines whether a seller may purchase nor wanted to continue Negative Option Rule, originally continue to send, and charge for, goods buying. promulgated in 1973. Under such plans or provide services without the The Commission tried to address (e.g., book-of-the-month clubs), sellers consumer’s further action. Notably, a these practices through individual law provide periodic notices offering goods contract could have both installment enforcement cases and a patchwork of to participating consumers and then and negative option features. Take, for regulations (see discussion at sections send—and charge for—those goods only instance, a software license agreement. III–IV). Nevertheless, problems persist, if the consumers take no action to A consumer may purchase a software as demonstrated in part by the tens of decline the offer. The periodic license for a year, in which the thousands of complaints consumers announcements and shipments can consumer is obligated for the entire submit about these practices to the FTC continue indefinitely. In continuity year, payable monthly, to renew each year. Moreover, the Commission plans, consumers agree in advance to automatically at the conclusion of the and States continue to regularly bring receive periodic shipments of goods or year unless the consumer cancels the cases challenging harmful negative provision of services (e.g., bottled water agreement.5Canceling the agreement option practices, including more than delivery), which they continue to during the first year does not void a 35 recent FTC cases.10These matters receive until they cancel the agreement. consumer’s obligation to pay for the involved a range of deceptive or unfair In automatic renewals, sellers (e.g., a whole first year, but it does terminate practices, including inadequate magazine publisher, credit monitoring the consumer’s responsibility for the disclosures for ‘‘free’’ offers and other service provider, etc.) automatically next year. products or services, enrollment renew consumers’ subscriptions when without consumer consent, and
VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90478 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations unfair and deceptive practices that 1. Section 5 of the FTC Act misrepresentation regarding any portion violated section 5 of the Act, 15 U.S.C. of the transaction. Section 5(a) of the FTC Act, 15 U.S.C.
45. Based on practices at the time, In addition to these deception-based 45(a), is the core consumer protection however, the Rule only applied to requirements, the Commission has statute enforced by the Commission.
prenotification plans for the sale of repeatedly stated billing consumers That statute broadly prohibits ‘‘unfair or goods, and therefore, does not reach the without consumers’ express informed deceptive acts or practices’’ but does not vast majority of modern negative option consent is an unfair act under the FTC specifically address negative option programs.12 Act.17 marketing.15Therefore, in guidance and Specifically, the Rule required cases, the FTC has highlighted six basic 2. ROSCA prenotification plan sellers to disclose requirements negative option marketing their plans’ material terms clearly and Enacted by Congress in 2010 to must follow to avoid deceptive and conspicuously before consumers address, in part, ongoing problems with unfair practices.16First, marketers must subscribe. To do so, it required sellers online negative option marketing, disclose the material terms of a negative to disclose seven material terms: (1) ROSCA contains general provisions option offer including, at a minimum:
how subscribers must notify the seller if related to disclosures, consent, and the existence of the negative option they do not wish to purchase the cancellation.18Specifically, ROSCA offer; the offer’s total cost; the transfer selection; (2) any minimum purchase prohibits charging or attempting to of a consumer’s billing information to a obligations; (3) the subscribers’ right to charge consumers for goods or services third party, if applicable; and how to cancel; (4) whether billing charges sold on the internet through any cancel the offer. Second, section 5 include postage and handling; (5) that negative option feature unless the requires these disclosures to be clear subscribers have at least ten days to marketer: (1) clearly and conspicuously and conspicuous. Third, sellers must reject a selection; (6) that if any discloses all material terms of the disclose the material terms of the subscriber is not given ten days to reject transaction before obtaining the negative option offer before consumers a selection, the seller will credit the consumer’s billing information, agree to the purchase. Fourth, marketers return of the selection and postage to regardless of whether a material term must obtain consumers’ consent to such return the selection, along with directly relates to the terms of the offers. Fifth, marketers must not impede shipping and handling; and (7) the negative option offer;19(2) obtains a the effective operation of promised frequency with which announcements consumer’s express informed consent cancellation procedures and must honor and forms will be sent.13In addition, before charging the consumer’s account; cancellation requests that comply with sellers had to disclose the specific and (3) provides simple mechanisms for those procedures. Finally, marketers periods during which they would send the consumer to stop recurring cannot make any material introductory merchandise, give charges.20ROSCA, however, does not consumers a specified period to respond prescribe specific steps marketers must 15Under the FTC Act, ‘‘unfair or deceptive acts to announcements, provide instructions or practices’’ include acts or practices involving follow to comply with these provisions for rejecting merchandise in foreign commerce that cause or are likely to cause and is limited to online transactions. announcements, and promptly honor reasonably foreseeable injury within the United Furthermore, pursuant to the statute, written cancellation requests.14 States or involve material conduct occurring within a violation of ROSCA is treated as a the United States. 15 U.S.C. 45(a)(4)(A). Section violation of a Commission trade B. Other Current Regulatory 5(n) of the FTC Act provides that ‘‘unfair’’ practices are those that cause or are likely to cause regulation rule under section 18 of the Requirements substantial injury to consumers which is not FTC Act.21Thus, the Commission may Several other statutes and regulations reasonably avoidable by consumers themselves and seek a variety of remedies for violations not outweighed by countervailing benefits to also address harmful negative option consumers or to competition. 15 U.S.C. 45(n). of ROSCA, including civil penalties practices. First, section 5 of the FTC Act 16See Negative Options: A Report by the Staff of under section 5(m)(1)(A) of the FTC has served as the Commission’s primary the FTC’s Division of Enforcement, 26–29 (Jan. Act;22injunctive relief under section mechanism for addressing deceptive 2009) (‘‘Staff Report’’), https://www.ftc.gov/reports/ 13(b) of the FTC Act;23and consumer negative option claims. Additionally, negative-options-federal-trade-commission- redress, damages, and other relief under workshop-analyzing-negative-option-marketing- the Restore Online Shoppers’ report-staff. In discussing the principal Section 5 section 19 of the FTC Act.24 Confidence Act (‘‘ROSCA’’), 15 U.S.C. requirements related to negative options, the report 8401–8405, the Telemarketing Sales cites the following pre-ROSCA cases, FTC v. JAB 3. Telemarketing Sales Rule Rule (‘‘TSR’’), 16 CFR part 310, the Ventures, LLC, No. 2:08–cv–04648 (C.D. Cal. 2008); The TSR prohibits deceptive FTC v. Complete Weightloss Ctr., No. 1:08–cv– Postal Reorganization Act (i.e., the telemarketing acts or practices, 00053 (D.N.D. 2008); FTC v. Berkeley Premium Unordered Merchandise Statute), 39 Nutraceuticals, No. 1:06–cv–00051 (S.D. Ohio U.S.C. 3009, and the Electronic Fund 2006); FTC v. Think All Publ’g, LLC, No. 4:07–cv– 17Courts have found unauthorized billing to be Transfer Act (‘‘EFTA’’), 15 U.S.C. 1693– 00011 (E.D. Tex. 2006); FTC v. HispaNexo, Inc., No. unfair under the FTC Act. See, e.g., FTC. v. Neovi, 1693r, all address various aspects of 1:06–cv–424 (E.D. Va. 2006); FTC v. Inc., 604 F.3d 1150, 1157–59 (9th Cir. 2010), Consumerinfo.com, No. 8:05–cv–00801 (C.D. Cal. amended by 2010 WL 2365956 (9th Cir. June 15, negative option marketing. ROSCA, 2005); FTC v. Conversion Mktg., No. 8:04–cv–01264 2010); FTC v. Amazon.com, Inc., No. 2:14–cv–1038, however, is the only law primarily (C.D. Cal. 2004); United States v. Mantra Films, Inc., 2016 WL 10654030, at *8 (W.D. Wash. Apr. 26, designed to do so, but only for online No. 2:03–cv–9184 (C.D. Cal. 2003); FTC v. Preferred 2016); FTC v. Ideal Fin. Sols., Inc., No. 2:13–cv– transactions. Alliance, Inc., No. 1:03–cv–0405 (N.D. Ga. 2003); 00143, 2015 WL 4032103, at *8 (D. Nev. June 30, United States v. Prochnow, No. 1:02–cv–917 (N.D. 2015).
4. Other Relevant Requirements Enforcement Efforts law enforcement attention at both the EFTA26and the Unordered The Commission initiated its last Federal and State level, the Commission Merchandise Statute27also contain regulatory review of the Negative published its 2019 advance notice of provisions relevant to unfair and Option Rule in 2009,32following a 2007 proposed rulemaking (‘‘ANPR’’) seeking deceptive negative option marketing. FTC workshop and subsequent Staff comments on the current Rule, as well EFTA prohibits sellers from imposing Report.33The Commission completed as possible new measures to reduce recurring charges on a consumer’s debit the review in 2014.34At the time, the consumer harm created by deceptive or cards or bank accounts without written Commission found the comments unfair negative option marketing.38 authorization.28The Unordered supporting the Rule’s expansion ‘‘argue Specifically, the Commission sought Merchandise Statute provides that convincingly that unfair, deceptive, and comment on various alternatives, mailing unordered merchandise, or a otherwise problematic negative option including amendments to existing rules bill for such merchandise, constitutes an marketing practices continue to cause to further address disclosures, consumer unfair method of competition and an substantial consumer injury, despite consent, and cancellation. The unfair trade practice in violation of determined enforcement efforts by the Commission also requested input on section 5 of the FTC Act.29 Commission and other law enforcement whether and how it should use its agencies.’’35It also noted practices not authority under section 18 of the FTC IV. Limitations of Existing Regulatory covered by the Rule (e.g., trial Act to expand the Negative Option Rule Requirements conversions and continuity plans) to address prevalent unfair or deceptive The existing patchwork of laws and accounted for most of the Commission’s practices involving negative option regulations does not provide industry enforcement activity in this area. marketing.39In response, the and consumers with a consistent legal Nevertheless, the Commission declined Commission received 17 comments.40 framework across media and offers. For
In addition, ROSCA and the TSR do not XXL Impressions, LLC, No. 1:17–cv–00067 (D. Me. Option Marketing’’ (‘‘2021 Enforcement 2017); FTC v. Health Rsch. Labs., LLC, No. 2:17–cv– Policy Statement’’ or ‘‘EPS’’) to provide 00467 (D. Me. 2017); FTC v. Mktg. Architects, No.
C. 2023 Notice of Proposed Rulemaking serve as the presiding officer of the After reviewing the comments Federation (‘‘NRF’’), FTC–2023–0033–1005). informal hearing and scheduled the received in response to the ANPR and Second, they argued the Commission’s proposed informal hearing for January 16, 2024. In issuing the 2021 Enforcement Policy Rule did not satisfy the specificity and prevalence the Hearing Notice, the Commission requirements of section 18. The Commission Statement, the Commission issued a addresses these comments in section VII.A. again did not designate any disputed notice of proposed rulemaking 44NPRM, 88 FR 24730. issues of material fact, finding the issues (‘‘NPRM’’) on April 23, 2023 (88 FR 45See NPRM, 88 FR 24728 (inviting comments on raised by IAB and NCTA did not need 24716). In the NPRM, the Commission free trials); id. at 24729 (requesting comments on to be resolved at the informal hearing proposed amending the existing Rule to p (i r n o v p it o i s n e g d c a o n m n m ua e l n r t e s m on in c d o e n r f p li r c o t v s i w si i o t n h ) ; e x id is . t a i t n 2 g 4 s 7 ta 3 t 0 e through cross-examination.52 prohibit material misrepresentations requirements; id. (seeking comments on proposed On January 16, 2024, Judge Foelak and to require sellers to provide material changes provision and exempted activities commenced the informal hearing, at important information to consumers, or entities); id. (inviting submissions of ‘‘data, which IAB, NCTA, Performance Driven obtain consumers’ express informed v am iew en s d , m an e d n t a s r ’ g ’) u ; m id e . n a t t s 2 o 4 n 7 3 th 2 e – 3 p 3 r o (i p n o v s i e t d in g comments Marketing Institute (‘‘PDMI’’), consent, and ensure consumers can on the impacts on small businesses, including any TechFreedom, and the International easily cancel negative option programs modifications to reduce costs or burdens for small Franchise Association (‘‘IFA’’) appeared if they choose. All these proposed entities); id. at 24734 (inviting comments on the and made oral submissions subject to Paperwork Reduction Act analysis). See also id. at changes would be applicable to all 24730 (NPRM section XIII, Request for Comments). cross-examination.53Included in their forms of negative option marketing 46See 16 CFR 1.11(e). oral and written submissions, IAB and across all media (e.g., telephone, 47Unique public comments to the NPRM are internet, traditional print media, and in- available online. See regulations.gov, Negative 48The FTC Act provides that ‘‘an interested person transactions).43 Option Rule (NPRM), FTC–2023–0033–0001, person is entitled to present his position orally or https://www.regulations.gov/document/FTC-2023- by documentary submission (or both).’’ 15 U.S.C. 41EPS, 86 FR 60822 (Nov. 4, 2021). u 00 n 3 iq 3 u -0 e 0 c 0 o 1 m . T m h e e n C ts o . m A m s e is x s p i l o a n in p e u d b a li t s r h e e g d u l 1 a , t 1 i 6 o 2 n s.gov, 57a(c)(2)(A). 42The Commission recently alleged a negative agencies may withhold duplicate/near duplicate 4916 CFR 1.11(e). option seller’s failure to disclose it was impeding examples of a mass-mail campaign. See Gen. Servs. 50The six requesters were (1) International access to its movie subscription service violates Admin., Regulations.gov Frequently Asked Franchise Association; (2) TechFreedom; (3) ROSCA. In re MoviePass, Inc., FTC Docket No. C– Questions, Find Dockets, Documents, and Performance Driven Marketing Institute; (4) 4751 (2021). Comments FAQs, ‘‘How are comments counted and NCTA—The Internet & Television Association; (5) 43The Commission proposed to issue such posted to Regulations.gov?,’’ https:// Frontdoor; and (6) Interactive Advertising Bureau. amendments pursuant to section 18 of the FTC Act, www.regulations.gov/faq. The Commission cannot All but one—TechFreedom—identified their which authorizes it to promulgate rules specifying quantify the number of individuals or entities interest in the proceeding either as industry groups acts or practices in or affecting commerce which are represented by the comments. The number of or private companies. unfair or deceptive. 15 U.S.C. 57a(a)(1)(B). Several comments undercounts the number of individuals 51See Notice of Informal Hearing (‘‘Hearing commenters raised concerns the Commission failed or entities represented by the comments because Notice’’), 88 FR 85525, 85526 (Dec. 8, 2023). to follow section 18’s procedures for two reasons. many comments, including those from different 5288 FR 85526–27. First, commenters argued the Commission’s types of organizations, jointly represent the 53The Hearing Notice also allowed interested proposed Rule went beyond the scope of the ANPR. opinions or interests of many. Overall, the persons to make additional written submissions. See, e.g., ESA, FTC–2023–0033–0867; USTelecom- Commission received 16,612 comments. Of those, The following interested parties timely filed The Broadband Association (‘‘USTelecom’’), FTC– 15,449 were not posted online for various reasons additional written submissions on December 22, 2023–0033–0876; Retail Industry Leaders (i.e., 14 unrelated, 23 duplicates, and 15,412 that 2023: (1) BSA—The Software Alliance; (2) PDMI; Association (‘‘RILA’’), FTC–2023–0033–0883; U.S. appear to be non-unique responses to mass media (3) U.S. Chamber of Commerce; (4) IAB; (5) NCTA; Chamber of Commerce (‘‘Chamber’’), FTC–2023– campaigns) and one comment was withdrawn. The and two individuals. All filings related to the 0033–0885; The Computer & Communications Commission has considered all timely and Hearing Notice are available online at Industry Association (‘‘CCIA’’), FTC–2023–0033– responsive public comments it received in response regulations.gov at https://www.regulations.gov/ 0984; IAB, FTC–2023–0033–1000; National Retail to its NPRM. document/FTC-2023-0073-0001. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90481 NCTA renewed their requests to have it ‘‘has reason to believe that the unfair including after the expiration of free the presiding officer designate disputed or deceptive acts or practices which are trials; enrollment without consumer issues of material fact.54Following the the subject of the proposed rulemaking consent; and inadequate or hearing, Judge Foelak designated two are prevalent.’’57An act or practice is unnecessarily burdensome cancellation disputed issues: (1) will the proposed ‘‘prevalent’’ if the FTC has previously and refund procedures. The FTC itself rule have an annual effect on the issued cease and desist orders regarding has brought at least 35 such cases in the national economy of $100 million or the act or practice, or if ‘‘any other years since ROSCA was enacted.60The more?; and (2) what will the information available to the Consumer Financial Protection Bureau recordkeeping and disclosure costs Commission indicates a widespread (‘‘CFPB’’) also has brought many of its associated with the proposed rule be? pattern of unfair or deceptive acts or own negative option cases.61Truth in Judge Foelak held subsequent hearings practices.’’58Based on the rulemaking Advertising, Inc. (‘‘TINA’’),62a on January 31, 2024, and February 14, record, the Commission has more than consumer advocacy organization, stated 2024. She allowed post-hearing briefs sufficient reason to believe unfair or in 2019 that more than 100 Federal class filed by February 22, and February 28, deceptive acts and practices in the actions involving various negative 2024, respectively, and issued her negative option marketplace are option terms and conditions have been recommended decision on April 12, prevalent. These practices include: (1) filed since 2014. Notwithstanding these 2024. Based on the evidence, the material misrepresentations made while actions, according to TINA, ‘‘the presiding officer found: (1) the proposed marketing using negative option features incidence of deceptive negative option Rule will have an annual effect on the to induce consumers to enter into national economy of $100 million or negative option programs; (2) failure to 60In the NPRM, the Commission cited a number more; and (2) there is insufficient provide important information about of its law enforcement actions challenging negative option marketing practices, including, for example, evidence to make a finding regarding material terms prior to billing FTC v. Process Am., Inc., No. 1:14–cv–00386 (C.D. the size of the recordkeeping and consumers; (3) lack of informed Cal. 2014) (processing of unauthorized charges disclosure costs associated with the consumer consent; and (4) failure to relating to negative option marketing); FTC v. Willms, No. 2:11–cv–00828 (W.D. Wash. 2011)
proposed Rule.55 provide consumers with a simple (internet free trials and continuity plans); FTC v.
VII. Discussion of Final Rule cancellation method, including failure Moneymaker, No. 2:11–cv–00461 (D. Nev. 2011) to honor cancellation requests, refusal to (internet trial offers and continuity programs); FTC A. Legal Standard for Promulgating the provide refunds to consumers who v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010) (internet trial offers); and FTC v. John Beck Final Rule unknowingly enrolled in programs, Amazing Profits, LLC, No. 2:09–cv–04719 (C.D. Cal.
(1) issue a SBP with statements consumer harm by luring consumers 2016); FTC v. XXL Impressions, LLC, No. 1:17–cv– detailing: (a) the prevalence of the acts into purchasing goods and services they 00067 (D. Me. 2017); FTC v. AAFE Prods. Corp., No. 3:17–cv–00575 (S.D. Cal. 2017); FTC v. Pact, Inc., or practices treated by the rule; (b) the do not want, or ensnaring consumers No. 2:17–cv–1429 (W.D. Wash. 2017); FTC v. Tarr, manner and context in which such acts into unwanted recurring payments that No. 3:17–cv–02024 (S.D. Cal. 2017); FTC v. or practices are unfair or deceptive; and are difficult or impossible to cancel. AdoreMe, Inc., No. 1:17–cv–09083 (S.D.N.Y. 2017); The Commission relies on substantial FTC v. DOTAuthority.com, Inc., No. 0:16–cv–62186 (c) the economic effect of the rule, evidence in the record showing a (S.D. Fla. 2016); FTC v. BunZai Media Grp., Inc., taking into account the effect on small No. 2:15–cv–04527 (C.D. Cal. 2015); and FTC v. business and consumers; and (2) ‘‘define widespread pattern of unfair or RevMountain, LLC, No. 2:17–cv–02000 (D. Nev. with specificity acts or practices which deceptive conduct in the negative 2017); see also FTC v. WealthPress, Inc., No. 3:23– option marketplace. This evidence cv–00046 (M.D. Fla. 2023); FTC v. Bridge It, Inc., are unfair or deceptive.’’ The
Commission addresses these Amazon.com, Inc., No. 2:23–cv–0932 (W.D. Wash. requirements in part A.1–2. In part A.3, State, private, and Federal actions 2023); FTC v. FloatMe Corp., No. 5:24–cv–00001 (including administrative and Federal (W.D. Tex. 2024); United States v. Adobe, Inc., No. the Commission addresses additional court FTC law enforcement actions); 5:24–cv–03630 (N.D. Cal. 2024). legal issues, including the ANPR’s scope consumer complaints and comments; 61See, e.g., CFPB v. Transunion, No. 1:22–cv– and the ‘‘major questions’’ doctrine. 01880 (N.D. Ill. 2022); CFPB v. ACTIVE Network, and studies. The Commission discusses LLC, No. 4:22–cv–00898 (E.D. Tex. 2022); CFPB v.
1. Statements Required Under Section each in turn below. Sterling Jewelers, Inc., No. 1:19–cv–00448 (S.D.N.Y. 18(d) of the FTC Act Federal, State, and Private Actions. 2019); In re Equifax Inc., et al., CFPB No. 2017– (a) Statement Regarding Prevalence of As discussed in the ANPR and NPRM, C (c F o P n B se – n 0 t 0 o 0 r 1 d , e 2 r 0 ); 1 C 7 F W PB L 1 v 0 . 3 P 6 ri 7 m 1 e 0 M (Ja k n tg . . 3 H , 2 o 0 ld 1 i 7 n ) g s, LLC, the Acts and Practices Treated by the the volume of enforcement efforts in No. 2:16–cv–07111 (C.D. Cal. 2016); In re Rule recent years seeking to stem illegal Transunion Interactive, Inc., et al., CFPB No. 2017– negative option marketing is significant. CFPB–0002, 2017 WL 1036711 (Jan. 3, 2017) Under the Magnuson-Moss statute, (consent order); CFPB v. Student Financial Aid These matters involve a range of the Commission may promulgate rules if Servs., Inc., No. 2:15–cv–00821 (E.D. Cal. 2015); deceptive and unfair practices, CFPB v. Affinion Group Holdings, Inc., No. 5:15– including: failure to adequately disclose cv–01005 (D. Conn. 2015); CFPB v. Intersections 54Subsequently, IFA also asserted there were the existence of negative options, Inc., No. 1:15–cv–835 (E.D. Va. 2015). Notably, the disputed issues of material fact regarding the CFPB has independent authority to enforce FTC impact to both small businesses and their rules, and both agencies share some overlapping consumers. IFA, FTC–2024–0001–0009. 5715 U.S.C. 57a(b)(3). jurisdiction. See 12 U.S.C. 5581(b)(5)(B)(ii). 55Recommended Decision by Presiding Officer, 5815 U.S.C. 57a(b)(3)(A)–(B); see also 62TINA, FTC–2019–0082–0014 (cmt. to ANPR, https://www.regulations.gov/comment/FTC-2024- Compassion Over Killing v. FDA, 849 F.3d 849, 855 https://www.regulations.gov/comment/FTC-2019- 0001-0042. (9th Cir. 2017). 0082-0014) and FTC–2023–0033–1139 (cmt. to 5615 U.S.C. 57a and 16 CFR 1.14(a)(1). 59NPRM, 88 FR 24725. NPRM). VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90482 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations offers continues to rise.’’63TINA also enrolled in costly continuity evidence in FTC cases.74Additionally, reports that deceptive negative options programs.69 TINA explained that negative options ‘‘have only continued to grow’’ since its Additionally, the State AGs outlined are one of its top complaint categories. 2019 comment.64 several ongoing investigations into These complaints usually involve Several state Attorneys General65also deceptive or unfair negative option consumers who unwittingly enroll in referenced dozens of enforcement programs since 2019. These programs and then find it difficult or actions taken in recent years to address investigations include allegations of impossible to cancel.75 the proliferation of deceptive negative misrepresenting offers as free when they Moreover, hundreds of consumer option practices they regularly were not; and failure to clearly and comments detailed specific practices encounter, including the ‘‘lack of conspicuously disclose negative option (discussed more thoroughly in informed consumer consent, lack of features.70 connection with the section-by-section clear and conspicuous disclosures, Additionally, consumer advocacy analysis below) demonstrating the failure to honor cancellation requests organizations and others explained that prevalence of unfair or deceptive and/or refusal to provide refunds to the widespread prevalence of deceptive consumers who unknowingly enrolled acts and practices underscores the negative option practices. Likewise, in plans.’’66These agencies explained ‘‘ongoing need for [S]tate engagement to comments from public interest and their actions ‘‘demonstrate that limit negative option abuses.’’71Several consumer advocacy groups further commenters observed that more than describe existing deceptive or unfair problems persist in this area and that half of States specifically regulate some practices prevalent in the negative additional regulatory action is aspect of negative option marketing.72A option marketplace. For example, needed.’’67For example, over the last group of law professors explain this Berkeley Consumer Law Center decade, New York alone has reached 23 ‘‘ongoing engagement just shows that explained businesses regularly use dark negative option settlements involving a unscrupulous negative-option business patterns76to facilitate enrollment in variety of products and services such as models remain such a problem that subscription-based products and inhibit membership programs, credit [S]tates increasingly find themselves cancellation, and provided numerous monitoring, dietary supplements, and needing to step in.’’73 examples of these activities.77A group apparel.68They also described several Consumer Complaints and of law professors referenced the multi- and individual state law Comments. The FTC receives tens of burgeoning industry offering to help enforcement actions involving negative thousands of complaints about negative consumers identify and cancel their option offers for products and services options each year through its Sentinel unwanted subscriptions. As they such as satellite radio, social networking complaint database, and marketers explained: ‘‘One might expect that, if services, language learning programs, receive many more as demonstrated by consumers experienced the marketplace security monitoring, and dietary as one in which they are adequately supplements. They further recounted 69Id. informed of recurring payments and numerous, illustrative complaints from 70State AGs, FTC–2023–0033–0886. readily able to cancel them, there would consumers who ordered what they 71See, e.g., Joint comment from Professor Kaitlin not be an emerging industry to help thought were free, no-obligation Caruso (U. of Maine School of Law), Professor Jeff samples but then found themselves Sovern (St. John’s U. School of Law), Professor Dee them do just that.’’78 Pridgen (U. of Wyoming College of Law), Professor Members of Congress also detailed Chrystin Ondersma (Rutgers Law School), Professor 63NPRM, 88 FR 24720.
VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90483 back in control of their purchases and consumers have been signed up ‘‘against survey finding more than half of U.S. subscriptions.’’80 their will’’ for ‘‘free trials’’ that adults experience unwanted charges Studies. Finally, ‘‘studies cited by automatically converted into a recurring from a subscription or membership.94 commenters confirm a pattern of payment.88 These findings are further supported by consumer ensnarement in unwanted NCL and others also cited a 2017 a Chase Bank study in 2021 finding recurring payments.’’81A Better national telephone survey nearly three-quarters of Americans Business Bureau study of FTC data, commissioned by CreditCards.com waste more than $50 a month on titled ‘‘Subscription Traps and finding 35% of U.S. consumers have unwanted subscription fees.95 Deceptive Free Trials Scam Millions enrolled in at least one automatically Despite the robust evidence that with Misleading Ads and Fake Celebrity renewing contract without realizing it.89 unfair or deceptive practices are Endorsements,’’ demonstrated In response to the NPRM, the Public exceedingly prevalent, several trade complaints about free trials doubled Interest Groups cited more recent organizations challenged the between 2015 and 2017, with studies confirming the continued Commission’s proposed prevalence complaints during the period reaching prevalence of harms from deceptive and determination. However, their nearly 37,000.82The BBB study shows unfair negative option practices. For arguments, as discussed below, are not consumer losses in FTC ‘‘free trial offer’’ instance, consumer groups referenced a persuasive.
cases exceeded $1.3 billion (over the ten 2022 study, which concluded ‘‘on First, they argued the Commission years covered by the study).83A group average, consumers pay two-and-a-half must show prevalence in a specific of consumer and public interest times what they originally estimated on industry in order to regulate negative advocacy organizations, including the monthly subscriptions, likely due to the option practices in that industry, but the National Consumers League84stated lack of adequate notice from sellers.’’90 Commission failed to do so. For that, according to the BBB, the average They also noted burdensome instance, NCTA asserted there is no consumer loss for a free trial is $186.85 cancellation procedures remain evidence of widespread deceptive Referring to another survey conducted rampant. ‘‘One survey found that more negative option practices in the in 2016, TINA noted unwanted fees than half of respondents reported it took broadband, cable, or voice industries associated with trial offers and an average of three months to cancel warranting regulation.96Other automatically renewing subscriptions unwanted recurring payments.’’91That commenters argued the Commission ranked as ‘‘the biggest financial same study reported 71% of individuals must identify the prevalence of a complaint of consumers.’’86Similarly, lost more than $50 a month in specific deceptive or unfair act to TINA noted the FBI’s internet Crime unwanted subscriptions. Another study Complaint Center recorded a rise in concluded consumers underestimate warrant regulating that specific act or complaints about free trial offers, how much they pay to maintain their practice under Section 18. For instance, growing from 1,738 in 2015 to 2,486 in subscriptions by an average of $133/ IAB, NCTA, TechNet, and TechFreedom 2017.87A 2019 Bankrate.com survey month (or $1,596 per year), and 42% of argued the Commission failed to show cited by NCL found that 59% of prevalence of misrepresentations about the consumers had forgotten about a the underlying product or service in subscription for which they continued connection with negative option 80Schiff and Norton, FTC–2023–0033–0868. to pay.92 81NPRM, 88 FR 24725. Finally, TINA also noted a consumer contracts. Similarly, three commenters 82Steve Baker, Subscription Traps and Deceptive argued the Commission should limit the survey by the Washington Attorney Free Trials Scam Millions with Misleading Ads and scope of the Rule to business-to- Fake Celebrity Endorsements, Better Business General’s office finding ‘‘59% of consumer transactions and exclude Bureau (Dec. 2018), https://www.bbb.org/article/ Washingtonians (3.5 million residents) investigations/18929-subscription-traps-and- may have been unintentionally enrolled business-to-business (‘‘B2B’’) deceptive-free-trials-scammillions-with-misleading- transactions, in part, because the in a subscription plan or service when ads-and-fake-celebrity-endorsements. Commission failed to show ‘‘the 83Id.; see also Better Business Bureau, BBB they thought they were making a one- prevalence of harms created by Investigation Update: Free Trial Offer Scams (Apr. time purchase.’’93TINA contended this automatically-renewing subscriptions 2020), https://www.bbb.org/article/news-releases/ is ‘‘consistent with’’ the 2022 Bankrate 22040-bbb-update-free-trial-offerscams (reporting entered into in the business-to-business the total has risen to nearly $1.4 billion since the context.’’97 2018 BBB study); id. (observing that while 88Bankrate, ‘‘Despite safety concerns, 64% of celebrities, credit card companies and government U.S. debit or credit cardholders save their As demonstrated above, however, agencies have increased their efforts to fight information online’’ (Oct. 24, 2019), at https:// there is ample evidence in the record deceptive free trial offer scams, victims continue to www.bankrate.com/pdfs/pr/20191024-online- demonstrating the prevalence of the lose millions of dollars to fraudsters after the shopping-survey.pdf (as cited by Civil Society specific unfair and deceptive practices release of a December 2018 BBB study about the Organizations, FTC–2023–0033–0870). across numerous sectors of the shady practices). 89NPRM, 88 FR 24720.
Fake Celebrity Endorsements, Better Business Sarah Brady and Korrena Bailie, ‘‘5 Tools To Help 95See n.91. Bureau (Dec. 2018). You Cancel Unwanted Subscriptions,’’ Forbes (July 96NCTA, FTC–2023–0033–0858; see also SCIC, 86NPRM, 88 FR 24720 (citing Rebecca Lake, 13, 2022), https://www.forbes.com/advisor/ FTC–2023–0033–0879. ‘‘Report: Hidden Fees Are #1 Consumer personal-finance/manage-subscriptions). See also 97BSA, FTC–2023–0033–1015; see also Complaint,’’ mybanktracker.com (updated Oct. 16, Einav, Liran, et al., ‘‘Selling Subscriptions’’ (Dec. 1, Anonymous commenter, FTC–2023–0033–1007; 2018), https://www.mybanktracker.com/money- 2023), https://nmahoney.people.stanford.edu/sites/ NCTA, FTC–2023–0033–0858. tips/money/hidden-fees-consumercomplaint- g/files/sbiybj23976/files/media/file/mahoney_ 98See sections VII.A.1.a–b and section II.A.1.b of 253387.) subscriptions.pdf. this SBP.
87. in which the prevalent acts or practices with consumers not realizing the 101NCTA, FTC–2023–0073–0008. are unfair or deceptive. The record deceptive and unfair enrollment until 102CTA, FTC–2023–0033–0997. CTA reports that demonstrates consumers are often lured they see unexpected charges, often after a 2022 study found the global subscription e- into enrolling in negative option several billing cycles.109 commerce market is expected to reach $904.2 programs through seller Finally, substantial record evidence billion by 2026, and between 2021 and 2022, existing subscription brands grew their customer misrepresentations about material shows sellers often fail to provide a bases by 31 percent. facts—for instance, when a seller offers simple cancellation method. If 103According to a 2018 McKinsey & Company a product for ‘‘free’’ when it is not.105 consumers cannot easily leave a study, the subscription e-commerce market Additionally, sellers misrepresent other negative option program when they increased more than 100% over a five-year period aspects of the deal, such as product wish, the negative option feature is prior to the study’s publication. Tony Chen, Ken Fenyo, Sylvia Yang, and Jessica Zhang, ‘‘Thinking features, processing or shipping fees, merely a means of charging consumers Inside the Subscription Box: New Research on E- billing information use, deadlines, for goods or services they no longer Commerce Consumers,’’ McKinsey & Company consumer authorization, refunds, want. Commission cases, the Sentinel (February 2018) (as cited by, e.g., TechNet, FTC– cancellations, among other facts.106 complaint database, and State Attorneys 2023–0033–0869 and Individual commenter, FTC– 2023–0033–0800). PDMI also observed that negative Sellers also often fail to disclose General’s complaints all show sellers options are offered in a wide array of product and important information about the offer often use difficult and cumbersome services from major brands including media prior to billing the consumer. As cancellation mechanisms to prevent or services, meal preparation kits, shaving and beauty products, beer and wine, contacts and ordinary detailed in the comments from, inter curtail cancellations.110This fact is household consumables. FTC–2023–0033–0864. alia, State AGs and TINA, sellers fail to further corroborated by studies Digital Content Next (‘‘DCN’’), FTC–2023–0033– discussed above.111 0983, reports the United States had more than one service); Anonymous commenter, FTC–2023–0033– billion paid subscriptions in Q1 2023 across the digital media landscape, indicating almost all 0024 (cable service); Individual commenter, FTC– 107See State Attorneys General (ANPR), FTC– online U.S. households subscribe to one or more 2023–0033–0039 (language learning app); 2019–0082–0012 and State AGs, FTC–2023–0033– digital media subscription services. See also, e.g., Anonymous commenter, FTC–2023–0033–0046 0886; TINA, FTC–2019–0082–0014 and FTC–2023– Individual commenter, FTC–2023–0033–0137 (software); Individual commenter, FTC–2023–0033– 0033–1139. 0049 (cannot cancel streaming service); Individual (detailing difficulty cancelling recurring 108See, e.g., id.; see also FTC v. Pact, Inc., No. subscriptions for newspaper, mobile, and other commenter, FTC–2023–0033–0050 (virus protection 2:17–cv–1429 (W.D. Wash. 2017); United States v. businesses); Individual commenter, FTC–2023– software and charity); Individual commenter, FTC– MyLife.com, Inc., No. 2:20–cv–6692 (C.D. Cal. 0033–0217 (reported spending hours on the phone 2023–0033–0052 (e-news service subscription); 2020); FTC v. NutraClick, LLC, No. 2:20–cv–08612 and online to cancel mobile account); Individual Individual commenter, FTC–2023–0033–0057 (C.D. Cal. 2020); In re Dun & Bradstreet, Inc., FTC commenter, FTC–2023–0033–0465 (reported (magazine subscription service); Individual Docket No. C–4761 (2022). See generally Staff difficulty cancelling rewards program subscription); commenter, FTC–2023–00330061 (newspaper); Report, n.16. Individual commenter, FTC–2023–0033–0674 Individual commenter, FTC–2023–0033–0063 (big 109See, e.g., State Attorneys General (ANPR), (complaint reporting difficulty canceling mobile box retailer membership); Individual commenter, FTC–2019–0082–0012 and State AGs, FTC–2023– device protection subscription); Individual FTC–2023–0033–0064 (cosmetics); Anonymous 0033–0886; FTC v. FloatMe Corp., No. 5:24–cv– commenter, FTC–2023–0033–0965 (trying to cancel commenter, FTC–2023–0033–0066 (home warranty 00001 (W.D. Tex. 2024); United States v. Cerebral, mobile phone service because they bill for different service); Individual commenter, FTC–2023–0033– Inc., No. 1:24–cv–21376 (S.D. Fla. 2024); FTC v. amount every month); Individual commenter, FTC– 0071 (lawncare service). Bridge It, Inc., No. 1:23–cv–09651 (S.D.N.Y. 2023); 2023–0033–0003 (difficulty cancelling ‘‘home 104See Prof. Chris Jay Hoofnagle, UC Berkeley FTC v. Benefytt Techs., Inc., No. 8:22–cv–01794 warranty’’ subscription); Individual commenter, (‘‘Hoofnagle’’), FTC–2023–0033–1137 (discussing (M.D. Fla. 2022); FTC v. First Am. Payment Sys., FTC–2023–0033–0004 (full cost and refund policy the subscription economy). See also nn.245–252, No. 4:22–cv–00654 (E.D. Tex. 2022); FTC v. for gym contract not clearly disclosed); Individual collecting cases showing deceptive and unfair NutraClick, LLC, No. 2:20–cv–08612 (C.D. Cal. commenter, FTC–2023–0033–0006 (‘‘2 attempts and negative option practices occur across a wide range 2020); FTC v. F9 Advert., LLC, No. 3:19–cv–01174 far too much time’’ to cancel radio subscription); of industries and involve a variety of claims. (D.P.R. 2019); FTC v. Age of Learning, Inc., No. Individual commenter, FTC–2023–0033–0008 105State AGs, FTC–2023–0033–0886 (consumer 2:20–cv–07996 (C.D. Cal. 2020); FTC v. NutraClick, (discussing how ‘‘subscription services in particular paid for shipping on ‘‘free’’ gift only to have it LLC, No. 2:16–cv–06819 (C.D. Cal. 2016); FTC v. AH pervade the market. Even long-standing ‘buy-it- converted to a paid item because she retained the Media Grp., LLC, No. 3:19–cv–04022 (N.D. Cal. once’ products such as certain software suits have item); id. (Money Map Press), FTC v. Triangle 2019); In re Urthbox, Inc., FTC Docket No. C–4676 moved to subscription models’’); Anonymous Media Corp., No. 3:18–cv–01388 (S.D. Cal. 2018) (2019); FTC v. Health Rsch. Labs., LLC, No. 2:17– commenter, FTC–2023–0033–0013 (difficulty (consumers who clicked on ads for risk free trials, cv–00467 (D. Me. 2017); FTC v HispaNexo, Inc., No. canceling home security monitoring contract, paid for shipping and handling fees unwittingly 1:06–cv–424 (E.D. Va. 2006). including hearing unwanted upsells); Anonymous enrolled in negative option programs). 110See section VII.B.6. commenter, FTC–2023–0033–0023 (webhosting 106See nn.245–252 (collecting cases). 111Section VII.A.1.a. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90485 (c) Statement as to the Economic Effect the unfair or deceptive negative option (a) ANPR of the Rule acts and practices covered by the Several commenters asserted the Finally, pursuant to section 18 and Rule.114While those critical of the ANPR, issued in 2019, failed to provide the Commission’s Rules, the SBP must proposed Rule cite to Katharine Gibbs adequate notice of the acts and practices include a statement regarding the School v. FTC, 612 F.2d 658 (2d Cir. to be covered by the proposed Rule. economic effect of the Rule. As part of 1979), this case is inapposite. In Specifically, ESA, USTelecom, RILA, a these rulemaking proceedings, the Katharine Gibbs School, the Second coalition of trade associations, Chamber, Commission solicited and received Circuit held the Commission failed to CCIA, IAB, and NRF argued the ANPR comments on the economic impact of connect elements of its trade regulation failed to provide notice the proposed the proposed Rule. In issuing the final rule to specifically defined unfair or Rule would cover misrepresentations of Rule, the Commission has carefully deceptive acts or practices. The opinion all material facts; would require express considered the comments and other held the Commission may not merely informed consent to opt-in to receive a information received as well as the costs set requirements and then define failure save;117and would require an annual and benefits of each provision, as to meet those requirements as unfair or reminder.118Thus, according to these discussed in more detail in section X, deceptive acts or practices. The commenters, including these provisions Final Regulatory Analysis. That analysis Commission must instead identify some in the final Rule would violate Section demonstrates the benefits of the Rule far underlying deceptive or unfair conduct 18(b)(2)(A). They further argued the lack exceed the costs. Benefits were and connect the rule requirements to of these topics’ inclusion in the ANPR evaluated on a per-cancellation basis; meant that affected entities had that conduct.
that is, the analysis assumes the primary inadequate opportunity to provide In contrast here, the Commission consumer benefit of the Rule will come input, leading to an inadequate specifically identified misrepresentation in the form of faster cancellations. Costs rulemaking record.119 were evaluated primarily to reflect of material facts as a deceptive practice, These arguments, however, are resources spent by businesses to review and defined the term ‘‘material’’ with unpersuasive. Section 18 imposes no and come into compliance with the the same meaning it has under Section requirement the ANPR have the level of Rule. The overall net benefit of the Rule 5 of the FTC Act.115Moreover, the specificity the commenters demand. In is estimated to exceed $5.3B (and could misrepresentations provision goes fact, the statute only says the ANPR be as much as $49.2B) over the first 10 further, providing categories of must include ‘‘a brief description of the years (in 2023 dollars). potentially material facts to assist the area of inquiry under consideration, the marketplace in understanding the objectives which the Commission seeks 2. Magnuson-Moss Specificity provision and supporting those to achieve, and possible regulatory Requirement examples with cases.116Thus, the final alternatives under consideration by the Pursuant to Magnuson-Moss, the Rule’s prohibition against material Commission.’’120The Commission Commission must also define with misrepresentations is not only included a discussion of each of these specificity acts or practices which are connected to underlying deceptive or topics in the ANPR.121Moreover, the unfair or deceptive and either prohibit unfair conduct, but in fact prohibits that affected entities have had the chance to those activities or establish rules to very conduct. raise concerns with the Rule in their prevent them. The Commission has comments to the NPRM, which the done just that, despite some 3. Other Legal Issues Commission has considered and commenters’ arguments to the contrary. responded to in this Statement of Basis Several commenters raised additional Specifically, IAB and others112argue and Purpose.
effectively address consumer harm.
Chamber (‘‘Coalition’’), FTC–2023–0033–0884; School dissent, ‘‘Congress required specific 121ANPR, 84 FR 52393; see also id. 52396–8 PDMI, FTC–2023–033–0864; TechNet, FTC–2023– definitions of such practices so that a rule would (Request for Comments); Section VII.B.3.b.1 0033–0869; TechFreedom, FTC–2023–0033–0872; ‘reasonably and fairly inform those within its ambit (discussing ANPR in context of §425.3). ACT-The App Association (‘‘ACT App of the obligation to be met and the activity to be 122PDMI, FTC–2023–0033–0864; ACT App Association’’), FTC–2023–0033–0874; USTelecom, avoided.’’’ 612 F.2d 658, 672 (quoting H.R. Rep. Association, FTC–2023–0033–0874; Coalition, FTC–2023–0033–0876. No.93–1107, 93d Cong., 2d Sess. 46 (1974), FTC–2023–0033–0884; Chamber, FTC–2023–0033– 113IAB, FTC–2023–0033–1000. reprinted in (1974) U.S.C.C.A.N., pp. 7702, 7727). 0885. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90486 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations asserted, and the economic and political extraordinary circumstance exists. The commenters raised concerns regarding significance of that assertion, provide a prohibitions and disclosures in the Rule the scope of this definition. reason to hesitate before concluding that do not effect a major change in the The Chamber, for example, suggested Congress meant to confer such economy. In fact, all the substantive the Commission delete the term authority.’’123Citing this authority, the requirements in the Rule are already ‘‘promoting’’ from the definition.130It commenters argue Congress only extant under section 5 of the FTC Act, cited a wide variety of actors who could granted the FTC ‘‘limited and tailored ROSCA, or the TSR. Moreover, the be swept in by the term, including authorities to regulate certain mediums Rules’ terms, as explained below, are ‘‘advertising companies, web designers, and types of negative option marketing, neither vague, oblique, or elliptical—in [and] entities in the supply chain,’’ who but not all mediums and types as the fact, if anything, they are clearer than ‘‘may not actually play an active role in NPRM encompasses.’’124Further, they the legal authority just cited. determining’’ what consumers see and assert Congress never intended for the hear about negative option programs.131
‘‘extraordinary cases’’ where agency with a negative option feature.’’ Several 134Id. action would ‘‘make a radical or 135Id.
fundamental change’’ to a statutory 128The proposed Rule stated it applied to any 136Id. IHRSA noted health and fitness scheme and assert ‘‘extravagant’’ form of negative option plan. Because ‘‘negative membership charges are typically processed on a authority over the national economy option plan’’ was a defined term in the old Rule monthly basis from the time of agreement, and in through ‘‘ambiguous statutory text,’’ specifically referring to prenotification plans, the many cases by a third-party service provider. Commission modifies the scope to apply to any IHRSA, FTC–2023–0033–0863. citing ‘‘modest words,’’ ‘‘vague terms,’’ form of ‘‘negative option program.’’ 137NCTA asserted, ‘‘The proposed rule also fails ‘‘subtle device[s],’’ or ‘‘oblique or 129Certain entities or activities are wholly or to account for third-party sign-up arrangements. For elliptical language.’’127Here, no such partially exempt from FTC jurisdiction under the example, programmers have arrangements with FTC Act, including most depository institutions, Roku, Amazon, Apple, and others that allow charities, transportation and communications consumers to sign up through these third parties for 123West Virginia v. EPA, 597 U.S. 697, 721 (2022)
(2) Analysis overbroad, excluding actors engaged in frustrate cancellation with impunity. A Based on the record, the Commission the practices condemned by the Rule. seller cannot evade its responsibility to revises the definition of ‘‘negative For example, a payment processor deal honestly with consumers by option seller’’ to remove the word selling its own services on a negative contracting with a third party who does ‘‘promoting,’’ but declines to create option basis, as opposed to just not.146 status-based exemptions.140Moreover, providing payment services for another
(2) Analysis individuals disagreed.157 companies . . . to email targeting The Commission declines to exempt Commenters advocating against campaigns . . . the cancelling process is insurance or service contracts from the including B2B sales in the Rule asserted ridiculously complex and at times Rule. The final Rule can be enforced by the Commission should presume hidden, if it exists at all on their the Commission only against covered businesses are more sophisticated than websites.’’163 persons and activities within the individual consumers,158and Seller and consumer commenters also Commission’s jurisdiction.151Restating contended B2B contracts typically are differed on the significance of existing or further specifying each jurisdictional individually negotiated.159For example, State law B2B exclusions. Three B2B limit in the final Rule’s text, therefore, ZoomInfo maintained business sellers recommended the Commission is not necessary. consumers are generally ‘‘more follow those States that exclude B2B Additionally, the requested industry- sophisticated than individual transactions.164A consumer, however, wide exemption is considerably broader consumers,’’ explaining B2B contracts asserted such exclusions are why this than the FTC’s jurisdictional ‘‘are assumed to result from arm’s- Rule is necessary.165Specifically, the limitations. The McCarran-Ferguson Act length negotiation and often benefit commenter explained: ‘‘negative option does not exempt entities engaged in the from professional legal counsel.’’160 marketing also greatly affect[s] many business of insurance from the Similarly, NCTA, an organization individual sellers and small Commission’s jurisdiction unless such representing the internet and television businesses,’’ but due to B2B exclusions, entities are subject to State industry, characterized business ‘‘some larger corporations or companies regulation.152Moreover, activities of consumers as ‘‘typically sophisticated,’’ are able to take advantage of that entities within the insurance industry and said the Commission should not loophole and use predatory negative that are beyond the scope of the intervene in transactions based on option practices against individual ‘‘business of insurance’’ are subject to ‘‘[n]on-form contracts that are the sellers and small businesses.’’166 the Commission’s jurisdiction.153No subject of extensive bargaining between Some sellers also referred to other commenter provided any compelling sophisticated companies.’’161 Federal regulations to support excluding reason to exempt these otherwise Seller and consumer commenters businesses from the scope of the Rule.
covered activities from the Rule. differed on whether the harmful For instance, ETA and NCTA each Finally, commenters’ citations to negative option practices discussed in noted the Commission excluded most existing State laws and regulations the NPRM are extant for B2B B2B transactions in the TSR. ETA made governing service contract sellers consumers. In support of excluding B2B the same observation about the Cooling indicate these sellers already provide transactions, two commenters asserted Off Rule.167Both CTIA and USTelecom disclosures and protections consistent there is insufficient evidence of harm in approvingly cited the FCC’s approach.
with the Rule. As a practical matter, the B2B context to support a prevalence USTelecom explained, ‘‘the FCC has sellers who already provide consumers finding.162A B2B consumer, however, limited certain consumer protection the Rule’s protections should not be noted individuals and small businesses rules to ‘mass-market retail services’’’ burdened by its application.154 both suffer from the harms of deceptive that are ‘‘‘marketed and sold on a (c) Business-to-Business and unfair negative option practices. standardized basis to residential ‘‘As a small business owner,’’ the (1) Comments customers, small businesses, and other individual wrote, ‘‘as well as a end-user customers such as schools and Nine commenters noted the NPRM libraries.’’’168USTelecom further did not expressly address whether the 155BSA, FTC–2023–0033–1015 (B2B software explained, ‘‘Mass-market retail services sellers); CTIA, FTC–2023–0033–0866 (wireless stand in contrast to ‘customized or communication industry); ETA, FTC–2023–0033– for the offering, sale, and renewal of home service 1004 (payments industry); NCTA, FTC–2023–0033– individually negotiated arrangements’ contracts, including the use of automatic renewals and applicable cancellation rights). 0858 (internet and television); USTelecom, FTC– that are typically offered to larger 151Nothing in this Rule, however, shall limit 2023–0033–0876 (broadband). A sixth association, organizations.’’169 the U.S. Chamber of Commerce, asked the another agency’s ability to enforce this Rule within ETA questioned whether the Commission to ensure that the scope of its cost- its own statutory authority, even if that authority is benefit analysis includes business-to-business Commission has authority to address different than the FTC’s authority. See, e.g., 12 transactions. FTC–2023–0033–0885. B2B transactions. ETA argued the U.S.C. 5581(b)(5)(B)(ii).
business of insurance only to the extent that such NCTA, FTC–2023–0033–0858; USTelecom, FTC– influence and law enforcement business is not regulated by state law.’’).
This inquiry requires a factual analysis of the requested any final rule exclude individually activities in question. negotiated business-to-business contracts. FTC– 165Individual commenter, FTC–2023–0033–0042.
included in B2B agreements. Similarly, occur in B2B transactions just as they do Nonetheless, two arguments for ZoomInfo explained ‘‘B2B agreements with individual consumers. None of excluding B2B transactions warrant are often complex, involving multiple these cases present the arms-length additional discussion. First, several decision-makers and points of contact, negotiation of contracts by sophisticated commenters elide the distinction who might rotate or leave their roles parties that commenters claim to be between B2B agreements generally and over the course of a contract.’’172 universal. For example, in its 2022 individually negotiated B2B agreements.
(2) Analysis It is neither the purpose nor the effect Systems,179the Commission alleged the The final Rule, like the proposed defendants violated section 5 and of the final Rule to prevent businesses Rule, covers B2B transactions. It has ROSCA by making false claims about from entering into agreements with been the Commission’s longstanding fees and cost savings to persuade individually negotiated negative option view that section 5 of the FTC Act173 merchants in small- and medium-sized terms. By requiring the cancellation protects business consumers as well as businesses, many of whom had limited mechanism to be ‘‘at least as easy to individual consumers. Moreover, English proficiency, to enter into use’’ as the consent mechanism, the commenters’ arguments that, under payment processing agreements.180 final Rule incorporates a symmetrical section 5, all business consumers must Once enrolled, the defendants allegedly standard that accounts for individually be held to a heightened standard of withdrew funds from merchants’ negotiated B2B agreements. A B2B sophistication are inconsistent with accounts without consent, and made it consumer who consents to a negative settled law. difficult and expensive to cancel the option feature through an individually The Commission has long enforced negotiated term of an agreement can service. Under a stipulated court order, the FTC Act against those who deceive also individually negotiate the the defendants must (among other and act unfairly to businesses and other cancellation mechanism. Moreover, as things) make it easier for merchants to organizations.174As the Supreme Court the Commission noted above, it will cancel their services.
explained in FTC v. Standard Educ. In the Commission’s 2022 Dun & enforce this Rule in the same manner in Soc., 302 U.S. 112, 116 (1937), ‘‘Laws Bradstreet181matter, the complaint which it enforces section 5 of the FTC are made to protect the trusting as well Act.184The Commission has not used its as the suspicious.’’ This principle consumer protection authority in the 176See Fed. Trade Comm’n, ‘‘Protecting Small applies no less to the business consumer Businesses: Cases,’’ https://www.ftc.gov/business- type of large individually negotiated than to the individual.175The guidance/small-businesses/protecting-small- B2B transactions commenters are Commission maintains a decades-long businesses-cases (last visited October 23, 2024); worried about.185Unsurprisingly, no
172ZoomInfo, FTC–2023–0033–0865. ETA also raised a concern about the definition of negative 177See Press Release, Fed. Trade Comm’n, ‘‘FTC, 182FTC v. Vonage Holdings Corp., No. 3:22–cv– option seller, addressed in Section VII.B.1.a. BBB, and Law Enforcement Partners Announce 06435 (D.N.J. 2022). 17315 U.S.C. 45(a). Results of Operation Main Street: Stopping Small 183The Adobe matter provides another recent Business Scams Law Enforcement and Education example of a matter alleging unlawful negative 174See, e.g., Indep. Directory Corp. v. FTC, 188 Initiative’’ (June 18, 2018), https://www.ftc.gov/ option practices targeting both individual and F.2d 468 (2d Cir. 1951) (deceptive practices in news-events/press-releases/2018/06/ftc-bbb-law- business consumers. United States v. Adobe, Inc., selling directory ads to businesses).
)
; s F e .
e 2 d al a so t , e .
g ., FTC main (last visited October 23, 2024). 184See section VII.B.1.a.
v. LoanPointe, LLC, 525 F. App’x 696, 701 (10th Cir. 178TSR, 89 FR 26760 (April 16, 2024). 185See 16 CFR 2.3. 2017) (FTC need only prove ‘‘the likelihood that a 179FTC v. First Am. Payment Sys., No. 4:22–cv– 186The Vonage order expressly exempts negative consumer (here, employers)’’ would be deceived); 00654 (E.D. Tex. 2022). option feature provisions in B2B contracts where FTC v. Crittenden, 19 F.3d 26 (9th Cir. 1994) (Table) 180In describing the basis for the the defendants ‘‘possess evidence that consumers (noting stipulated judgment with B2B office misrepresentations provision of the proposed Rule, negotiated significant terms of the negative option supplier); FTC v. Inc21.com Corp., 688 F. Supp. 2d the NPRM cited (among other cases) First Am. feature that are only negotiable with business 927 (N.D. Cal. 2010) (preliminary injunction against Payment Sys. NPRM, 88 FR 24726 n.65. See also consumers.’’ FTC v. Vonage Holdings Corp., No. deceptive and unfair B2B billing scheme); FTC v. ETA, FTC–2023–0033–1004. 3:22–cv–06435 (D.N.J. 2022). The final Rule is less IFC Credit Corp., 543 F. Supp. 2d 925, 934 (N.D. 181In re Dun & Bradstreet, Inc., FTC Docket No. prescriptive and more flexible than that order, Ill. 2008) (FTC Act applies to B2B sales). C–4761 (2022). Continued VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90490 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations Second, it appears several ‘‘material’’ in connection with §425.3 conspicuous, if a consumer must click commenters mistakenly thought the and §425.4,189‘‘simple cancellation on a hyperlink to see it.197 required simple cancellation mechanism,’’190‘‘practical,’’ and Additionally, several commenters mechanism would necessarily terminate ‘‘normal business hours,’’191because requested the Commission revise certain all aspects of any broader contract or these terms are used throughout the of its proposed definitions for clarity. agreement. In fact, this provision only Rule. Other commenters asked the For instance, the National Federation of pertains to cancellation of the negative Commission to add a definition for Independent Businesses (‘‘NFIB’’) asked option feature. Complex commercial ‘‘consumer’’ that excludes the Commission to revise the definitions agreements, such as those described by for ‘‘clear and conspicuous’’ and businesses,192while another asked the ETA, will have numerous provisions ‘‘negative option feature’’ to ‘‘make their Commission to include small businesses unrelated to negative option features. meanings clearer’’198by, for example, in that definition.193Similarly, other Nothing in this Rule prohibits these using simpler words in the clear and commenters asked the Commission to provisions from being subject to conspicuous definition (‘‘words and ‘‘exempt’’ certain industries from, or separate cancellation and termination grammar’’ versus ‘‘diction and syntax’’) otherwise alter the scope of, the terms. or by providing detailed examples of definition of ‘‘negative option each type of program covered in the 2. Proposed §425.2 Definitions seller.’’194 definition of negative option feature.
renewals, continuity plans, free-to-pay 190Center for Data Innovation (‘‘CDI’’), FTC– and interactive electronic medium for conversion or fee-to-pay conversions, 2023–0033–0887; see also Act App Association, clarity. Further, as discussed in section and pre-notification negative option FTC–2023–0033–0874; NRF, FTC–2023–0033–1005 VII.B.4, the Commission modifies the plans.187 (failed to defined ‘‘as simple as’’). definition of clear and conspicuous. Additionally, the proposed Rule 191International Carwash Association, FTC– Second, the Commission removes the 2023–0033–1142.
defined ‘‘clear and conspicuous,’’ definition of save. As discussed in 192See, e.g., Anonymous commenter, FTC–2023– ‘‘negative option seller,’’ and ‘‘save.’’ To 0033–1007; Zoominfo, FTC–2023–0033–0865; section VII.B.6.c the proposed saves define ‘‘clear and conspicuous,’’ the CTIA, FTC–2023–0033–0866; BSA, FTC–2023– provision did not achieve the right FTC imported its definition developed 0033–1015. balance between protecting consumers through years of enforcement 193Individual commenter, FTC–2023–0033–0042. from unfair tactics and allowing sellers 194See, e.g., Asurion, FTC–2023–0033–0878 experience. As explained in the NPRM, to provide necessary and valuable (exempt service contracts); Chamber, FTC–2023– the proposed definition substantially 0033–0885 (exclude promoting); ETA, FTC–2023– information about cancellation. overlaps with the concepts provided in 0033–1004 (exclude ‘‘charging for’’). These requests Therefore, the Commission declines to California and District of Columbia are more appropriately addressed in the scope and include the NPRM’s proposed limitation negative option laws,188with one requested exemptions, and the Commission does on saves, and instead will consider not consider them here.
exception. Specifically, the District of issuing an SNPRM in the future for 195Save was defined in the proposed Rule as an Columbia definition requires attempt by a seller to present any additional offers, disclosures to be visually proximate to modifications to the existing agreement, reasons to 197See, e.g., NCTA, FTC–2023–0033–0858 any request for consumer consent. The retain the existing offer, or similar information (definition does not take into account small when a consumer attempts to cancel a negative screens); Chamber, FTC–2023–0033–0885 (‘‘The final Rule incorporates this requirement option feature. requirements that disclosure on the internet or in a separate consent section. 196ESA, FTC–2023–0033–0867. PDMI argued mobile applications be ‘unavoidable’ and similarly as to the definition of save. FTC–2023– ‘immediately adjacent’ rase practical concerns.’’);
(a) Summary of Comments 0033–0864 (arguing sellers should be able to be able CCIA, FTC–2023–0033–0984 (definition should The Commission did not receive any to immediately discuss pause, skip or modification ‘‘hew closely to the Commission’s guidance in its options without having to ask for permission, .com Disclosures policy to ensure regulatory comments specifically supporting any particularly because it is impossible to know which consistency.’’). proposed definition, though several customers prefer to cancel as opposed to merely 198NFIB, FTC–2023–0033–0789. Accord Kuehn, commenters generally supported the modify their current plan). Accord USTelecom, FTC–2023–0033–0871 (proposed revised definition concepts incorporated in the FTC–2023–0033–0876 (definition of Save overly of negative option feature); Chamber, FTC–2023– broad); RILA, FTC–2023–0033–0883 (modify 0033–0885 (requests the definition of negative definitions, such as ‘‘clear and definition of save to allow short clarification and option feature to be revised to exclude monthly conspicuous disclosures.’’ Several confirmation of intent follow-up communications); subscription services). See section VII.B.4 for commenters critiqued the Commission’s Chamber, FTC–2023–0033–0885; CDI, FTC–2023– further discussion of proposed modifications. See omission of certain definitions, such as 0033–0887 (‘‘Commission should exclude also ETA, FTC–2023–0033–1004 (clarify and information about permanent, irreparable harms narrow ‘‘automatic renewal in the definition). that may result from cancellation, and is relevant 199NFIB, FTC–2023–0033–0789 (requesting thereby promoting more flexibility in the to the current subscription or product plan.’’); specific examples of each type of program be marketplace. CCIA, FTC–2023–0033–0984; IAB, FTC–2023– included in the definition of negative option 187Section II of this Notice contains descriptions 0033–1000 (definition of save overly broad and feature); see also IHRSA, FTC–2023–0033–0863 of these various plans. ‘‘would prohibit the presentation of useful, (observes the Commission does not define what 188Cal. Bus. & Prof. Code section 17601 and DC consumer-friendly details about a consumer’s ‘‘automatic renewal, continuity plan’’ and other Code section 28A–202. subscription before they cancel it.’’). examples of negative option features mean). VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90491 further comment. Accordingly, without The FTC Act provides the legal basis multiple sources, they argued the the saves provision, the Commission for the Commission to prevent and ‘‘Commission thus has more than ample determines there is no need for a remedy misrepresentations in the ‘reason to believe that’ co-occurring defined term at this time. negative option context. Specifically, negative option violations and other Although several commenters section 5(a)(1) of the FTC Act declares misrepresentations ‘are prevalent.’’’210 critiqued the lack of definitions for such unfair or deceptive acts or practices in These commenters further argued the terms as ‘‘simple cancellation or affecting commerce to be unlawful. Commission should not adopt a mechanism,’’ ‘‘practical,’’ or ‘‘normal Negative option sellers making material narrower provision limited strictly to business hours,’’ the Commission misrepresentations are engaged in the elements of a negative option feature addresses these concerns with further deceptive practices. Addressing these because, in their view, it would be clarification, rather than with formal practices through the Rule prevents difficult ‘‘to fully separate definitions, in the section-by-section deception by giving the Commission the misrepresentations regarding the analysis below. As to commenter ability to seek civil penalties (where negative option feature from all other requests for a definition of ‘‘consumer’’ appropriate under 5(m)(1)(a)), where material misrepresentations.’’211 expressly excluding (or including) they are not already provided, thus business-to-business transactions, the deterring misrepresentations, protecting Several commenters, largely trade Commission similarly addresses these consumers, and leveling the playing groups and sellers, criticized the requests in the sections regarding scope field for ‘‘honest sellers who must proposed provision. As discussed in and requested exemptions, above. compete with those who engage in section V.A, several questioned the Finally, NFIB asked the Commission deception.’’205 prevalence of misrepresentations212and to add specific examples of each type of asserted the provision was not within negative option program to the text of (a) Summary of Comments the scope of the ANPR.213Additionally, the Rule, stating those served by the The State AGs strongly supported this several commenters argued the Rule would likely not understand these provision, stating, for example, it would provision is overbroad, and suggested it ‘‘terms of art.’’200The Commission ‘‘combat[] seller misrepresentations, by is unnecessary in light of existing law. discusses examples of each type of providing the FTC with authority to Finally, they proposed ways to narrow negative option program in more detail seek civil penalties and consumer the proposed provision. as part of the SBP at section II. Further, redress for material misrepresentations Several commenters objected to the the Commission typically engages in in all types of media.’’206Echoing the scope of the proposed provision. Citing robust consumer and business NPRM, they explained, ‘‘[l]ike the FTC, Commissioner Wilson’s dissent to the education campaigns when we have found that negative option NPRM, TechNet noted the proposed promulgating and issuing final rules and marketing cases ‘often involve deceptive Rule ‘‘would capture alleged will do so here. The Commission representations not only related to the misrepresentations regarding the therefore disagrees the Rule must negative option feature but to the underlying product or service ‘wholly incorporate these examples into the underlying product (or service) or other unrelated’ to the negative option text.201 aspects of the transaction as well.’’’207 feature.’’214Three commenters asserted Law Professors further supported 3. Proposed §425.3 Misrepresentations no current trade regulation rule prohibiting ‘‘material Section 425.3 of the proposed Rule misrepresentations . . . whether or not deceptive-free-trialsscam-millions-with-misleading- prohibited sellers from misrepresenting the false claim is exclusively about the ads-and-fake-celebrity-endorsements. The Law ‘‘any material fact related to the negative option feature.’’208They, too, professors further pointed to evidence found by transaction, such as the negative option offered evidence of the prevalence of searching BBB’s ScamTracker for terms like feature, or any material fact related to misconduct, stating ‘‘entities like the ‘‘subscription.’’ See, e.g., Better Business Bureau, ScamTracker, ID #720953, https://www.bbb.org/ the underlying good or service.’’202As Better Business Bureau have long scamtracker/lookupscam/720953. They explained in the NPRM, reported, based on FTC and other data, additionally cited Consumer Financial Protection ‘‘misrepresentations in negative option the prevalence of misrepresentation in Bureau, ‘‘CFPB Charges TransUnion and Senior marketing cases often involve deceptive certain negative option arrangements, Executive John Danaher with Violating Law Enforcement Order’’ (Apr. 2022), https:// representations not only related to the and non-FTC enforcement efforts www.consumerfinance.gov/about-us/newsroom/ negative option feature but to the confirm the problem.’’209Citing cfpb-charges-transunion-and-seniorexecutive-john- underlying product (or service) or other danaher-with-violating-law-enforcement-order/; aspects of the transaction as well.’’203 No. 2:17–cv–00467 (D. Me. 2017); FTC v. Leanspa, David Pierson, ‘Santa Monica fitness brand These include ‘‘misrepresentations LLC, No. 3:11–cv–01715 (D. Conn. 2011); FTC v. Beachbody is fined $3.6 million over automatic WealthPress, Inc., No. 3:23–cv–00046 (M.D. Fla. renewals,’’ L.A. Times (Aug. 29, 2017), https:// related to costs, product efficacy, free 2023); FTC v. BunZai Media Grp., Inc., No. 2:15– www.latimes.com/business/la-fi-beachbody- trial claims, processing or shipping fees, cv–04527 (C.D. Cal. 2015); FTC v. Willms, No. 2:11– 20170829-story.html; Bruce A. Craig, Negative- billing information use, deadlines, cv–00828 (W.D. Wash. 2011); FTC v. Universal Option Billing—Understanding the Stealth Scams consumer authorization, refunds, [and] Premium Servs., No. 2:06–cv–00849 (C.D. Cal. of the ‘90s, 7 Loy. Consumer L. Rev. 5 (1994). 2006); FTC v. Remote Response Corp., No. 1:06–cv– 210Law Professors, FTC–2023–0033–0861. cancellation.’’204 20168 (S.D. Fla. 2006); and FTC v. Johnson, No. 211Law Professors, FTC–2023–0033–0861. 2:10–cv–02203 (D. Nev. 2016). 212CTA, FTC–2023–0033–0997; ESA, FTC–2023– 200NFIB, FTC–2023–0033–0789. 205NPRM, 88 FR 24726. 0033–0867; IAB, FTC–2023–0033–1000; N/MA, 201Further, as explained in n.307, the 206State AGs, FTC–2023–0033–0886. FTC–2023–0033–0873; RILA, FTC–2023–0033– Commission also declines to revise the definition of 207Id. 0883; TechFreedom, FTC–2023–0033–0872. See ‘‘clear and conspicuous’’ to replace the words 208Law Professors, FTC–2023–0033–0861. section VII.A for a discussion of prevalence ‘‘diction and syntax’’ with ‘‘words and grammar.’’ 209Id., citing Better Business Bureau, ‘‘BBB addressing these comments. 202NPRM, 88 FR 24734. Investigation Update: Free Trial Offer Scams’’ (Apr. 213ANA, FTC–2023–0033–1001; CCIA, FTC– 203NPRM, 88 FR 24726. 2020), https://www.bbb.org/article/news-releases/ 2023–0033–0984; Coalition, FTC–2023–0033–0884; 204Id. (citing e.g., FTC v. Tarr, No. 3:17–cv–02024 22040-bbb-update-free-trial-offerscams; C. Steven ESA, FTC–2023–0033–0867; Frontdoor, FTC–2023– (S.D. Cal. 2017); FTC v. First Am. Payment Sys., No. Baker & Better Business Bureau, ‘‘Subscription 0033–0862; IAB, FTC–2023–0033–1000; NRF, FTC– 4:22–cv–00654 (E.D. Tex. 2022); FTC v. XXL Traps and Deceptive Free Trials Scam Millions with 2023–0033–1005; RILA, FTC–2023–0033–0883. See Impressions, LLC, No. 1:17–cv–00067 (D. Me. 2017); Misleading Ads and Fake Celebrity Endorsements’’ section VII.A for a discussion addressing these United States v. MyLife.com, Inc., No. 2:20–cv–6692 (Dec. 2018), https://www.bbb.org/article/ comments. (C.D. Cal. 2020); FTC v. Health Rsch. Labs., LLC, investigations/18929-subscription-traps-and- 214TechNet, FTC–2023–0033–0869. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90492 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations prohibits misrepresentations so negative option plans that consumers provision to the terms of the negative broadly.215 will enjoy.’’221 option feature. For instance, BSA Several commenters asserted existing advocated for limiting the provision ‘‘to Similarly on scope, some commenters laws and regulations make the proposed facts relating to the transaction and not also argued the proposed language provision unnecessary. Some argued every material fact relating to the lacked the specificity necessary to give section 5’s prohibition against deceptive underlying good or service.’’229CCIA sellers notice of what conduct would practices already provides the and CDI agreed, stating the final phrase violate the Rule.216For example, ACT Commission sufficient authority on this should instead cover only those material App Association asserted, issue.222Others asserted State laws and facts related to the underlying negative ‘‘Notwithstanding best efforts, tech regulations prohibiting option feature and exclude ‘‘any startups’ ability to flawlessly adhere to misrepresentations are sufficient to material fact related to the underlying the vague and broad language used in protect the public.223 good or service.’’230 this rule is unrealistic.’’217 Commenters were divided on A few commenters provided ROSCA’s coverage. NRF, for example, (b) Analysis hypotheticals or asked rhetorical said ‘‘[i]n light of the Commission’s Based on the record, the Commission questions to illustrate concerns about decision that ROSCA already prohibits adopts a clarified version of the material the proposal’s breadth. MIA, for deceptive statements made in misrepresentation section and adds a example, stated, ‘‘if a streaming service connection with a subscription, even if definition for further clarification. advertises, ‘movies that you will love,’ not directly related to subscription Specifically, the final Rule omits the but you do not ‘love’ them, is that a terms, many of the proposed proposed language referring to ‘‘any violation of this rule subject to amendments are unnecessary.’’224In material fact related to the transaction, penalties? If a housekeeping service contrast, PDMI said while MoviePass such as the negative option feature, or ‘‘perhaps reflects a colorable approach,’’ any material fact related to the claims, ‘great cleaning every time,’ but the application of ROSCA there underlying good or service’’ and instead the resulting cleanliness is not up to the ‘‘exceeded Congress’ intent.’’225 prohibits misrepresentation of ‘‘any consumer’s ‘standards,’ will that trigger Similarly, IAB asserted the proposed material fact,’’ and defines ‘‘material’’ this provision and any resulting Rule would break new ground by consistent with the TSR and section 5 penalties?’’218The Chamber asked, ‘‘grant[ing] the Commission authority to of the FTC Act. Further, to enhance ‘‘[c]ould a privacy policy, for example, seek monetary remedies against a first- clarity and specificity, the text lists be considered a material representation time offender for misrepresentations several examples of potentially material covered under this requirement?’’219 that would not give rise to monetary fact categories, taken from Commission Many of these commenters argued the relief if made outside the context of an precedent. reach of the proposed Rule would autorenewal agreement.’’226 As further explained below: (1) Several commenters recommended negatively impact consumers by despite commenters’ concerns to the changes if the proposed provision discouraging negative option offerings. contrary, this provision is consistent remains in the Rule. BSA, for example, TechNet said, ‘‘[f]or a variety of with the ANPR and prevalence suggested the Commission should subscription services, the main drivers requirements of section 18 of the FTC define the term ‘‘material,’’ citing the of consumer engagement are the Act; (2) consistent with ROSCA, the TSR and the FTC Policy Statement on subscription services’ ability to provide final provision is not limited to material Deception as examples.227Separately, financial savings, convenience, and misrepresentations about the negative RILA urged the Commission ‘‘to include access to premium services. . . . option feature itself; (3) the Commission clear language stating a ‘reasonable Unfortunately, the NPRM ignores these declines to exclude any subset of person standard’ will apply to benefits and would discourage the material misrepresentations from the determinations of ‘material facts’ related offering of subscription services scope of the Rule; and (4) for clarity, the to products.’’228 altogether.’’220ESA feared ‘‘this section Several commenters suggested the Commission adds a definition of will discourage industry members from Commission limit the misrepresentation ‘‘material’’ consistent with established law of section 5 and other Commission developing and offering innovative Rules.
5. With such prohibited conduct at issue and ensures the Rule accords To further promote clarity, the defined, the trade regulation rule may with longstanding section 5 precedent. Commission includes a list of non- also more broadly ‘‘include The Commission declines to limit the exclusive examples in the text of requirements prescribed for the purpose misrepresentations prohibition solely to §425.3. In addition to the negative of preventing such acts or practices,’’ elements of the negative option option feature itself, the examples but the core of a trade regulation rule is feature.239First, the Commission finds include certain characteristics the the description of acts or practices imposing such a narrow restriction Commission has identified as already violative of section 5.235The would be inconsistent with existing presumptively material for more than 40 misrepresentations section of the Rule is protections. Pursuant to ROSCA section years243and which have in fact narrower than the full scope of tools 8403, sellers must ‘‘clearly and appeared as the subject of material available under section 18. It simply conspicuously disclose all material misrepresentations in Commission negative option cases—cost,244purpose 23215 U.S.C. (b)(2)(A)(i). 23615 U.S.C. 8403(1).
Cerebral, Inc., No. 1:24–cv–21376 (S.D. Fla. 2024); include requirements prescribed for the channels. While the record shows this FTC v. Bridge It, Inc., No. 1:23–cv–09651 (S.D.N.Y. purpose of preventing such acts or practice offers distinct benefits, it also 2023); FTC v. Benefytt Techs., Inc., No. 8:22–cv– practices.’’252It places no additional shows the practice is plagued by 01794 (M.D. Fla. 2022); FTC v. First Am. Payment restrictions on the scope of this distinct abuse. This is not a hypothetical Sys., No. 4:22–cv–00654 (E.D. Tex. 2022); FTC v.
XXL Impressions, LLC, No. 1:17–cv–00067 (D. Me. rulemaking. statement; the Commission is not 2017); FTC v. Cardiff, No. 5:18–cv–02104 (C.D. Cal. Several commenters appear to think promulgating the final Rule because 2018); FTC v. Health Rsch. Labs., LLC, No. 2:17–cv– section 18 requires the Commission to negative option features may engender 00467 (D. Me. 2017); FTC v. Tarr, No. 3:17–cv– define specific claims as deceptive; for deception, whether relating to the 02024 (S.D. Cal. 2017); FTC v. AdoreMe, Inc., No.
1:17–cv–09083 (S.D.N.Y. 2017); FTC v. Pact, Inc., example, two commenters cited the feature itself or to other material facts, No. 2:17–cv–1429 (W.D. Wash. 2017); FTC v. Business Opportunity Rule’s treatment but rather because the record shows Leanspa, LLC, No. 3:11–cv–01715 (D. Conn. 2011); of misrepresentations.253While the they have.256Just as with the benefits of FTC v. Willms, No. 2:11–cv–00828 (W.D. Wash.
No. 2:14–cv–01649 (D. Nev. 2014); FTC v. Leanspa, (completeness of order); FTC v. Apex Capital Grp., 5:18–cv–02104 (C.D. Cal. 2018); FTC v. JDI Dating, LLC, No. 3:11–cv–01715 (D. Conn. 2011); FTC v. LLC, No. 2:18–cv–09573 (C.D. Cal. 2018) Ltd., No. 1:14–cv–08400 (N.D. Ill. 2014); FTC v. Willms, No. 2:11–cv–00828 (W.D. Wash. 2011); FTC (completeness of order); FTC v. Moneymaker, No. Credit Bureau Ctr., LLC, No. 1:17–cv–00194 (N.D.
v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010); FTC 2:11–cv–00461 (D. Nev. 2011) (purpose of Ill. 2017); FTC v. BunZai Media Grp., Inc., No. 2:15– v. Remote Response Corp., No. 1:06–cv–20168 (S.D. authorization). cv–04527 (C.D. Cal. 2015); FTC v.
Fla. 2006). 250E.g., United States v. Cerebral, Inc., No. 1:24– DOTAuthority.com, Inc., No. 0:16–cv–62186 (S.D. 246See, e.g., FTC v. XXL Impressions, LLC, No. cv–21376 (S.D. Fla. 2024) (data security and Fla. 2016); FTC v. Health Rsch. Labs., LLC, No. 1:17–cv–00067 (D. Me. 2017); FTC v. Cardiff, No. privacy); In re MoviePass, Inc., FTC Docket No. C– 2:17–cv–00467 (D. Me. 2017); FTC v. Tarr, No. 5:18–cv–02104 (C.D. Cal. 2018); FTC v. Health 4751 (2021) (data security). 3:17–cv–02024 (S.D. Cal. 2017); FTC v. AdoreMe, Inc., No. 1:17–cv–09083 (S.D.N.Y. 2017); FTC v.
Rsch. Labs., LLC, No. 2:17–cv–00467 (D. Me. 2017); 251E.g., FTC v. XXL Impressions, LLC, No. 1:17– Pact, Inc., No. 2:17–cv–1429 (W.D. Wash. 2017);
FTC v. Health Formulas, LLC, No. 2:14–cv–01649 cv–00067 (D. Me. 2017); FTC v. Cardiff, No. 5:18– FTC v. RevMountain, LLC, No. 2:17–cv–02000 (D.
(D. Nev. 2014); FTC v. Leanspa, LLC, No. 3:11–cv– cv–02104 (C.D. Cal. 2018); FTC v. Willms, No. 2:11– Nev. 2017); FTC v. AAFE Prods. Corp., No. 3:17– 01715 (D. Conn. 2011); FTC v. Willms, No. 2:11–cv– cv–00828 (W.D. Wash. 2011). cv–00575 (S.D. Cal. 2017); FTC v. Health Formulas, 00828 (W.D. Wash. 2011). 25215 U.S.C. 57a(a)(1)(B). LLC, No. 2:14–cv–01649 (D. Nev. 2014); FTC v. Dill, 247E.g., FTC v. Elite IT Partners, Inc., No. 2:19– 253PDMI, FTC–2023–003–0864 (contrasting the No. 2:16–cv–00023 (D. Me. 2016); FTC v. Leanspa, cv–00125 (D. Utah 2019) (affiliation with well- proposed Rule language with Business Opportunity LLC, No. 3:11–cv–01715 (D. Conn. 2011); FTC v. known companies); In re Urthbox, Inc., FTC Docket Rule language, saying ‘‘The Business Opportunity Willms, No. 2:11–cv–00828 (W.D. Wash. 2011); FTC No. C–4676 (2019) (independence of reviews); FTC Rule does not prohibit any misrepresentation in v. Moneymaker, No. 2:11–cv–00461 (D. Nev. 2011);
v. BunZai Media Grp., Inc., No. 2:15–cv–04527 connection with business opportunities. It prohibits FTC v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010); (C.D. Cal. 2015) (BBB accreditation and ratings); specific misrepresentations about earnings FTC v. Inc21.com Corp., 745 F. Supp. 2d 975 (N.D. FTC v. DOTAuthority.com, Inc., No. 0:16–cv–62186 claims.’’); TechFreedom, FTC–2023–0033–0872 Cal. 2010); FTC v. JAB Ventures, LLC, No. 2:08–cv– (S.D. Fla. 2016) (ratings); FTC v. FTN Promotions, (‘‘For example, the Business Opportunity Rule 04648 (C.D. Cal. 2008); FTC v. Ultralife Fitness, Inc., Inc., No. 8:07–cv–1279 (M.D. Fla. 2007) (affiliation prohibits no fewer than 21 different kinds of No. 2:08–cv–07655 (C.D. Cal. 2008); FTC v. FTN with consumer’s bank). misrepresentation regarding business opportunities. Promotions, Inc., No. 8:07–cv–1279 (M.D. Fla. 248E.g., FTC v. XXL Impressions, LLC, No. 1:17– This specificity is typical of trade regulation 2007); FTC v. Think All Publ’g, LLC, No. 4:07–cv– cv–00067 (D. Me. 2017) (radio news show); FTC v. rules.’’) (footnotes omitted). 00011 (E.D. Tex. 2007); FTC v HispaNexo, Inc., No. Leanspa, LLC, No. 3:11–cv–01715 (D. Conn. 2011) 25415 U.S.C. 57a(a)(1)(B). 1:06–cv–424 (E.D. Va. 2006); FTC v. Universal (news reports). 25516 CFR 437.6(i). Premium Servs., No. 2:06–cv–00849 (C.D. Cal. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90495 negative option marketing, these cannot easily evaluate medical claims deception, regardless of whether that problems do not lose their distinct about dietary supplements), so too, here, term directly relates to the terms of the character, in other words they are the Commission finds additional negative option offer.’’262As explained distinct practices, even though they protection warranted. in the NPRM, the Commission drafted appear in a variety of contexts. The Commission has considered this provision because ‘‘many sellers fail In addressing this deceptive practice, commenters’ section 18 specificity to provide adequate disclosures, thereby the Commission remains guided by core concerns pertaining to material luring consumers into purchasing goods principles articulated in its 1983 misrepresentations and finds them or services they do not want.’’263To Deception Policy Statement. As the unsupported by the record. These address this issue, the proposed Rule Commission explained, in considering commenters suggest a hypothetical required sellers to provide the following whether to act against a deceptive world where negative option features important information prior to obtaining practice, the Commission will observe provide distinguishable commercial a consumer’s billing information: ‘‘(1) the extent to which consumers benefits without presenting that consumers’ payments will be themselves have been able to police and distinguishable material recurring, if applicable; (2) the deadline generate consequences for seller misrepresentation challenges. The by which consumers must act to stop deception. reality is otherwise. Thus, the final Rule charges; (3) the amount or ranges of prohibits the specific practice of sellers costs consumers may incur; (4) the date Finally, as a matter of policy, when consumers can easily evaluate the product or misrepresenting material terms or facts the charge will be submitted for service, it is inexpensive, and it is frequently in connection with negative option payment; and (5) information about the purchased, the Commission will examine the sales. mechanism consumers may use to practice closely before issuing a complaint (4) For clarity, the final Rule adds a cancel the recurring payments.’’264 based on deception. There is little incentive definition of ‘‘material’’ consistent with The Commission also proposed for sellers to misrepresent (either by an precedent. requirements regarding the form and explicit false statement or a deliberate false As noted above, and as suggested by location of this important information, implied statement) in these circumstances commenters, the Commission defines as its ‘‘law enforcement experience and since they normally would seek to encourage ‘‘material’’ in the final Rule. This consumer complaints are replete with repeat purchases. Where, as here, market incentives place strong constraints on the definition adds clarity and addresses the examples of hidden disclosures, likelihood of deception, the Commission will rhetorical questions raised by including those in fine print, buried in examine a practice closely before commenters regarding scope. paragraphs of legalese and sales pitches, proceeding.257 Specifically, consistent with section 5, and accessible only through The record shows the practice of the TSR, and longstanding Commission hyperlinks.’’265Thus, under the misrepresenting material facts to induce policy and case law, the final Rule proposed Rule, information ‘‘directly consent to negative option features has defines the term to mean likely to affect related to the negative option feature created distinct issues consumers have a person’s choice of, or conduct . . . must appear immediately adjacent not been able to address themselves, regarding, goods or services.259Thus, to the means of recording the enabling sellers to collect numerous mere puffery is not material.260 consumer’s consent for the negative recurring payments before consumers The hypotheticals posed by MIA— option feature.’’ Information ‘‘not detect the misrepresentation and act to ‘‘movies that you will love’’ or ‘‘great directly related to the negative option stop the charges. This problem is not cleaning every time’’—are classic feature . . . must appear before confined to a particular subset of examples of puffery, and thus, are not consumers make a decision to buy (e.g., industries or misrepresentations but within the scope of materiality.261The before they ‘add to shopping cart’).’’ instead is a too-frequent practice response to the question posed by the Further, the proposal stated all throughout negative option Chamber—whether misrepresentation of disclosures must be clear and marketing.258Specifically, when a a privacy policy would be covered— conspicuous as defined in §425.2(c). consumer makes a series of purchases depends, as it always has, on whether Among other elements of the clear and from the same seller in ordinary the seller misrepresents its privacy conspicuous definition, the proposed circumstances (rather than through a policy in a way likely to affect consumer Rule specified that in any negative option), each purchase requires choice or conduct. communication using an interactive electronic medium, such as the internet, the consumer to actively, even if only 4. Proposed §425.4 Important mobile application, or software, the briefly, re-evaluate the transaction and Information disclosure must be unavoidable. The affirmatively consent. Dishonest Section 425.4 of the proposed Rule proposed Rule also specified that a negative option sellers too easily bypass prohibited sellers from failing to disclosure is not clear and conspicuous these typical guardrails of ‘‘repeat disclose ‘‘any material conditions if a consumer ‘‘must take any action, purchases.’’ Thus, up-front related to the underlying product or such as clicking on a hyperlink or misrepresentations can induce service that is necessary to prevent hovering over an icon, to see it.’’ consumers into recurring transactions Finally, the proposed Rule prohibited lacking ordinary sales’ built-in 25916 CFR 310.2(t); In re Cliffdale Assocs., Inc., sellers from including any information interruptions for re-evaluation and 103 F.T.C. 110 (1984). that interferes with, detracts from, renewed consent. As with other areas 260See FTC v. Direct Mktg. Concepts, Inc., 624 contradicts, or otherwise undermines where consumers have limited F.3d 1, 11 (1st Cir. 2010) (‘‘Where a claim is merely the ability of consumers to read, hear, opportunities for critical up-front ‘exaggerated advertising, blustering, and boasting evaluation (for example, consumers upon which no reasonable buyer would rely,’ it see, or otherwise understand the may be un-actionable puffery.’’). required disclosures. The final clause of 261The Commission declines to add language this prohibition ‘‘includ[ed] any 2006); FTC v. Remote Response Corp., No. 1:06–cv– defining a ‘‘reasonable person standard’’ as 20168 (S.D. Fla. 2006). suggested by RILA, and refers instead to the 257Policy Statement on Deception (Oct. 14, 1983) discussion of reasonableness set forth in the 262NPRM, 88 FR 24727. (appended to In re Cliffdale Assocs., Inc., 103 F.T.C. Commission’s Policy Statement on Deception (Oct. 263NPRM, 88 FR 24726–27. 110 (1984)). 14, 1983) (appended to In re Cliffdale Assocs., Inc., 264NPRM, 88 FR 24726. 258See n.257. 103 F.T.C. 110 (1984)). 265NPRM, 88 FR 24727. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90496 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations information not directly related to the is an easy way to cancel online.’’270 disclosures appearing ‘‘immediately material terms and conditions of any Another said, ‘‘I actually subscribe to far adjacent to the means of recording the negative option feature.’’ fewer services than I would if I knew consumer’s consent for the negative Through these provisions, the that I could easily cancel once I had option feature.’’276CART asserted this Commission sought to prevent tried a sample.’’271 provision, together with others, ‘‘will deception by businesses taking Public advocacy commenters also greatly minimize consumer deception advantage of the gray areas in current supported the provision. The Berkeley and ensure that consumers fully law, to deter fraudulent actors through Consumer Law Center said, ‘‘the understand—and agree to—the nature of the possibility of monetary relief, and to requirement of ‘clear and conspicuous’ the transaction under consideration.’’277 ‘‘level the playing field for legitimate disclosures of ‘any material term related Other commenters, mostly industry businesses, freeing them from having to to the underlying goods or services that groups,278expressed several concerns compete against those employing is necessary to prevent deception’ will with the proposed requirements, deception.’’266 help prevent cancellation terms from specifically with the definition of ‘‘clear being shrouded in mystery through and conspicuous,’’ the scope and timing (a) Summary of Comments complicated terms and conditions, of the material terms to be disclosed, Thousands of commenters supported while also blocking the practice of specific disclosure requirements, the important information requirement, hiding subscription services that are placement, and treatment of other stating it is ‘‘critically important that needed to fully use a product.’’272 information.279 companies make it explicitly clear what Multiple commenters claimed the Similarly, a coalition of consumer and consumers are signing up for.’’267 requirement that disclosures using an public interest advocacy organizations Consumers identified problematic interactive electronic medium must be asserted the proposed disclosure practices the provision would address, ‘‘unavoidable’’ would be unworkable requirement ‘‘will clearly inform including insufficient and unclear given the additional provision that a consumers of the terms of the contract disclosures in small print or those ‘‘disclosure is not clear and conspicuous and how they may terminate the appearing too late in the transaction. For if a consumer must take any action, agreement.’’273 example, an individual commenter said, such as clicking on a hyperlink or Law enforcement commenters ‘‘[t]oo many [sellers] hide these details hovering over an icon, to see it.’’280 likewise supported the important in extra fine print, and increasingly text Commenters noted it would be difficult information requirements. The State is in a very light gray color, making it or impossible to implement this AGs said they would ‘‘repel the abusive even harder to read.’’268Another requirement on small screens (such as practices of hidden disclosures, individual commenter noted, ‘‘I ordered mobile phones), and it may reduce ‘including those in fine print, buried in skin care from a tv infomercial only to rather than improve clarity. paragraphs of legalese and sales pitches, find out it was a subscription thing Several commenters also objected to and accessible only through though none of this was disclosed by the requirement sellers disclose material hyperlinks.’’’274They particularly famous actresses on the terms other than those pertaining emphasized their support for ‘‘the promotion. . . . Iw ent back to my exclusively to the negative option required disclosure of ‘the information receipt of what I originally ordered and feature, asserting this would be necessary for the consumer to cancel the in fine print saw that I had been overbroad.281Additionally, commenters negative option feature.’’’275The duped!’’269 questioned how the Commission would California Auto-Renew Task Force Several individual commenters enforce a requirement to disclose (‘‘CART’’), a group of Southern indicated clear upfront disclosures material terms before obtaining a California prosecutors, supported would help them make informed choices and improve their willingness 276CART, FTC–2023–0033–0698. 270Individual commenter, FTC–2023–0033–0781.
to try negative option offerings, 277Id.
particularly if the disclosure provided Accord Individual commenter, 0196 (‘‘I have had to 278Not all industry groups criticized the provision. Specifically, MIA wrote, ‘‘The an easy cancellation mechanism. As one get to the point of not subscribing to any online Association agrees with the important information put it, ‘‘I am much more like[ly] to try— offers, as far too many times I have found it nearly requirement under the proposed Rule.’’ MIA, FTC– and buy—a new service if I know there impossible to unsubscribe’’); Individual commenter, 2023–0033–1008. FTC–2023–0033–0306 (‘‘you could win over more 279In addition, some commenters cited industry- subscribers to your services if you took away the specific laws and regulations pertaining to 266NPRM, 88 FR 24727. fear and doubts of the public that they will probably disclosures as rendering the proposed provision 267Thousands of consumers submitted the be hooked into something that would be more unnecessary or counterproductive. ACA Connects- following identical comment in their own names: troublesome to get out of . . . I can tell you that America’s Communications Association (‘‘ACA’’), ‘‘It’s critically important that companies make it I have passed over many opportunities that I was FTC–2023–0033–0881; NCTA, FTC–2023–0033– explicitly clear what consumers are signing up for interested in for this very reason.’’); Individual 0858; SFE, FTC–2023–0033–1151; USTelecom, and to make canceling fast and easy. If you signed commenter, FTC–2023–0033–0333 (‘‘I’ve had some FTC–2023–0033–0876. up online, you should be able to cancel online. If difficulty in the past cancelling enrollments or 280ANA, FTC–2023–0033–1001; CCIA, FTC– it took one click to join, it should take one click subscriptions, so that now I’ve become very wary 2023–0033–0984; Coalition, FTC–2023–0033–0884; to cancel. Implementing this consumer protection of products or services I would otherwise ESA, FTC–2023–0033–0867; IAB, FTC–2023–0033– rule has the potential to save American consumers appreciate having. Implementing this consumer 1000; NCTA, FTC–2023–0033–0858; Chamber, millions of dollars and I hope it is implemented as protection rule would help me feel more confident FTC–2023–0033–0885. NFIB suggested the soon as possible.’’ While apparently a response to again.’’). Commission strike the provision ‘‘The disclosure a mass solicitation, many consumers further 272Berkeley Consumer Law Center, FTC–2023– must use diction and syntax understandable to personalized their submission by adding their 0033–0855. Similarly, for the same reasons they ordinary consumers’’ and replace it with ‘‘‘The unique experiences and desire for the Rule. See, provided in connection with the misrepresentations disclosure must use words and grammar that e.g., Individual commenter, FTC–2023–0033–0161; provision, the Law Professors encouraged the ordinary consumers would likely understand.’’’ –0163; –0164; 0198; –0204; –0545; 0658. Commission to maintain the proposed disclosure FTC–2023–0033–0789. 268Individual commenter, FTC–2023–0033–0268. provision’s coverage of material terms necessary to 281ACT App Association, FTC–2023–0033–0874; Similarly, another individual commenter said, prevent deception, regardless of whether such terms ANA, FTC–2023–0033–1001; BSA, FTC–2023– ‘‘Businesses should not present agreements in tiny are exclusively about the negative option feature. 0033–1015; CCIA, FTC–2023–0033–0984; NCTA, print on an agent’s tablet for the customer to sign. Law Professors, FTC–2023–0033–0861. FTC–2023–0033–0858; NFIB, FTC–2023–0033– I can’t read the print.’’ Individual commenter, FTC– 273Public Interest Groups, FTC–2023–0033–0880. 0789; NRF, FTC–2023–0033–1005; PDMI, FTC– 2023–0033–0349. 274State AGs, FTC–2023–0033–0886. 2023–003–0864; Sirius XM, FTC–2023–0033–0857; 269Individual commenter, FTC–2023–0033–0345. 275Id. Chamber, FTC–2023–0033–0885. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90497 consumer’s billing information, . . . ‘‘immediately adjacent’’ to manner that is capable of being retained especially where a consumer previously recording the consumer’s consent.289 by the consumer.’’294 elected to save billing information with Commenters asserted having numerous
was vague and impractical. They this provision to only information First, they recommended requiring contended the requirement would result related to the negative option feature. sellers to ‘‘disclose all material policies in unnecessary details crowding out Section 425.4(a)’s requirement that concerning cancellation.’’ Second, they other disclosures.287IAB contended ‘‘[a] sellers disclose ‘‘all material terms’’ recommended ‘‘sellers be required to more effective strategy [regarding prior to obtaining the consumer’s billing disclose ‘all the information necessary cancellation disclosures] would be to information is consistent with ROSCA for the consumer to effectively cancel make clear but concise disclosures of and section 5 of the FTC Act. Moreover, the negative option feature.’’’ (Emphasis where that information can be in the Commission’s law enforcement in comment.) They explained, found.’’288 experience such a provision is necessary ‘‘[d]isclosures in the form of ‘click-here- Additionally, multiple commenters to prevent deception.295Therefore, to-cancel’ icons, which lead to terms criticized the provision requiring the extending this requirement is well and conditions pages, confusing placement of material terms ‘‘directly within the Commission’s rulemaking cancellation flows, or do not otherwise related to the negative option feature’’ authority.296 explain how to cancel online, should To address commenters’ concerns not be permitted.’’ Third, they 282CTA, FTC–2023–0033–0997; ESA, FTC–2023– about clarity, however, §425.2(e) adds a 0033–0867; IAB, FTC–2023–0033–1000; NRF, FTC– recommended ‘‘the FTC amend this definition of ‘‘material;’’ specifically, 2023–0033–1005; RILA, FTC–2023–0033–0883. provision to require that the important material means ‘‘likely to affect a Sirius XM asserted this requirement could be information identified by this proposed interpreted to mean every advertisement must person’s choice of, or conduct regarding, Rule be provided to the consumer in a contain disclosure of all material terms. FTC–2023– goods or services.’’297This definition is 0033–0857. consistent with longstanding section 5 283Rebecca Kuehn (‘‘Kuehn’’), FTC–2023–0033– 289ANA, FTC–2023–0033–1001; CCIA, FTC– case law and other Commission rules 0871; NRF, FTC–2023–0033–1005. 2023–0033–0984; Coalition, FTC–2023–0033–0884; defining ‘‘material.’’298 284CCIA, FTC–2023–0033–0984; CTA, FTC– CTA, FTC–2023–0033–0997; ESA, FTC–2023– 2023–0033–0997; ESA, FTC–2023–0033–0867; IAB, 0033–0867; IAB, FTC–2023–0033–1000; Direct FTC–2023–0033–1000; NRF, FTC–2023–0033–1005; Marketing Companies, FTC–2023–0033–1016; NRF, 294State AGs, FTC–2023–0033–0886. RILA, FTC–2023–0033–0883; Sirius XM, FTC– FTC–2023–0033–1005; SFE, FTC–2023–0033–1151; 295See., e.g., In re MoviePass, Inc., FTC Docket 2023–0033–0857. Sirius XM, FTC–2023–0033–0857; Chamber, FTC– No. C–4751 (2021). 285IAB, FTC–2023–0033–1000 (deadlines); 2023–0033–0885. 29615 U.S.C. 57a(a)(1)(B). Comment from Kelley Drye & Warren LLP on behalf 290Individual commenter, FTC–2023–0033–0552. 297Additionally, the Commission changes ‘‘any’’ of certain direct marketing companies (‘‘Direct 291NRF, FTC–2023–0033–1005. to ‘‘all’’ material terms, and deletes the phrase Marketing Companies’’), FTC–2023–0033–1016 292Coalition, FTC–2023–0033–0884; Chamber, ‘‘related to the underlying good or service that is (deadlines); NRF, FTC–2023–0033–1005 (amount or FTC–2023–0033–0885. necessary to prevent deception’’ for clarity. range of costs); Sirius XM, FTC–2023–0033–0857 293NRF, FTC–2023–0033–1005 (emphasis in Specifically, the Commission makes clear that (amount or range of costs). comment); see also Chamber, FTC–2023–0033–0885 sellers are required to disclose all material terms, 286Direct Marketing Companies, FTC–2023– (‘‘[T]he [disclosure] requirement is also ambiguous consistent with the requirements of ROSCA. 0033–1016. considering it does not clearly outline the specific 298See In re Cliffdale Associates, Inc., 103 F.T.C. 287CCIA, FTC–2023–0033–0984; ESA, FTC– material terms that need to be disclosed, which is 110, 165 (1984) (misleading impression created by 2023–0033–0867; IAB, FTC–2023–0033–1000; NRF, particularly important considering the requirement a solicitation is material if it ‘‘involves information FTC–2023–0033–1005. applies not just to the negative option feature, but that is important to consumers and, hence, likely 288IAB, FTC–2023–0033–1000. all terms in the transaction.’’). Continued VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90498 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations Additionally, the Commission obtains the consumer’s billing §425.4(b)(2)(i), would result in detailed modifies the proposed list of important information. For example, taxes or cancellation disclosures crowding out information.299The Commission retains delivery fees may depend in part on the other important required disclosures.302 the first proposed requirement that billing information the consumer This new language should provide sellers must disclose ‘‘[t]hat consumers provides. Thus, the Commission consumers with concise critical upfront will be Charged for the good or service, clarifies under the final Rule as adopted, information about how to cancel, while or that those Charges will increase after the ‘‘amount (or range of costs)’’ need offering sellers flexibility to avoid any applicable trial period ends, and, if not be exact if an exact figure is obscuring other important applicable, that the Charges will be on impossible, but the seller must give a information.303 a recurring basis, unless the consumer reasonable approximation. For example, Some sellers expressed concern timely takes steps to prevent or stop it is within the meaning of ‘‘amount (or regarding the timing of disclosures such Charges.’’300The Commission range of costs)’’ for a seller to disclose where a consumer previously elected to continues to find this requirement an amount ‘‘plus tax’’ where the seller save billing information with the seller. appropriate to combat deception. requires billing information to To address this concern the Commission The Commission revises the second determine the actual amount of tax. now clarifies that, where a consumer proposed disclosure, that sellers provide However, a ‘‘plus shipping’’ disclosure has previously provided account ‘‘the deadline (by date or frequency) by may not be sufficient if the amount of information to the seller and expressly which the consumer must act in order shipping is beyond what a consumer allowed the seller to store that to stop all charges.’’ As revised, this would reasonably expect or is greater information,304the seller must make the provision requires sellers to disclose than the amount a seller would required disclosures prior to obtaining ‘‘each deadline (by date or frequency) reasonably incur for shipping. In such a the consumer’s consent to use saved by which the consumer must act to circumstance, the seller would need to account information.305 prevent or stop the Charges.’’ This provide an estimate of shipping costs. (2) The Commission modifies the change clarifies there may not be a These clarifications should address requirements of §425.4(b) to promote single ‘‘deadline’’ by which a consumer commenters’ concerns about having to clarity. must act to ‘‘stop all charges.’’ A single disclose an exact cost when doing so is Section 425.4(b)(1) provides, ‘‘[e]ach seller, for example, may offer a single not possible. disclosure required by paragraph (a) of The final Rule omits the proposed consumer multiple goods or services, this section must be clear and fourth disclosure: the date (or dates)
and the consumer may wish to stop conspicuous.’’ The Commission retains each charge will be submitted for some charges without terminating the this requirement but revises the payment. The Commission is persuaded entire relationship. The Commission definition of clear and conspicuous at by commenters’ concern that a specific also clarifies that ‘‘frequency’’ as used in §425.2(c) to address commenters’ date or dates may be cumbersome or the final Rule includes a description of concerns regarding space-constrained impossible to calculate. For example, if an irregular frequency (e.g., within a the seller will submit a charge when it certain period after the seller notifies 302For example, IAB suggested the Commission ships a new item in a series, the seller the consumer a new item in a series has should require sellers ‘‘to make clear but concise become available) as well as a regular may not be able to predict the specific disclosures of where [cancellation] information can dates it will submit the charge in the be found, so consumers can find that information one (e.g., the 15th of each month).
too great a burden and could lead to practices used to manipulate users into Specifically, there may be necessary consumer confusion.307Thus, rather making choices they would not material disclosures not directly related than define ‘‘directly related to the otherwise have made.310 to the terms and conditions of a negative negative option feature,’’ the Additionally, under §425.5(a)(3) of option feature, and it is illogical to Commission removes this phrasing and the proposed Rule, sellers had to obtain simultaneously require these confines the ‘‘immediately adjacent’’ consumers’ unambiguously affirmative disclosures (through §§425.4(a) and requirement to a specific, narrow list of consent to the rest of the transaction to (b)(2)) and prohibit them (through disclosures. This change provides ensure consumers agreed to all elements §425.4(b)(3)). The Commission clarity and improves predictability for of the agreement, even those not therefore omits the clause from the final specifically related to the negative Rule. This revision does not alter the 306The Commission declines to adopt NFIB’s option feature. Further, §425.5(a)(4) of requirement of §425.4(b)(2)(i) that suggested change to strike the provision ‘‘The the proposed Rule required sellers to disclosure must use diction and syntax certain specific disclosures be made obtain and maintain (for three years or understandable to ordinary consumers’’ and replace clearly and conspicuously immediately a year after cancellation, whichever is it with ‘‘‘The disclosure must use words and adjacent to the means of recording the grammar that ordinary consumers would likely consumer’s consent. A seller who makes understand.’’’ Particularly in the context of audio 310See, e.g., FTC v. RevMountain, LLC, No. 2:17– disclosures, the terms ‘‘diction and syntax’’ provide cv–02000 (D. Nev. 2017); FTC v. Cyberspace.com, clearer requirements than the terms ‘‘words and 308Coalition, FTC–2023–0033–0884; Chamber, LLC, 453 F.3d 1196 (9th Cir. 2006); United States grammar.’’ NFIB, FTC–2023–0033–0789. FTC–2023–0033–0885. v. Mantra Films, Inc., No. 2:03–cv–9184 (C.D. Cal. 307NRF, FTC–2023–0033–1005; Law Professors, 309Kuehn, FTC–2023–0033–0871; NRF, FTC– 2003); FTC v. Crescent Publ’g Grp., Inc., 129 F. FTC–2023–0033–0861. 2023–0033–1005. Supp. 2d 311 (S.D.N.Y. 2001). VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90500 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations longer) verification of the consumer’s Sellers and trade groups also commenter, in these situations a second consent. The Commission specifically supported the requirement,316as did consent is likely unanticipated, and sought comment on the appropriate consumer groups.317However, sellers thus, could be confusing.319 recordkeeping period.311 and trade groups expressed concern Other groups asserted if consumers To maintain consistency with the about the requirement that sellers obtain are confused, they may not affirmatively TSR, §425.5(b) contained a cross- separate, unambiguously affirmative consent to the rest of the transaction, reference to 16 CFR part 310 so sellers consent to the ‘‘rest of the transaction,’’ which could cause uncertainty about subject to the TSR know they must as opposed to the ‘‘negative option the existence of the contract.320 comply with all applicable provisions of feature’’ itself. Specifically, these Commenters also noted too many that Rule, including those related to pre- commenters asserted consumers may be required actions during the purchasing acquired account information and free- confused where the product or service process may lead to ‘‘fatigue’’ and to-pay conversions. itself is only offered as a negative ‘‘cognitive overload,’’ causing Proposed §425.5(c) provided an option, such as with streaming services consumers to abandon transactions they exemplar consent mechanism for those or periodicals.318As explained by one may have otherwise wanted.321Finally, making written offers (including those several commenters complained the on the internet) to illustrate how sellers without consent); Individual commenter, FTC– separate consent requirements would be could obtain consumers’ unambiguously 2023–0033–0039 (free-trial conversion to one year difficult (and costly) to implement, but affirmative consent to the negative plan without consent); Individual commenter-FTC– without any benefit to consumers.322 option feature. Specifically, this 2023–0033–0052 (discount to full-price conversion without consent); Individual commenter, FTC– provision stated for all written offers, 2023–0033–1119 (cancelled, then automatically re- separate context. For example, most consumers sellers may obtain such consent through enrolled without consent); Individual commenter, would likely want to review all of the benefits they a check box, signature, or other FTC–2023–0033–0079 (automatically re-enrolled would receive as part of a subscription including substantially similar method, which the without consent); Individual commenter, FTC– any discounts when deciding on whether to choose 2023–0033–0083 (no disclosure account would be the option of automatic renewal.’’); APCIA, FTC– consumer must affirmatively select or automatically renewed); FTC–2023–0033–0138 2023–0033–0996 (‘‘Requiring a separate consent for sign to accept the negative option (charged after cancellation); Individual commenter, a feature that is inherent in service contracts— feature. This consent had to be FTC–2023–0033–0275 (no affirmative consent to continuous coverage—seems unnecessary and independent from any other portion of monthly charge). detrimental to consumers.’’). the offer.312 316Sirius XM, FTC–2023–0033–0857 (businesses 319IAB, FTC–2023–0033–1000 (‘‘Furthermore, should be required to obtain express informed consumers are familiar with subscription sign-up Finally, the Commission invited consent to the negative option feature at the point experiences and do not expect to have to consent comments on whether sellers offering of sale); PDMI, FTC–2023–0033–0864 (no objection a second time once they choose to purchase an free trials should be required to obtain to the general requirement that sellers obtain a autorenewal plan.’’). One individual consumer an additional round of consent before consumer’s consent to a transaction containing a confirmed the comment. Individual commenter, negative option feature); MIA, FTC–2023–0033– FTC–2023–0033–0552 (‘‘The rule specifically charging a consumer at the end of a free 1008 (agreeing with the consent requirement under prescribes that users must affirmatively assent trial.313 the proposed Rule). specifically to the negative option feature, but in 317Berkely Consumer Law Center, FTC–2023– cases where a user is only purchasing a negative (a) Summary of Comments 0033–0855; State AGs, FTC–2023–0033–0886 option product, how should other disclosures be Consistent with the Commission’s and (noting State Attorneys General support the FTC’s presented?’’) States’ enforcement experience,314 proposed consent requirements and agree this 320NCTA, FTC–2023–0033–0858; Sonsini Alarm provision is necessary given how easily marketers Clients, FTC–2023–0033–0860 (‘‘could lead to individual consumers’ comments can enroll consumers in negative option programs consumers inadvertently failing to consent to auto- confirm the need for clear, without actual consent.). One individual consumer renewal (because they did not notice the second unambiguous, affirmative consent to a generally supported the separate consent check box) and having an unintended lapse in negative option feature. These requirements of the proposed Rule, but asked that home security system coverage.’’); Asurion, FTC– the regulation prevent businesses from only offering 2023–0033–0878 (‘‘many consumers who want and comments identify numerous examples goods and services through auto-renewal and could benefit from auto-renewal protection of consumers’ unwitting enrollment in subscription programs, i.e., consumers should have provisions will neglect to make the requisite two negative option programs.315 the option to purchase a good or service a la carte separate affirmative consents and suffer real and not only on a recurring basis. Individual consequences when they find themselves with a commenter, FTC–2023–0033–0026. broken device during a gap in coverage’’); APCIA, 311NPRM, FR 88 24727 n.70; see also id. at 318Sirius XM, FTC–2023–0033–0857 (requiring FTC–2023–0033–0996 (‘‘A consumer who wants a 24734. an additional consent will only result in consumer service contract but then inadvertently fails to 312To avoid potential conflict with EFTA, this confusion); NCTA, FTC–2023–0033–0858 check a box indicating separate consent for the proposed provision does not apply to transactions (‘‘requiring two consents could lead to consumer negative option feature could find that they no covered by the preauthorized transfer provision of confusion (to say nothing of their exasperation at longer have coverage at the time they most need that Act, 15 U.S.C. 1693e, and Regulation E, 12 CFR being forced to read and provide consent to a it.’’). 1005.10. Those EFTA provisions, which apply to a plethora of successive and largely duplicative 321See, e.g., DCN, FTC–2023–0033–0983 (could range of preauthorized transfers include some used documents). They may wonder why they are being lead to over-notification); CCIA, FTC–2023–0033– for negative options, contain various prescriptive asked to consent twice to a single transaction. And 0984 (‘‘Adding too much additional information or requirements (e.g., written consumer signatures that might worry that they have somehow too many required actions in a purchase cart has comply with E-Sign, 15 U.S.C. 7001–7006, evidence misunderstood one or both of the consent notices’’); diminishing returns for consumer comprehension of consumer identity and assent, the inclusion of PDMI, FTC–2023–003–0864 (anecdotal evidence and attention, and can increase the cognitive load terms in the consumer authorization, and the received from several PDMI members demonstrates for consumers to the point that they simply stop provision of a copy of the authorization to the that any time an additional choice or check box is reading or give up on the purchase.’’); ANA, FTC– consumer) beyond the measures identified in the offered to a consumer during a single transaction, 2023–0033–1001. proposed Rule. Consequently, compliance with the such extra steps are likely to cause consumer 322NCTA, FTC–2023–0033–0858 (‘‘would require proposed Rule would not necessarily ensure confusion); N/MA, FTC–2023–0033–0873 companies to change their current customer sign-up compliance with Regulation E. For example, use of (‘‘Requiring sellers to separate a single unified offer flows, at significant cost, without providing a check box for consent without additional into separate components is not only unnecessary, consumers with any additional benefits’’); PDMI, measures may not comply with Regulation E’s more it risks creating consumer confusion and fatigue’’ FTC–2023–003–0864 (‘‘requiring merchants to specific authorization requirements. and consumers may ‘‘simply abandon the implement a double opt-in would impose an 313NPRM, 88 FR 24728. transaction’’); RILA, FTC–2023–0033–0883 extraordinary financial and resource burden on 314See, e.g., State Attorneys General (ANPR), (‘‘requirement for two distinct consents . . . may be sellers.’’); id. (double opt-in requirements ‘‘makes FTC–2019–0082–0012; State AGs, FTC–2023–0033– confusing and not helpful to consumers.’’); DCN, absolutely no sense, where, as is often the case, 0886 (citing cases); FTC v. Amazon.com, Inc., No. FTC–2023–0033–0983 (‘‘We are concerned that there is no transaction separate from the negative 2:23–cv–0932 (W.D. Wash. 2023); see also n.109. requiring a separate consent would be confusing for option transaction’’); SCIC, FTC–2023–0033–0879; 315See, e.g., Anonymous commenter, FTC–2023– the consumer who may not have the details of the Chamber, FTC–2023–0033–0885 (little to no 0033–0799 (automatically enrolled in program entire contract readily available in the mandated evidence that double opt-in will create any VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90501 Thus, these commenters asked the posited: ‘‘[a]lternatively, to advance the maintain records of consumer consent Commission to exclude transactions same goal, and because the Proposed for at least three years, even for where the negative option feature is not Rule already requires clear and consumers who signed up for a free trial independent of the good or service conspicuous disclosure of material and cancelled it before being charged. being sold, i.e., where the good or terms, the FTC could instead require As drafted, the proposed amendments service is itself only offered as a subscription service providers to would also require sellers to maintain negative option,323or to delete the prominently disclose subscription terms records of consumer consent for eleven requirement that sellers obtain separate, in a manner that differentiates them years for individuals who continuously unambiguous, affirmative consent ‘‘to from other disclosures, such as in subscribe to negative option features for the rest of the transaction.’’324 bolded or underlined font, in the course at least ten years.’’333 Two commenters asked the of obtaining consumer consent to the Numerous commenters asserted these Commission to modify the proposed transaction.’’328Additionally, several recordkeeping requirements would provision by merging consent to the commenters questioned ‘‘why a seller increase costs, which could ultimately transaction and the negative option should be precluded from including be passed onto consumers,334or small feature. These commenters suggested a other material terms of the transaction separate consent should only be in obtaining a single consent.’’329 businesses, especially with respect to necessary where there are two Some commenters raised additional in-person and telephone transactions.335 independent portions of the transaction: concerns. For instance, several Others raised concern the proposed one related to the negative option commenters challenged the recordkeeping requirement could feature and a second for the sale of a Commission’s statement that a separate conflict with best privacy practices. For separate good or service (including a check box or similar method could be example, commenters noted the free trial).325Without this change, used to record a consumer’s retention period is at odds with the commenter Kuehn suggested ‘‘the unambiguously affirmative consent. need to minimize the amount of proposed Rule could have the Specifically, PDMI contended the check consumer data that businesses hold and unintended result of diminishing the box, signature, or ‘‘substantially to enable customers to request deletion efficacy of other important terms of the similar’’ method of consent could of their data.336Commenters also contract.’’ Accordingly, Kuehn quickly become obsolete and ‘‘replaced suggested the Commission reduce the suggested the Commission revise the by far more effective and consumer length of the recordkeeping definition of negative option feature to friendly mechanisms.’’330Another, requirement, e.g., to six months,337or encompass the entire contract (rather NRF, argued courts routinely hold a revise the proposal to eliminate the than a provision of the contract).326This separate check box is not required for requirement for those who do not allow alteration, along with changing ‘‘rest of consumers to manifest asset to terms customers to purchase without the transaction’’ to ‘‘the sale of another and conditions of the agreement, so long 333ANA, FTC–2023–0033–1001; see also BSA, good or service,’’ would make it clear as the terms are reasonably FTC–2023–0033–1015 (‘‘the current language could separate consent is only required where conspicuous.331Finally, a group of be read to require a company to retain for three the seller has both an auto renewal direct marketing companies, argued years the records of a customer who signed up for agreement and the sale of another good standalone consent is not necessary or a free trial but cancelled before the trial ended—and was therefore never a paying customer.’’).
or service. reasonable, and other methods could 334APCIA, FTC–2023–0033–0996; IAB, FTC– IAB, DCN, CTA, and several direct suffice. They suggested the Commission 2023–0033–1000 (‘‘this requirement will be marketing companies asserted the include language that it ‘‘shall be a significantly costly, as subscription businesses will Commission could achieve the same question of fact’’ whether the seller need to overhaul their sign-up processes to comply outcome—informed consent—through obtained consent through another with this requirement. Businesses seeking to offset this increased cost will be forced to pass this cost less restrictive means, e.g., by requiring means.332 to consumers or avoid offering subscriptions at a clearer disclosure of the negative Additionally, several trade groups and all’’). option feature.327For example, CTA sellers expressed concern about the 335NCTA, FTC–2023–0033–0858 (‘‘The proposal NPRM’s proposed recordkeeping fails to account for the immense burden the consumer benefit, instead will increase consumer requirements. For instance, one trade proposal would impose on companies using fatigue); see also IAB, FTC–2023–0033–1000 group explained the proposed alternative means to sell their products and services (double opt-in could be especially burdensome for by requiring them to create and implement ways to bundled services, requiring consumers to check an requirements ‘‘would require sellers to capture and store duplicative layers of consumer additional box for each service, without added consent.’’). benefit to clarity or disclosure); ICA, 2023–0033– disclosure proximate to the consumer’s consent 336CCIA, FTC–2023–0033–0984 (‘‘This record 1142 (‘‘requiring recording keeping of ‘‘express would be insufficient to prevent deception and retention rule also seems to be at odds with key informed consent’’ potentially expressed through remedy allegedly prevalent unfair or deceptive acts principles of consumer privacy, namely the need to verbal, digital, or written records for multiple years and practices’’). minimize the amount of consumer data that will be an onerous and expensive requirement for 328CTA, FTC–2023–0033–0997. businesses hold and to enable customers to request small business owners to fulfill.’’). 329PDMI, FTC–2023–003–0864; Sirius XM, FTC– deletion of any data in possession of a third party. 323Chamber, FTC–2023–0033–0885 (‘‘unless 2023–0033–0857 (‘‘Businesses should be able to A shorter mandatory retention period is more there is a negative promotional option, service obtain such consent in conjunction with the other appropriate for both businesses and consumers.’’); providers should not be required to have a separate terms of an offer,[] as long as they clearly and NCTA, FTC–2023–0033–0858 (‘‘Not only is it consent for monthly billing and the underlying conspicuously disclose the negative option features expensive to maintain these records, it does not transaction when the underlying transaction is for and the other material terms of the offer and refrain comport with privacy best practices.’’). a monthly service.’’); see also MIA, FTC–2023– from ‘‘includ[ing] any information that ‘interferes 337ICA, 2023–0033–1142 (‘‘Decrease the duration 0033–1008 (‘‘an additional consent to initiate a with, detracts from, contradicts, or otherwise of the record-keeping requirement to six months Subscription is unnecessary and superfluous’’). undermines’’ the negative option terms.’’). after the business and the consumer enters into the 324See, e.g., Direct Marketing Companies, FTC– 330PDMI, FTC–2023–003–0864. agreement.’’); see also Direct Marketing Companies, 2023–0033–1016. 331NRF, FTC–2023–0033–1005 (citing Meyer v. FTC–2023–0033–1016 (change recordkeeping 325Kuehn, FTC–2023–0033–0871; RILA, FTC– Uber Techs., Inc., 868 F.3d 66, 79 (2d Cir. 2017)). requirement to keep or maintain records ‘‘for at 2023–0033–0883. It is unclear from NRF’s comment whether it least one year if the consumer is charged at least 326Kuehn, FTC–2023–0033–0871. questioned separate consent generally, or the twice within six months after the initial charge; or 327Direct Marketing Companies, FTC–2023– guidance on a check box. for at least three years if the consumer is not 0033–1016 (‘‘the Commission provides no evidence 332Direct Marketing Companies, FTC–2023– charged at least twice within six months after the or rationale that a robust, clear and conspicuous 0033–1016. initial charge.’’). VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90502 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations accepting the terms of the negative trade groups disagreed, specifically negative option basis; however, doing so option feature.338 noting the Commission’s own analysis does not lessen the need to ensure Two consumer groups supported the indicating a separate consent may not be consumers consent to the negative consent provision but asked the necessary given the other requirements option mechanism within the Commission to add clarifying language. of the Rule343and existing State agreement. Therefore, the analysis Specifically, Berkeley Consumer Law laws.344 below does not separately address this Center asked the Commission to state issue.
Individual commenter, FTC–2023–0033–0607 (‘‘A or personal items, and then you forget to cancel it 347Section 425.5(a)(1). ‘trial offer’ should be just that—a ONE-TIME after that trial is over.’’’). 348Section 425.5(c) allows sellers to comply with purchase.’’). 343Sirius XM, FTC–2023–0033–0857 (‘‘As long as the requirement to obtain unambiguously 342State AGs, FTC–2023–0033–0886 (‘‘the State consumers are clearly informed about the terms of affirmative consent to the negative option feature Attorneys General again respectfully encourage the a free trial offer and evince affirmative consent, no through a check box, signature, or other FTC to require sellers offering free trials to obtain further consumer consent should be required when substantially similar method. an additional round of consent before charging a the free trial period expires.’’). 349See Rule §425.4(a)(1)–(4). consumer at the completion of the free trial.’’); Law 344CCIA, FTC–2023–0033–0984; Chamber, FTC– 350The Commission further notes because the Professors, FTC–2023–0033–0861 (‘‘we ask that the 2023–0033–0885. seller is obtaining express informed consent to the Commission require additional consent from the 345This change will not affect a seller’s obligation negative option feature separately from the rest of consumer before a business may convert a free (or to maintain appropriate records under other the transaction, consumers are, in effect, agreeing to nominal-fee) trial into an expensive subscription. regulations, e.g., the TSR. both the negative option feature and the sale of the Indeed, it seems that Congress, in adopting ROSCA, 346See section VII.B.7. good or service separately. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90503 option feature and the rest of the demonstrate it meets this threshold. The sellers to specific mechanism that may transaction could be hard to implement final provision will allow sellers to become obsolete. for many sellers. Thus, the final Rule destroy consumer records more quickly, Further, the Commission declines to does not contain the separate consent while accomplishing the same goal.354 modify the final Rule to allow sellers to requirement.351 Finally, the Commission clarifies obtain express informed consent by
said, taking advantage of consumers’ consumers uniformly expressing their 364Individual commenter, FTC–2023–0033–0231; ‘‘forgetfulness’’ is extremely troubling Individual commenter, FTC–2023–0033–0109. desire for a simple easy to use and thus ripe to be addressed by other 365Individual commenter, FTC–2023–0033–0403. cancellation mechanism.361Such means. 366‘‘Unsubscribing should be easier than comments included: ‘‘If you signed up subscribing.’’ Individual commenter, FTC–2023– 6. Proposed §425.6 Simple Cancellation online, you should be able to cancel 0033–0005. Accord Individual commenter, FTC– (‘‘Click to Cancel’’) online. If it took one click to join, it 2023–0033–0021 (same); Anonymous commenter, FTC–2023–0033–0040 (‘‘I am in favor of making it Section 425.6 of the proposed Rule should take one click to cancel;’’362‘‘I easier to discontinue services.’’); Individual contains several requirements to ensure commenter, FTC–2023–0033–0107 (‘‘Canceling a consumers can easily cancel negative 360NPRM, 88 FR 24729. subscription should be easier that setting up the 361Individual commenter FTC–2023–0033–0029 subscription.’’). option features. As explained in the (‘‘Please implement this necessary rule to protect 367Individual commenter, FTC–2023–0011 (‘‘It NPRM, ‘‘easy cancellation is an consumers and save us hours on the phone should be very easy to cancel a subscription, essential feature of a fair and non- cancelling services we signed up for with one click artificially creating difficulty or hurdles only serves deceptive negative option program,’’ but online.’’); Individual commenter, FTC–2023–0033– to hurt the consumer of a service as well as a 0072 (‘‘I have had issues with some online company’s image and deplete trust in a brand or one that has become ‘‘far too often subscriptions which were entered into purely service.’’); Individual commenter, FTC–2023–0033– illusory.’’359‘‘If consumers cannot online, but to cancel I had to call a phone number 0036 (‘‘It should be very easy to cancel a easily leave a negative option program, open only during certain business hours. I would subscription!!!!!’’). the negative option feature is little more like a rule that requires all subscriptions to be 368Individual commenter, FTC–2023–0033–0030; available to cancel through the same means as they Individual commenter, FTC–2023–0033–0035; see were initiated, whether that is online, in person, also Individual commenter, FTC–2023–0033–0188 356Law Professors, FTC–2023–0033–0861. phone, mail, or chat. I believe that would be fair (‘‘If you sign up online, you should be able to 357Rule §425.2(c)(6). to people of all technological levels while allowing cancel online. If it took one click to join, it should 358Deceptive sellers also commonly delay businesses to conduct business how they feel take one click to cancel. Kind of like shipment of goods or services until close to the end comfortable without allowing them to create ‘unsubscribing’ from an email newsletter you don’t of the trial period, giving consumers little time to unnecessary hurdles for customers looking to end want to get anymore.’’); Individual commenter, stop the charge or cancel the negative option. See, their service.’’). FTC–2023–0033–0236 (‘‘When I get an email from e.g., Individual commenter, FTC–2023–0033–0085. 362Individual commenter, FTC–2023–0033–0111. a politician I’m not interested in there is always an 359NPRM, 88 FR 24729; see ANPR, 84 FR 52395 Thousands of individual consumers repeated this unsubscribe button. Why can’t paid subscriptions (discussing general requirements for nondeceptive phrase through a mass media campaign. See, e.g., be the same?’’). negative options); id. at 52396 (discussing the Anonymous commenter, FTC–2023–0033–0013; 369Controlling the Assault of Non-Solicited ongoing problems in the marketplace including Individual commenter, FTC–2023–0033–0016 (‘‘If I Pornography and Marketing Act of 2003 (‘‘CAN– inadequate or overly burdensome cancellation can subscribe in one click, I should be able to SPAM Act’’), 15 U.S.C. 7701–7713; 16 CFR part procedures). unsubscribe in one click.’’); Individual commenter, 316. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90505 often have to resort to disputing the wasted on unused and unwanted to the prevalent acts or practices the charge with credit card companies (or products and services they were not Commission identified.380 cancelling the card altogether) because effectively able to cancel due to
0033–029 (‘‘Please implement this necessary rule to 383BSA specifically requested the Commission phrases and if you don’t know to click on just the protect consumers and save us hours on the phone revise subsection (a) to the following: ‘‘We suggest right one, you’ll never be able to cancel.’’).
cancelling services we signed up for with one click revising this language to clarify the intended result online.’’); Anonymous commenter, FTC–2023– 375Law Professors, FTC–2023–0033–0861; see by stating the obligation is ‘to cancel the negative also State AGs, FTC–2023–0033–0886 (‘‘state 0033–0040 (‘‘My negative experience was that it option feature and immediately stop any recurring attorneys general strongly endorse the FTC’s efforts was a simple ‘click’ on-line to sign up for a service charges for the good or service.’’’ BSA, FTC–2023– to ensure that consumers enrolled in subscription but to cancel same service it took three phone calls 0033–1015. However, this change could create services or other negative option plans are and hours of my time.); Individual commenter, ambiguity regarding application of the subsection to continuing to pay for those plans because they want FTC–2023–0033–0084 (‘‘I spent over two hours of the initiation of charges under free- and fee-to-paid to maintain their subscriptions, and not because it my time trying to cancel the subscription.’’); conversions. Accordingly, the Commission will not is too much trouble to cancel.’’).
Individual commenter, FTC–2023–0033–0106 (‘‘I’ve incorporate the suggested change. definitely lost at least 30 hours of my life dealing 376PDMI, FTC–2023–003–0864; ACT App 384See, e.g., EPS, 86 FR 60822; FTC v. FloatMe Association, FTC–2023–0033–0874 (elusive with insufferable ‘retention specialists,’ all of whom Corp., No. 5:24–cv–00001 (W.D. Tex. 2024); United language); IAB, FTC–2023–0033–1000 (unclear how should be ashamed of what they do.’’); Individual States v. Cerebral, Inc., No. 1:24–cv–21376 (S.D. to measure simplicity).
commenter, FTC–2023–0033–0431; Individual Fla. 2024); FTC v. Bridge It, Inc., No. 1:23–cv–09651 commenter, FTC–2023–0033–0385 (‘‘This is not a 377Chamber, FTC–2023–0033–0885 (‘‘ambiguous (S.D.N.Y. 2023); FTC v. Vonage Holdings Corp., No. bot generating a letter; it’s an actual person, and I and hard to implement requirement); NRF, FTC– 3:22–cv–06435 (D.N.J. 2022); FTC v. Benefytt want to register strong support for the one Click 2023–0033–1005 (as simple as not defined and no Techs., Inc., No. 8:22–cv–01794 (M.D. Fla. 2022); rule you are considering. I have wasted hours trying examples). FTC v. First Am. Payment Sys., No. 4:22–cv–00654 to deal with customer service, whose only goal is 378ACT App Association, FTC–2023–0033–0874. (E.D. Tex. 2022); United States v. MyLife.com, Inc., to keep me on board.’’); Individual commenter, The Commission does indeed define ‘‘simple No. 2:20–cv–6692 (C.D. Cal. 2020); FTC v. FTC–2023–0033–0672 (‘‘It’s about time! Trying to mechanism’’ through the requirements of §425.6, as RagingBull.com, LLC, No. 1:20–cv–03538 (D. Md. unsubscribe can waste many hours, induce stress, well as through existing caselaw and the 2021 2020); FTC v. Age of Learning, Inc., No. 2:20–cv– result in unwanted subscription or cancellation Enforcement Policy Statement. See n.385. 07996 (C.D. Cal 2020); FTC v. Match Grp., Inc., No. fees, and leave personal data subject to abuse.’’); 379ESA, FTC–2023–0033–0867; IHRSA, FTC– 3:19–cv–02281 (N.D. Tex. 2019); FTC v. Cardiff, No. Individual commenter, FTC–2023–0033–0642 2023–0033–0863; Chamber, FTC–2023–0033–0885; 5:18–cv–02104 (C.D. Cal. 2018); FTC v. AdoreMe, (‘‘There needs to be a substantial penalty when a BSA, FTC–2023–0033–1015. Continued VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90506 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations Moreover, the ‘‘as easy as’’ standard is insufficient clarity.391Not all negative on ‘‘consumer expectations,’’ even clearer in context, i.e., a flexible option features begin with a purchase convenience, or common use by the measure that ensures consumers have (e.g., free trials), and when a transaction seller).395 similar cancellation and consent is initiated is subject to interpretation or Consumer groups and law experiences in terms of time, burden, possible manipulation. Given this enforcement asked the Commission to expense, and ease of use, among other ambiguity, businesses attempting to add minimum requirements to the things.385The Commission is aware comply with the proposed Rule may simple cancellation mechanism. For these experiences may not always be have difficulty, and those attempting to instance, the State AGs asked the perfectly symmetrical. Consumers may evade the proposed Rule may find Commission to include the various have to verify or authenticate their loopholes with the proposed initiation requirements stated in the 2021 identity, for instance,386or they may be or purchase date trigger. Thus, the Enforcement Policy Statement, e.g., asked to confirm their intent to Commission revises §425.6(b)392to require negative option sellers ‘‘not [to] cancel.387However, reasonable require the simple cancellation erect unreasonable barriers to verification, authentication, or mechanism be ‘‘as easy as’’ the cancellation or impede the effective mechanism the consumer used ‘‘to confirmation procedures should not operation of promised cancellation consent’’ to the negative option feature, create distinctly asymmetrical procedures, and must honor rather than ‘‘initiate’’ or ‘‘purchase’’ the experiences, particularly if the cancellation requests that comply with feature. The moment of consent avoids cancellation mechanism is located such procedures.’’396They also urged the lack of clarity the terms ‘‘purchase’’ within account or user settings secured the Commission to adopt language from and ‘‘initiate’’ introduce and clarifies by authentication requirements for New York’s statute, which provides the action to which the cancellation access. Any authentication, verification, simple cancellation mechanisms must must be compared.
or confirmation procedure that creates be ‘‘cost effective, timely, and easy to unreasonable asymmetry runs afoul of (b) Proposed §425.6(c) Minimum use.’’397Additionally, the Center for section 5 of the FTC Act and the Rule. Requirements for Simple Mechanisms Data Innovation asked the Commission Moreover, given the extensive record (1) Summary of Comments to create a working group to define and the Commission’s experience with simple mechanism further, including The proposed Rule required sellers to sellers using verification and best practices for businesses.398 provide a simple cancellation authentication tools to thwart or delay mechanism through the same medium Finally, some commenters suggested cancellation,388the Commission (internet, phone, in-person) the the record lacks evidence that it would declines to create a safe harbor for these consumer used to consent to the be unfair or harmful to consumers to activities as some States have389and as negative option feature. Almost have a cancellation process different some commenters requested.390 uniformly, consumers supported this from the sign-up process.399 Nevertheless, as some commenters requirement.393However, a number of a Accordingly, they argued promulgating point out, the proposed initiation or trade groups disagreed, arguing, as a trade regulation rule requiring such purchase date trigger may provide explained below, the requirement is too symmetry is beyond the Commission’s prescriptive, or could lead to accidental authority. Further, IAB argued the Inc., No. 1:17–cv–09083 (S.D.N.Y. 2017); FTC v. or inadvertent cancellation.394Instead, Commission cannot create new AAFE Prods. Corp., No. 3:17–cv–00575 (S.D. Cal. these commenters suggested the requirements defining simple 2017); FTC v. JDI Dating, Ltd., No. 1:14–cv–08400 Commission allow consumers to choose cancellation methods beyond ROSCA’s (N.D. Ill. 2014).
390USTelecom, FTC–2023–0033–0876 to accidental and/or malicious cancellations.); NRF, (‘‘expressly allow’’ business to engage in privacy FTC–2023–0033–1005 (data suggests that one-click- 399CTA, FTC–2023–0033–0997; IAB, FTC–2023– and data security measures prior to cancellation); cancellation functions frequently cause accidental 0033–1000. ANA, FTC–2023–0033–1001. cancellations). 400IAB, FTC–2023–0033–1000. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90507 spend significant time on the telephone industries posited consumers often do calls in ‘‘comparable timeframe to sign- to cancel their subscriptions.401 not, in fact, want to cancel, but rather up calls.’’411They also suggested In contrast, RILA suggested seek to downgrade or modify services. telephone answering systems should not consumers would not always expect to Therefore, requiring a consumer to be limited to normal business hours if find a cancellation function through the speak to a live agent best accomplishes they are entirely automated. The State same online medium the consumer used this goal, regardless of how the AGs further asked the Commission to to enroll. ‘‘For example, contracts are consumer enrolled.408 incorporate the guidance for telephone . . . increasingly concluded online Alarm companies raised a similar cancellation from the 2021 Enforcement through third parties or via social media concern, i.e., there are no safeguards to Policy statement, for example, ensuring apps. Regardless of how a customer ensure the consumer intended to cancel ‘‘the calls are not lengthier or otherwise initially signs up, once she/he (rather than, e.g., unsubscribe from more burdensome than the telephone establishes a purchasing arrangement marketing emails) when cancelling call the consumer used to consent to the with a seller, the customer will logically online. They also emphasized the negative option feature,’’ and look to the seller to cancel.’’402Several importance of verifying a consumer’s prohibiting sellers from ‘‘hang[ing] up commenters agreed, stating where a identity prior to cancellation. As on consumers who call to cancel; consumer enrolls through a third party, explained by a commenter representing plac[ing] them on hold for an or through an IoT device, the consumer various alarm company clients, alarm unreasonably long time; provid[ing] may naturally look to the seller with companies’ ‘‘cancellation procedures false information about how to cancel; whom the consumer has the are designed to prevent inadvertent or or misrepresent[ing] the reasons for agreement.403 malicious disabling of alarm monitoring delays in processing consumers’ Similarly, trade groups, such as NCTA services, often by directing consumers cancellation requests.’’412 and PDMI, argued mandating consumer to call trained customer support cancellation through the same website representatives who can verify the (c) Proposed §425.6(c)(3): In-person or web-based application the consumer consumer’s identity via their secure Cancellation used to initiate the transaction is too passcode and ensure any changes made For in-person sales, proposed prescriptive.404Several of these to the account are intentional and fully §425.6(c)(3) required sellers to offer commenters asserted the proposed informed.’’409 online or telephone call cancellation requirement is unnecessary and
suggested it may not be possible to offer these situations, the proposed Rule the same website or web-based required sellers to provide a telephone Individual consumers identified the application due to contractual number to consumers and ‘‘assure’’ all many ways in which demanding in- obligations and limitations imposed by calls are answered promptly during person cancellation is unfair. For third parties.407 ‘‘normal business hours’’ and are no instance, they observed it may not Additionally, broadband, wireless, more costly than the call to enroll. always be possible to cancel in person, and streaming groups, such as NCTA Several commenters asked the as was true during the COVID and USTelecom, suggested the same- Commission to modify this section. pandemic,413after a consumer moves medium requirement is particularly Specifically, N/MA asked that sellers be from the area,414or for people with troublesome for their industries because allowed to confirm telephone young children or who have difficulty consumers often subscribe to multiple, cancellations through email leaving their home.415Others or bundled, services, rendering verification.410A group of law cancellation online through a single professors asked the Commission to 411Law Professors, FTC–2023–0033–0861. click difficult or impossible. These require sellers to answer cancellation 412State AGs, FTC–2023–0033–0886. 413Individual commenter, FTC–2023–0033–0399 401Individual commenter, FTC–2023–0033–0215 408USTelecom, FTC–2023–0033–0876; CTIA, (‘‘Even if I didn’t sign up online, terminating, a (‘‘If you signed up online, you should be able to FTC–2023–0033–0866 (‘‘imperative that businesses membership in person isn’t always possible. Lock cancel online. If it took one click to join, it should are able to have a live representative speak with a down during Covid being a prime example.’’). take one click to cancel.’’); Individual commenter, customer seeking to cancel, regardless of the 414Individual commenter, FTC–2023–0033–0677 FTC–2023–0033–0847; Anonymous commenter, medium used to sign up’’); NCTA, FTC–2023– (‘‘Companies are absolutely being deceptive about FTC–2023–0033–0040 (‘‘My negative experience 0033–0858; (‘‘Whatever these consumers’ reasons their practices when it comes to canceling a service, was that it was a simple ‘click’ on-line to sign up for seeking to cancel or modify services, in most including their initial pitch to ‘Cancel anytime!’ for a service but to cancel same service it took three instances they are best served by speaking with a only for you to find out that canceling requires you phone calls and hours of my time. If I can sign up live agent, even if they enrolled online.’’); see also to go in person to a business in a place you might Chamber, FTC–2023–0033–0885 (subscriptions to not even live anymore’’). with a ‘click’ then I SHOULD be able to cancel with a ‘click.’’’). multiple products or services ‘‘require[] more time 415Individual commenter, FTC–2023–0033–0741 402RILA, FTC–2023–0033–0883. and personal assistance to address when a customer (‘‘[m]any places . . . require you to go in person to seeks to cancel only one of such related products cancel—they won’t even let you do it over the 403ESA, FTC–2023–0033–0867; ANA, FTC– or services’’). phone! This harms anyone that may have trouble 2023–0033–1001.
(2) Analysis the Commission to promulgate to engage with a representative to cancel
sellers to provide consumers with a to cancel online); Anonymous commenter, FTC– 420See, e.g., N/MA, FTC–2023–0033–0873 2023–0033–0044 (shouldn’t be forced to make a simple mechanism to immediately stop (subscribers should be allowed to choose method phone call and sit on hold for hours if signed up charges that is cost-effective, timely, and most convenient; subscribers who sign up by mail online); Individual commenter, FTC–2023–0033– easy to use. Such a mechanism cannot may prefer to cancel online or by telephone, and 0072 (fair to consumers to allow consumers to include ‘‘unreasonable barriers to c to o n ca su n m ce e l r o s n w li h n o e ) s ; u S b i s ri c u ri s b X ed M b , y F T te C le – p 2 h 0 o 2 n 3– e 0 m 0 a 3 y 3 – p 0 r 8 e 5 fe 7 r c In a d n i c v e i l d t u h a r l o c u o g m h m sa e m n e te m r, e F a T n C s – a 2 s 0 t 2 h 3 e – y 0 w 03 er 3 e – 0 in 0 i 8 ti 7 a t ( e ‘‘ d I ); cancellation or impede the effective (‘‘For example, requiring a customer to use direct think any offer you can buy with a click should also operation of promised cancellation mail to cancel if the customer used direct mail to be an offer to unsubscribe with a click’’; having to procedures.’’419This provision makes accept a subscription offer would be inconvenient call instead is a scam); Anonymous commenter, for the customer and not the customer’s expected FTC–2023–0033–0095 (‘‘I would like to specify that or desired means for cancellation. Instead, the [company] did not allow to terminate the account 416See, e.g., Individual commenter, FTC–2023– cancellation method should be an easy-to-use online. They specifically requested a phone call, 0033–0510 (‘‘I had to go in person 3 different times mechanism for a consumer to stop recurring charge which they then ignored for as long as possible. because the manager wasn’t there so to cancel it’’). which would closely track consumer expectations This practice is unfair and deceptive and needs to 417Individual commenter, FTC–2023–0033–0007 and allow for changes in technology.’’); State AGs, be outlawed.’’); Anonymous commenter; FTC– (‘‘I work dispute resolutions for a bank. I see so FTC–2023–0033–0886 (‘‘We respectfully suggest 2023–0033–0097 (FTC should ban practice of many cases where someone is trying to cancel requiring sellers to allow all consumers to cancel companies only offering cancellation via phone something like a gym membership and, while they through any medium that the seller uses to sell call, despite not requiring a phone call for signup); can sign up in person, they for some reason have subscriptions or memberships, regardless of the Individual commenter, FTC–2023–0033–0274 to mail a certified letter to the [company’s] home medium through which that particular consumer (‘‘having to call the company to cancel when the office. That has always seemed unreasonable and signed up.’’). party clicked on the website is forced verbal deliberately contrived.’’). 421See generally section VII.A. speech’’); Individual commenter, FTC–2023–0033– 418ICA, FTC–2023–0033–1142. ICA’s comment 42215 U.S.C. 57a(a)(1)(B). 0356 (‘‘If you signed up online, you should be able seems to suggest a misunderstanding that the Rule 423NPRM, 88 FR 24716 n.9. Although, as stated to cancel online. If it took one click to join, it would require both telephone and online in the NPRM, Congress did not direct the FTC to should take one click to cancel. I am tried [sic] of cancellation for in-person consent. It does not. A promulgate implementing regulations, it certainly calling some call center, waiting on hold, and then business may elect either online or telephone (or did not preclude them, and the language contained having someone go through a long script about why both), but there must be at least one mechanism in in ROSCA confirms the FTC’s authority to do so. I should not cancel. Generally make it as easy to addition to in-person cancellation. 15 U.S.C. 8404(a) (‘‘Violation of this chapter or any cancel as to sign up.’’); Individual commenter, 419EPS, 86 FR 60823; see also NPRM, 88 FR regulation prescribed under this chapter shall be FTC–2023–0033–0379 (‘‘I have now been charged 24728 (explaining the simple cancellation treated as a violation of a rule. . . .’’); see also id. for a full month because I have to call and speak VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90509 frustration over having to hunt to find online.427As several commenters cancellation button in a consumer’s cancellation mechanisms, usually rightly noted, however, consumers may account or user settings is, thus, one buried deep within a website or in fine not always expect (and it may not example of a simple online cancellation print on a bill or other always be possible) to use the same mechanism.431The Commission correspondence.425The Commission precise means for both enrollment and cautions, however, while such a has brought numerous cases alleging cancellation.428 mechanism need not be exactly the these practices are unfair or Accordingly, to clarify the intent of same as the consent mechanism, the deceptive.426The proposed Rule sought the original language and to better seller cannot make it more difficult to to prevent these unfair and deceptive match consumer expectation with actual use or find than the consent mechanism. practices by requiring sellers to provide cancellation procedures, the For example, the seller cannot an easily accessible online cancellation Commission now clarifies that where a prominently label the mechanism mechanism to consumers who enrolled consumer enrolls online, whether within the account settings but make it through a website, a mobile application, difficult for consumers to find the to a representative instead of clicking to cancel.’’); chat, email, or messaging, consumers account settings in the first instance. Individual commenter, FTC–2023–0033–0443 (‘‘If must be afforded an equally simple Further, the Commission emphasizes the public is allowed to set up an account online online cancellation experience, i.e., one that the cancellation mechanism must we should be allowed to cancel online without ever making a phone call. The consumer should have that allows them easily to find and use be easy to find at the time the consumer more rights than corporations.’’); Individual the cancellation mechanism.429 decides to cancel. Providing an easy-to- commenter, FTC–2023–0033–0617 (‘‘It is truly Many commenters agreed consumers find mechanism at consent does not obnoxious to be able to click to join but have to would consider a link or button located mean the mechanism will be easy to research to find the way to cancel, often involving making a phone call and being left on hold.’’); on a website or within a user’s account find later when the consumer wants to Individual commenter, FTC–2023–0033–0716 (‘‘We or device settings to be ‘‘easy to cancel, and therefore will not prevent shouldn’t have to call the company to cancel!’’); find.’’430Providing a clearly-labeled unreasonable barriers to cancellation. Individual commenter, FTC–2023–0033–0788 (requiring a call when enrolled online is ‘‘coercive Thus, providing the information and unfair’’); Individual commenter, FTC–2023– 427NPRM, 88 FR 24728 (‘‘On the internet, this necessary to find the cancellation 0033–0822 (‘‘I am sick of having to call a phone ‘Click to Cancel’ provision requires sellers, at a mechanism at enrollment (as required number to cancel something I signed up for on line, minimum, to provide an accessible cancellation and often speaking to someone who is snide, mechanism on the same website or web-based under §425.4) does not discharge the sarcastic, or downright rude!’’). application used for sign-up.’’). seller’s obligation to ensure cancellation 425Individual commenter, FTC–2023–0033–0065 428See, e.g., ESA, FTC–2023–0033–0867 (‘‘Such a is easy to find when most relevant to the (‘‘Often a company makes it significantly more requirement would not be helpful for players consumer.432 difficult to even find out where or how to cancel seeking to cancel a subscription, as in-game is not (ii) ‘‘Interactive electronic medium’’ is a subscription.’’); Individual commenter, FTC– the place that most players would expect to find a 2023–0033–0024 (‘‘It took a Google search to find cancellation ingress.’’); RILA, FTC–2023–0033– broadly defined to include all methods the right Customer Service number because it was 0883 (‘‘The method that a consumer uses for initial of electronic communication. hidden or unavailable on the website.’’); Individual sign-up may not be the place where that consumer The State AGs asked the Commission commenter, FTC–2023–0033–0084 (finally found would expect to find a simple cancellation specifically to address the requirements corporate number to cancel trampoline park after function. For example, contracts are also scouring website for a membership enrolled online); increasingly concluded online through third parties for cancellation by chat, text messaging, see also Individual commenter, FTC–2023–0033– or via social media apps. Regardless of how a and email. The State AGs explained that 0067 (‘‘why are they allowed to sign you up for customer initially signs up, once she/he establishes although chat and text are increasingly automatic renewal with no way to cancel nothing a purchasing arrangement with a seller, the common cancellation mechanisms, they on their web page in order to cancel a customer will logically look to the seller to cancel subscription’’); Individual commenter, FTC–2023– the arrangement.’’). share some of the same qualities and 0033–0071 (biggest annoyance is that subscriptions 429The Chamber asked the Commission to clarify potential problems as telephone can be signed up for so easily with a few buttons that web-based chat is an appropriate cancellation cancellation because they require on the remote but nearly impossible to cancel); where a consumer signs up online. As is clear from interaction with a live or virtual Anonymous commenter, FTC–2023–0033–0108 (‘‘I the record, unless the seller required the consumer customer representative.433Further, the certainly hope this goes through. These companies to engage with an agent through a web-based chat make it incredibly difficult to even find the cancel to enroll, the Rule will preclude requiring the State AGs suggested email should not be or opt out option.’’); Anonymous commenter, FTC– consumer to do so to cancel. There is substantial an acceptable cancellation medium for 2023–0033–0123 (‘‘Straight forward plain language evidence this asymmetrical practice of requiring online consent.434 cancelation instructions that are easy to locate consumers to engage with agents (live or virtual) for To address these concerns, the should be required.’’); Individual commenter, FTC– cancellation but not enrollment is one of the 2023–0033–0124 (‘‘Clearly there should be an easy principal methods sellers use to create unfair and Commission revises the proposed way to unsubscribe that is easy to find.’’); deceptive cancellation procedures. Accordingly, it provision to refer to ‘‘interactive Individual commenter, FTC–2023–0033–0560 is appropriate to include limitations within the electronic medium’’ rather than (cancellation page should be easy to find); Rule to prevent unscrupulous sellers from using ‘‘internet.’’ This change clearly includes Individual commenter, FTC–2023–0033–0642 (‘‘If such practices. you signed up online, you should be able to cancel 430Individual commenter, FTC–2023–0033–0124 text, chat, and email within the scope of online. If it took one click to join, it should take (‘‘Clearly there should be an easy way to online cancellation mechanisms. one click to cancel. I have had trouble finding unsubscribe that is easy to find.’’); Individual where to cancel on multiple subscription services. commenter, FTC–2023–0033–0252 (‘‘I had been colors, etc.).’’); Individual commenter, FTC–2023– Often, they are confusing on purpose to keep thinking of contacting my Governor to suggest just 0033–1006 (cancellation should be highlighted and customers like me trapped in the payment cycle. such a rule that the method provided for signing up in an obvious location).
Some require an email or phone call to a separate for a service must also be provided for cancelling customer service representative. Cancelling should the same service, be just as easy to find, and require 431See, e.g., Cal. Bus. & Prof. Code not be harder than signing up for their service.’’); no more steps than it took to sign up.’’); Individual §1702(d)(1)(A); Conn. Gen. Stat. Ann. §42–158ff Individual commenter, FTC–2023–0033–0685 (‘‘I commenter, FTC–2023–0033–0560 (‘‘And ensure (d)(1)(A); N.J. Stat. Ann. §56:8–42.1.a. am tired of having to screen grab the fine print to the bill is explicit with requirement to make it 432See, e.g., Individual commenter, FTC–2023– figure out my options for cancelling subscriptions- EASY TO FIND HOW TO REACH the company or 0033–0022 (‘‘Note that subscriptions are by their it just shouldn’t be this hard!?!’’); Ashley Sheil on cancellation page.’’); Individual commenter, FTC– very nature long lasting in time, therefor behalf of Maynooth University and in collaboration 2023–0033–0640 (‘‘The Federal Trade Commission requirements should not just emphasize some fine with Radboud University, FTC–2023–0033–1006 needs to make it mandatory for companies to have print disclosure at the time of sign up but also it (observing that companies may take advantage of an easy to find button to cancel a subscriptions should be easy to check back with the company or the ‘‘as easy as’’ requirement, and recommending -online-.’’); Individual commenter, FTC–2023– their many layers of subcontractors to cancel at any termination button should be highlighted and 0033–0784 (‘‘And the cancel button should be easy anytime in the future.’’). in an obvious location). to find and as attractively marketed as an 433State AGs, FTC–2023–0033–0886. 426See n.385 (citing simple cancellation cases). opportunity to extend a subscription (font size, 434Id. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90510 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations Specifically, the phrase ‘‘interactive without speaking with an agent, are access to emergency services, for electronic medium’’ used in the ‘‘clear unfair. Specifically, this asymmetry example) without a live discussion.440 and conspicuous’’ definition includes creates unreasonable barriers to They further assert providing this all media that involve electronic cancellation, such as unreasonable hold information online could be communications (except telephone times, unreasonable verification complicated and expensive for the seller calls), whether or not they strictly use requirements, and aggressive save and not what the consumer would the internet (and thus would otherwise tactics. Moreover, comments and the prefer.441NCTA noted only 30% of its be ‘‘online’’). Consumers may not know Commission’s enforcement experience members’ customers sign up online, whether a text or chat is MMS (online) indicate consumers likely understand a with the remaining 70% enrolling in or SMS (offline), for example. This simple online enrollment experience as person or over the phone.442 broader definition should provide an implied claim that the cancellation NCTA’s comment seems to suggest flexibility to sellers while continuing to experience also will be simple.436As the simple cancellation mechanism require parallel cancellation and sign-up consumers themselves explain, they do requirement demands a certain procedures to meet consumers not anticipate engaging with a customer asymmetry—specifically, no matter how expectations. service representative (whether by complex online enrollment is, the Although the State AGs suggested phone, or through a web-based chat or proposed Rule would require a simple prohibiting the use of email as a messaging) if they did not do so to sign ‘‘one click’’ cancellation mechanism, cancellation mechanism, the record up for the negative option feature.437 which could preclude the seller from provides no basis for doing so. Further, Thus, the Commission further clarifies, confirming cancellation intent or consistent with the Commission’s for online consent, the seller cannot apprising consumers of negative definition of interactive electronic require the consumer to engage with an consequences of cancellation. The medium, several States specifically agent or customer service representative Commission reiterates the simple allow sellers to use email as an online to cancel unless the consumer did so at cancellation requirement requires cancellation method.435Thus, the final enrollment.438 symmetry in terms of, inter alia, time, Rule does not bar the use of email to Finally, the Commission declines to burden, expense, and ease of use. It does effectuate online cancellation. exclude industries providing bundled not require use of the exact same
Importantly, however, the final Rule deceptive in violation of section 5); United States returning to the in-person venue may be impossible. does not require a seller to physically v. Cerebral, Inc., No. 1:24–cv–21376 (S.D. Fla. 2024) The Commission notes the in-person method only (delays in cancellation deceptive and injured must be made available, ‘‘where practical.’’ answer the telephone call (a task that consumers in violation of section 5); FTC v. Bridge 446NPRM, 88 FR 24729. could be difficult for, e.g., a sole It, Inc., No. 1:23–cv–09651 (S.D.N.Y. 2023) (claims 447See, e.g., Individual commenter, FTC–2023– proprietorship). An answering machine to cancel at any time without paying any fees, 0033–0006 (‘‘Last year I had the pleasure of trying interest, or other charges deceptive); FTC v. Vonage that clearly provides for cancellation to cancel a radio subscription which took 2 Holdings Corp., No. 3:22–cv–06435 (D.N.J. 2022)
(e.g., a message stating: if you want to (requiring phone cancellation with roadblocks attempts and far too much time to accomplish. Unable to cancel online, I was forced to call and cancel your subscription please identify including long hold times, frequent disconnects, speak with several agents trying to convince me to that subscription, and leave identifying endless loops, and early termination fee unfair keep their service. After nearly a half hour of information) would comply with this under section 5); FTC v. Benefytt Techs., Inc., No. insisting I wanted to cancel, they simply hung up provision of the Rule. To effectuate the 8 fo :2 r 2 a – d c d v i – ti 0 o 1 n 7 a 9 l 4 p r (M od . u D c . t F i l s a . d 2 e 0 ce 2 p 2 t ) i ( v u e n a e n x d p e u c n te fa d i r c ) o ; s In t o p n ro m ce e s s w a h l i l c o h v f e o r r a c g e a d i n m f e r o to m s t t h ar e t b th eg e i n ca n n in ce g l .’ l ’ a ) t ; ion provision’s intent, the final Rule states re Dun & Bradstreet, Inc., FTC Docket No. C–4761 Anonymous commenter, FTC–2023–0033–0024 sellers, whether answering the (2022) (renewal practices, including at end of (able to cancel only after listening to a ‘‘long sale cancellation call in person or not, must designated time periods, deceptive); FTC v. First pitch about why he shouldn’t’’); Anonymous
a CS rep that will not accept your request to cancel, 5:24–cv–03630 (N.D. Cal. 2024); FTC v. 448NCTA, FTC–2023–0033–0858; PDMI, FTC– talks over you, continued harassment, making offer Amazon.com, Inc., No. 2:23–cv–0932 (W.D. Wash. 2023–0033–0864; Chamber, FTC–2023–0033–0885.
after offer. We must stop this deceptive practice.); 2023). Individual commenter, FTC–2023–0033–1063 449Id. 455NPRM, 88 FR 24729, citing FTC Policy (‘‘Now I’m about to cancel my [company name] 450See, e.g., PDMI, FTC–2023–0033–0864; ANA, Statement on Unfairness, appended to In re account. If it’s anything like the last time when I FTC–2023–0033–1001; CTIA, FTC–2023–0033– International Harvester Co., 104 F.T.C. 949 (1984). moved, I expect to spend several hours dealing with 0866. ‘‘To justify a finding of unfairness the injury must multiple levels of salespeople, trying to convince 451See, e.g., CCIA, FTC–2023–0033–0984. Some satisfy three tests. It must be substantial; it must not me to stay.’’); Individual commenter, FTC–2023– commenters also argued the saves provision be outweighed by any countervailing benefits to 0033–1099 (Once customer service is contacted, it violates the First Amendment. E.g., PDMI, FTC– consumers or competition that the practice should not take more than about 90 seconds to 2023–0033–0864; Chamber, FTC–2023–0033–0885; produces; and it must be an injury that consumers cancel a subscription instead of the endless ACT App Association, FTC–2023–0033–0874. The themselves could not reasonably have avoided.’’ Id.; questions of why you want to cancel. Then try to Commission rejects this proposition. See see also 15 U.S.C. 45(n) (Commission has no keep you by offering a discounted rate on yet Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d 1228 authority to declare a practice unfair ‘‘unless the act another year of useless service. Please make this (10th Cir. 2004). or practice causes or is likely to cause substantial end.); Individual commenter, FTC–2023–0033–1138 452See nn.447–448. injury to consumers which is not reasonably (The agent, made multiple attempts to sell me the 453See nn.449–452. avoidable by consumers themselves and not service, disregarding my many direct statements VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90513 comment on this proposal, including or offering consumers the ability to opt- commenters observed that requiring whether it should narrow the coverage out of subscription reminders (ESA).462 reminders through a telephone call of the proposed language, for example, Other commenters agreed, asking for could violate the TCPA, the TSR, or at by types of covered services or the ‘‘less prescriptive’’ requirements that minimum, be a nuisance, and thus duration between reminders.456 would allow businesses more ignored by consumers.469Many of these (a) Summary of Comments flexibility.463 commenters advocated for letting Several commenters, while not urging consumers choose how they want to The Commission received 32 the Commission to reject the reminder receive annual reminders,470or comments in response.457Consumers, requirement, suggested the NPRM allowing sellers to provide reminders public interest and consumer advocacy proposal did not satisfy the unfairness through any medium they typically use groups, and academics, among others, test. For instance, CTA, a technology to communicate with consumers.471 generally supported the reminder trade association, questioned whether requirement, observing, for example, there was sufficient basis to find a lack Additionally, several commenters that ‘‘subscription-based products and of annual reminder is an unfair practice disagreed with the Commission’s services have become so widespread or causes consumer harm.464Similarly, observation that agreements involving that consumers are having difficulty two other commenters from the delivery of physical goods inherently keeping track of them all.’’458The communications industry questioned create a ‘‘regular, tangible presence’’ commenters asserted the proposed whether a lack of annual reminder that serves as a reminder of the ‘‘annual notice will clearly inform would be unfair in the specific context contract.472For example, they noted consumers of the terms of the contract of services that are ‘‘always on,’’ such as some companies charge a monthly fee, and how they may terminate the cable or wireless services.465 but only deliver physical goods at the agreement.’’459Despite this support, A few commenters asked to be consumer’s request. virtually every group of commenters— exempted from the reminder Some commenters stated that, without individuals, consumer advocates, trade requirement based on the nature of their Federal preemption, the annual organizations, and industry groups— industries or the frequency of existing reminder requirement would create suggested the Commission modify or notices.466For instance, cable/ another layer of regulatory complexity clarify its proposal. broadband/wireless/streaming industry because several State laws already Only three commenters specifically groups suggested they should be exempt requested the Commission jettison a for the same reasons they argued the require reminders or notices.473In reminder provision altogether. unfairness test did not render the lack contrast, Professor Hoofnagle stated Specifically, ESA argued the of reminders illegal in their industries. many ‘‘credit card processing service’’ requirement (1) would impose a Similarly, these and other sellers, such providers likely afford a simple and significant burden on businesses as service contract providers, suggested inexpensive means for sellers to comply because several State laws already consumers who receive monthly bills with State and Federal mandates require reminders or notices; (2) would are already effectively receiving ‘‘because policy changes can be made be improper because the Commission reminders, and therefore, these programmatically in dashboards.’’474 did not raise reminders in the ANPR; transactions should be exempt.467 Several commenters suggested the and (3) would increase the overall Several commenters questioned the Commission amend the proposal. For number of notices consumers receive, proposed requirement that sellers instance, TINA and several individual which could result in consumers provide the annual reminder through consumers recommended the ignoring reminders, thus benefiting bad the same medium the consumer used to Commission require reminders at the actors. NCTA suggested the Commission consent to the negative option end of a free trial period.475Others should instead ‘‘allow businesses feature.468For example, several suggested the Commission require more flexibility to determine whether to frequent reminders, such as every six provide reminders.’’460IAB also 462ESA, FTC–2023–0033–0867; NCTA, FTC– ‘‘recommend[ed] that the Commission 2023–0033–0858. 0873; Act App Association, FTC–2023–0033–0874; remove this requirement for several 463See, e.g., Sirius XM, FTC–2023–0033–0857 CTA, FTC–2023–0033–0997; Chamber, FTC–2023– reasons.’’461Both ESA and NCTA (asking Commission not to mandate exactly how 0033–0885; ANA, FTC–2023–0033–1001. conceded, however, the Commission renewal notices must be sent); N/MA, FTC–2023– 469Sirius XM, FTC–2023–0033–0857; Kuehn, 0033–0873 (allow sellers to obtain consent to FTC–2023–0033–0871; N/MA, FTC–2023–0033– could adopt the provision with provide notice through alternate means); Chamber, 0873; Chamber, FTC–2023–0033–0885; SCIC, FTC– additional modifications, such as FTC–2023–0033–0885 (proposed revisions); DCN, 2023–0033–0879. making the reminders optional (NCTA) FTC–2023–0033–0983 (make annual notice an 470Sirius XM, FTC–2023–0033–0857; Kuehn, option company could comply with to provide FTC–2023–0033–0871; Chamber, FTC–2023–0033– adequate notice of obligations); ACT App outweighed by countervailing benefits to consumers Association, FTC–2023–0033–0874 (adopt a less 0885; Public Interest Groups, FTC–2023–0033– or to competition’’). prescriptive approach so same medium can be used 0880. 456NPRM, 88 FR 24729; see also id. at section to comply with State and Federal requirements). 471State AGs, FTC–2023–0033–0886. XIII, Request for Comments (‘‘The Commission 464CTA, FTC–2023–0033–0997 (no basis to 472Individual commenter, FTC–2023–0033–0026; seeks any suggestions or alternative methods for conclude different medium is unfair, or that lack of TINA, FTC–2023–0033–1139. improving current requirements.’’). reminders is unfair). 473NCTA, FTC–2023–0033–0858; ESA, FTC– 457The Commission received comments from, 465NCTA, FTC–2023–0033–0858 (lack of notice 2023–0033–0867; IAB, FTC–2023–0033–1000; ACT inter alia, individual consumers; cable/broadband/ for ‘‘always on’’ services not unfair, injury App Association, FTC–2023–0033–0874. communications industry groups; public interest reasonably avoidable); USTelecom, FTC–2023– 474Hoofnagle, FTC–2023–0033–1137. and consumer advocacy groups; various trade 0033–0876 (same). 475Individual commenter, FTC–2023–0033–0039 associations representing traditional and digital 466See, e.g., CTIA, FTC–2023–0033–0866 (not reminded ‘‘that the free trial was up’’); marketing, technology, news and magazine media, (exempt mobile services offered on a month-to- Individual commenter, FTC–2023–0033–0045 gaming and entertainment, and retail industries; month basis); USTelecom, FTC–2023–0033–0876 (‘‘consumer should get an email reminder their free academic and public policy groups; and service (exempt broadband and communication services). period is about to end’’); Individual commenter, contract and alarm company industries. The Commission addresses exemptions elsewhere FTC–2023–0033–0050 (businesses should ‘‘be 458State AGs, FTC–2023–00330–0886. in the SBP at sections VII.B.1 and VIII. required to provide advance notice that the free trial 459Public Interest Groups, FTC–2023–0033–0880. 467See, e.g., Chamber, FTC–2023–0033–0885. is about to expire.’’); TINA, FTC–2023–0033–1139; 460NCTA, FTC–2023–0033–0858. 468Sirius XM, FTC–2023–0033–0857; Kuehn, ACT App Association, FTC–2023–0033–0874 461IAB, FTC–2023–0033–1000. FTC–2023–0033–0871; N/MA, FTC–2023–0033– (provide less prescriptive process). VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90514 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations months, or before each charge.476They (b) Analysis Commission should completely preempt noted that under an annual notice State laws in this area.488These After reviewing these comments, the requirement, a consumer could be commenters argued having both State Commission determines it needs charged up to 12 times before and Federal standards may confuse additional information on the scope and discovering a negative option feature.477 particularities of the proposed annual consumers and create financial and One commenter asked the Commission reminder requirement. The record operational burdens for sellers, thus to require a reminder for so-called suggests, given the proliferation of raising consumer prices. For example, ‘‘zombie’’ agreements, ones that have subscription and auto-renewal services, NCTA asserted that, without long periods, e.g., 24 months, of consumers have difficulty tracking all preemption, the proposed Rule ‘‘would inactivity.478 the negative option services and encourage the enactment of new [S]tate In contrast, other commenters noted products in which they may be laws with differing standards.’’489 consumers may suffer from ‘‘notice enrolled—so much so that there are now Another industry commenter suggested fatigue’’ given the increasing popularity companies claiming to help consumers the Commission should work with of subscription services.479Some argued keep track of these services for a fee. As lawmakers on one national standard.490 there is no evidence of tangible one commenter noted, consumers Other industry groups and individual consumer benefit from additional should not have to sign up for yet businesses supported preemption in notices, and consumers should be given another service to manage all their various ways. For example, CTA argued a choice whether to opt-in to receive subscriptions.485Thus, limiting the the Rule should ‘‘preempt [S]tate laws annual reminders (or more frequent reminder provision to just non-physical with differing requirements.’’491Two reminders), or to opt-out.480Three goods, and only annually, may not additional commenters, including a commenters suggested sending annual adequately mitigate the harm caused by mixed group of industry associations, reminder notices could increase negative option practices in the asserted the Rule should set the ceiling opportunities for phishing and other marketplace. and preempt any State provision that is deceptive practices.481 Additionally, the Commission shares more stringent.492 Finally, several commenters asked the some commenters’ concerns that NRF said the Rule should ‘‘preempt Commission to clarify certain aspects of consumers may ignore these reminder any [S]tate law requirements that the reminder requirement. For instance, calls. Further, as some commenters contradict or are inconsistent with the ANA asked the Commission to explain noted, the proposed provision does not Rule . . . to the extent of the what constitutes the ‘‘same medium,’’ specify the timing for these reminders inconsistency.’’493To effectuate this and a group of law professors asked for (e.g., should sellers issue reminders change, NRF suggested the Commission more detail about what constitutes an annually from the date of initial adopt language from California’s adequate telephone reminder.482 purchase and a specific number of days Automatic Renewal Law, which it said Additionally, some commenters asked before the charge?). Accordingly, the other States have copied. NRF proposed the Commission to clarify that sellers Commission will consider issuing a State laws be deemed inconsistent if can rely on contact information SNPRM seeking additional comment on they require disclosures or actions ‘‘that provided by the consumer at the time of these issues at a later date. contradict . . . the [final rule],’’ and consent,483or to provide that abiding by requirements be deemed contradictory if State reminder requirements satisfies a 8. Proposed §425.8 Relation to State they use the same terms differently from seller’s obligations under this Laws the final rule or require ‘‘using a term provision.484 In its NPRM, the Commission different from the one required in the proposed that amendments to the Rule [final rule] to describe the same 476Public Interest Groups, FTC–2023–0033–0880 would not affect State laws, regulations, item.’’494 (‘‘consumers deserve to know when they are about orders, or interpretations relating to to be charged automatically, with a chance to opt Several industry groups expressed out’’); State AGs, FTC–2023–0033–0886; MIA, FTC– negative options, except to the extent concern regarding potential confusion 2023–0033–1008; Individual commenter, FTC– they are inconsistent with the final about preemption. For example, ACA 2023–0033–0026 (notification within one month of Rule, and then only to the extent of the renewal, stating specific renewal date); Individual Connects asserted it ‘‘may be unclear inconsistency. A State provision would commenter, FTC–2023–0033–0708 (commenting whether and to what extent [a particular that companies do not provide reminders before not be ‘‘inconsistent’’ with the proposed State law offers] ‘greater’ or ‘lesser’ being charged, possibly overdrawing an account). Rule if it affords any consumer greater protection than [the proposed Rule]’’ 477See, e.g., Public Interest Groups, FTC–2023– protection than the Rule.486 0033–0880. The Commission received a range of and asked for more guidance generally 478Law Professors, FTC–2023–0033–0861. or for a process that lets interested comments in response. On one end, a 479NCTA, FTC–2023–0033–0858; USTelecom, parties ask the Commission if a commenter opined the ‘‘FTC cannot FTC–2023–0033–0876; CCIA, FTC–2023–0033– 0985 (recommending a biannual reminder for preempt existing [State] laws,’’ so it longer subscriptions); and Coalition, FTC–2023– should instead strive for 488NCTA, FTC–2023–0033–0858; PDMI, FTC– 0 (i 0 n 3 c 3 o – rr 0 e 8 c 8 tl 4 y ; s s e ta e t e a s ls t o h e D C cu N r , r e F n T t C p – r 2 o 0 p 2 o 3 s – e 0 d 0 r 3 u 3 l – e 0 w 9 o 8 u 3 l d ‘‘harmonization and consistency with 2 E 0 S 2 A 3 , – F 0 T 0 C 33 – – 2 0 0 8 2 6 3 4 – ; 0 C 03 C 3 IA –0 , 8 F 6 T 7 C ; – IA 20 B 2 , 3 F – T 0 C 0 – 3 2 3 0 – 2 0 3 9 – 8 0 4 0 ; 33– require monthly notice for month-to-month existing laws.’’487At the other end, 1000. renewals). multiple industry groups said the 489NCTA, FTC–2023–0033–0858; see also 480NCTA, FTC–2023–0033–0858 (opt in); ESA, Chamber, FTC–2023–0033–0885 (‘‘A floor just F 20 T 2 C 3 – – 2 0 0 0 2 3 3 3 – – 0 0 0 8 3 8 3 5 – ( 0 o 8 p 6 t 7 i n (o ); p D t o C u N t , ) ; F C T h C a – m 2 b 0 e 2 r 3 , – F 0 T 0 C 3 – 3 – (‘‘S 48 u 5 b S s t c a r t i e p t A io G n s , m F a T n C a – g 2 em 02 e 3 n – t 0 h 0 a 3 s 3 b – e 0 c 8 o 8 m 6 e an entire c a r c e tu at a e l s ly a n en i s n u c r r i e n a g s e c d o n [F si ] s e t d e e n r c a y l b o u f r o d v e e n ra w ll i r t e h g o u u l t a tion 0983 (opt out); Public Interest Groups, FTC–2023– industry; consumers can choose from a variety of on entities in the different [S]tates.’’). 0033–0880 (opt out). companies that offer to monitor their recurring 490IHRSA, FTC–2023–0033–0863 (national 481NCTA, FTC–2023–0033–0858; ESA, FTC– subscriptions. We believe that consumers should standard). 2023–0033–0867; DCN, FTC–2023–0033–0983. not have to sign up for yet another service—one that 491CTA, FTC–2023–0033–0997; see also Sirius 482ANA, FTC–2023–0033–1001 (same medium); comes with privacy and security risks, as XM, FTC–2023–0033–0857; DCN, FTC–2023–0033– Law Professors, FTC–2023–0033–0861 (adequate subscription monitoring services require sharing 0983. phone reminder). financial account and other sensitive information— 492Coalition, FTC–2023–0033–0884; CCIA, FTC– 483Sirius XM, FTC–2023–0033–0857; NFIB, FTC– in order to effectively manage their subscriptions.’’). 2023–0033–0984. 2023–0033–0789. 486See proposed §425.8. 493NRF, FTC–2023–0033–1005. 484ACT App Association, FTC–2023–0033–0874. 487ANA, FTC–2023–0033–1001. 494Id. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90515 particular State law is inconsistent.495 Rule. The final language also continues and other covered persons may seek full NRF noted such a system has worked to make clear State requirements are not or partial exemptions if they can well with gift card laws, explaining the inconsistent with the Rule to the extent demonstrate application of the Rule’s CARD Act (Pub. L. 111–24, 124 Stat. they afford greater protection to any requirements to a particular product or 2385) preempts less restrictive State consumer. The manners in which a service, or class of product or service, is laws.496 State law may provide greater protection not necessary to prevent the acts or Finally, a group of law professors are many. For example, a State law that practices to which the Rule relates. supported the Commission’s proposed requires sellers to remind consumers at
496NRF, FTC–2023–0033–1005. 502See, e.g., NPRM, 88 FR 24730. Five commenters responded.510TINA 497Law Professors, FTC–2023–0033–0861. 503Categories of products and services for which reiterated sellers should provide 498Id. commenters sought exemptions include: alarm 499See, e.g., Am. Fin. Servs. Ass’n v. FTC, 767 companies (FTC–2023–0033–0860; FTC–2023– F.2d 957, 989 (D.C. Cir. 1985). 0033–1001); wireless carriers (FTC–2023–0033– 505NFIB, FTC–2023–0033–0789.
500Preemption would occur where there is an 0866); telecommunication providers (FTC–2023– 506This provision is comparable to the actual conflict between the two schemes of 0033–0876; FTC–2023–0033–0881); service severability provision in other Commission Rules. regulation such that both cannot stand in the same contracts (FTC–2023–0033–0877; FTC–2023–0033– See 16 CFR 437.10 (Business Opportunity Rule); 16 area. Fla. Lime & Avocado Growers, Inc. v. Paul, 0879; FTC–2023–0033–0882; FTC–2023–0033– CFR 455.7 (Used Motor Vehicle Rule); 16 CFR 373 U.S. 132, 141 (1963); see also Am. Fin. Servs. 0996; FTC–2023–0033–1136; FTC–2023–0033– 436.11 (Franchising Rule); 16 CFR 453.8 (Funeral Ass’n v. FTC, 767 F.2d 957 (D.C. Cir. 1985) (Credit 1143); insurance agreements, service contracts on Industry Rule); 16 CFR 310.9 (TSR). Practices Rule); Harry & Bryant Co. v. FTC, 726 F.2d consumer goods, and cancellable month-to-month 507NPRM, 88 FR 24730. 993 (4th Cir. 1984) (Funeral Rule); Am. Optometric agreements (FTC–2023–0033–0878); and retail 508NPRM, 88 FR 24724. Ass’n v. FTC, 626 F.2d 896 (D.C. Cir. 1980) energy service (FTC–2023–0033–1151). Some of 509Those States include Virginia, California, and (Ophthalmic Practices Rule). these and others sought to exclude B2B agreements. Oregon. NPRM, 88 FR 24724. 501See, e.g., 16 CFR 437.9(b) (Business See section VII.B.1.c. 510ESA, FTC–2023–0033–0867; USTelecom, Opportunity Rule); id. 435.3(b) (Merchandise Rule); 504See 16 CFR 1.25, 1.31; see also 86 FR 59851 FTC–2023–0033–0876; ACA, FTC–2023–0033–
id. 436.10 (Franchise Rule); id. 429.2 (Cooling-Off (Oct. 29, 2021) (amending Commission procedures 0881; IAB, FTC–2023–0033–1000; and TINA, FTC– Rule). and rules on the petition exemption process). 2023–0033–1139. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90516 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations consumers with notice of material Finally, as the Commission explained rule.’’519By contrast, consumers changes to subscription terms.511 in the NPRM, whether a seller’s failure generally encouraged the Commission to Further, it asserted the Commission’s to notify a consumer of material changes enact the Rule without delay.520 reasoning is at odds with State laws and is unfair or deceptive could be heavily None of the commenters identified a the Commission’s longstanding position dependent on the particular facts and precise period it would take to comply on material terms, i.e., that they be circumstances, such as the seller’s with a specific provision or otherwise ‘‘clearly and conspicuously disclosed upfront marketing claims. For example, detailed what would necessitate a when relevant to the marketing being based on a clear upfront agreement to particular length of time.521They did, presented.’’512TINA further argued allow periodic price increases, however, detail the general actions they allowing businesses to ‘‘hide’’ material consumers may understand that firms would need to take. For example, NCTA changes to these contracts is likely to can make small price increases over explained, ‘‘this proposal would require cause injury because consumers ‘‘do not long periods of time. On the other hand, companies to change and update their read these contracts (let alone monitor significant unilateral changes to the customer processes and user interfaces them for changes) and a significant terms of the agreement, such as huge to provide the mandated notices, obtain minority of consumers are not even prices increases over short periods of additional consent, and implement aware they are bound by these time would probably be inconsistent cancellation mechanisms,’’ as well as subscription contracts.’’513 with reasonable consumer expectation, troubleshoot those changes in a careful In contrast, ESA, USTelecom, ACA, and therefore, deceptive or unfair. way to avoid ‘‘glitches and issues that and IAB supported the Commission’s Because the determination of whether a would affect service and frustrate and proposal. IAB and ESA said it is practice runs afoul of section 5 in this harm consumers.’’522 ‘‘industry practice for subscription- context is highly fact dependent, the The Commission recognizes changes based services and products to have Commission declines to address it at to processes and disclosures typically regular price increases over time,’’ and this time. Nevertheless, the Commission require some time to address and has consumers expect it.514USTelecom will continue to monitor the need for regularly provided a grace period for agreed with the Commission’s rationale such a requirement and will continue to implementation of its rules.523Small that ‘‘whether such a practice is unfair bring enforcement actions when businesses in particular may require or deceptive depends heavily on the appropriate. time to ensure their modified processes facts presented in each case.’’515ACA, conform to the Rule. To address these
2. Analysis in response.517The Commission plans Rule, consistent with 5 U.S.C. 801(a)(3). Based on the record, the Commission to continue its efforts to provide This section prohibits does not require notice of material information to help consumers with misrepresentations in connection with a changes to contract conditions in the their purchasing decisions and avoid negative option feature. Existing law final Rule. The final Rule requires the ensnarement in unwanted recurring already requires sellers not to make seller disclose important information payment programs. However, consumer misrepresentations. Therefore, this prior to charging the consumer. Such education is not a substitute for provision should not impose an added information includes all material terms, improving existing regulatory time or cost burden on businesses including, e.g., the range of costs the provisions. Consumer education is operating lawfully.524 consumer will be charged and the likely to have a limited benefit where The Commission recognizes the frequency of charges that will incur sellers lure consumers into an remainder of the final Rule may require unless the consumer takes timely steps agreement without consumers’ some businesses to implement or to prevent or stop them. The seller’s knowledge, particularly with the use of modify systems, software, or failure to disclose such information dark patterns. procedures. As detailed in the NPRM, upfront, clearly and conspicuously, however, the existing legal landscape
513Id. probably uneconomical intervention). 524Similarly, the various procedural sections of 514IAB, FTC–2023–0033–1000; ESA, FTC–2023– 518IAB, FTC–2023–0033–1000 (at least 12 the Rule, e.g., §425.1 (Scope), §425.2 (Definitions); 0033–0867. months); ESA, FTC–2023–0033–0867 (12–18 §425.7 (Relation to State Laws), §425.8 515USTelecom, FTC–2023–0033–0876. months); Kuehn, FTC–2023–0033–0871 (12–18 (Exemptions), and §425.9 (Severability) are also 516ACA, FTC–2023–0033–0881. months). operative 60 days after publication. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90517 addition to State laws to address sellers’ IX. Congressional Review Act The Commission received comments negative option practices.525The from trade associations regarding the Pursuant to the Congressional Review Commission has also issued guidance to preliminary regulatory analysis in the Act, 5 U.S.C. 801 et seq., we anticipate businesses on the basic requirements NPRM, and three presented testimony the Office of Information and Regulatory that negative option marketers must and expert reports at the informal Affairs will designate the final Rule as follow to avoid deception.526 hearing. Comments and testimony, a ‘‘major rule,’’ as defined by 5 U.S.C.
Compliance with these statutes and including reports submitted by experts, 804(2).
regulations should mean sellers have a were largely conclusory in nature.533 significant head start on their X. Final Regulatory Analysis The general theme of the comments and compliance efforts. testimony, however, was that the Under section 22(a) of the FTC Act, 15 compliance costs would be higher than Moreover, the Commission has U.S.C. 57b–3(a), the Commission must those estimated in the NPRM’s streamlined the final Rule, significantly issue a preliminary regulatory analysis preliminary analysis, and the reducing the compliance burdens. for a proceeding to amend a rule if the Commission herewith presents revised Specifically, for reasons detailed in Commission: (1) estimates that the estimates of those compliance costs.
section VII, above, the final Rule omits amendment will have an annual effect or modifies proposed requirements that on the national economy of $100 B. Regulatory Analysis gave some commenters particular million or more; (2) estimates that the 1. Concise statement of the need for, concern. Most notably, the Commission amendment will cause a substantial and the objectives of, the final Rule. omitted the entire annual reminder and change in the cost or price of certain As discussed previously, the objective saves requirements. As commenters categories of goods or services; or (3) of the proposed amendments is to curb pointed out, these two sections imposed otherwise determines that the deceptive or unfair negative option the greatest compliance burdens on amendment will have a significant effect practices . The legal basis for the sellers.527Their removal, therefore, upon covered entities or upon proposed amendments is section should substantially reduce the time consumers. Although the Commission 18(a)(1)(B) of the FTC Act, which and expense needed to ensure processes preliminarily determined the proposed provides the Commission with authority comply. amendments to the Rule would not have to issue ‘‘rules which define with such effects on the national economy; specificity acts or practices which are Similarly, other modifications should on the cost of goods and services offered unfair or deceptive acts or practices in clarify and streamline requirements, for sale by mail, telephone, or over the or affecting commerce.’’534 making compliance easier. For example, internet; or on covered parties or As described in this SBP, the the final Rule eliminates certain consumers, several commenters raised amendments address unfair or deceptive recordkeeping requirements.528 concerns with the Commission’s negative option practices. The FTC, Additionally, the final Rule narrows the preliminary determination. Ultimately, other Federal agencies, and State required disclosures.529These changes the presiding officer determined, after attorneys general have brought multiple combined with existing law obviate the receiving additional comments from administrative and judicial actions to need for a lengthy grace period. interested stakeholders, the proposed stop and remedy harmful negative amendments would have such effect.532 option practices. The record E. Anti-Abuse Provision In accordance with section 22, the demonstrates, however, that existing The Law Professors suggested the Commission therefore issues its final legal authorities fall short because they Commission include an ‘‘anti-abuse’’ regulatory analysis below. leave consumers unprotected from certain practices and constrain the relief provision to provide a mechanism for
VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90518 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations option marketing. The final Rule also negative option plans that are marketed The final Rule requires negative provides clarity about how to avoid in person or through the mail and option sellers to provide cancellation deceptive negative option disclosures therefore, currently, are covered only by mechanisms that are at least as easy to and procedures. For example, ROSCA section 5 of the FTC Act and not by use as the mechanisms by which lacks specificity about cancellation ROSCA or the TSR. However, failing to consumers consent to negative option procedures and the placement, content, proceed in accordance with the final plans. For negative option sales made and timing of cancellation-related Rule would substantially reduce or online or over the telephone, ‘‘at least as disclosures. The final Rule now eliminate the benefits of the Rule, easy to use’’ requires that the provides clear standards for sellers including clarifying the requirements cancellation mechanism operate in the about, inter alia, the content and timing currently spread throughout statutes same medium and take no more time or of important information disclosures and regulations and covering negative effort than the consumer used when and what constitute ‘‘simple options in media not subject to the TSR enrolling in the negative option plan. mechanisms’’ for the consumer to stop or ROSCA. For negative option sales that are made recurring charges. Further, the Rule Given that the Commission expects in-person or through the mail, the final allows the Commission to seek civil the unquantified benefits and Rule requires that, in addition to penalties and consumer redress under unquantified costs of the final Rule to be offering cancellation through the section 19(a)(1) of the FTC Act in small, and that there is considerable specific method used for enrollment, the contexts where such remedies are scope for the net benefits to remain seller must also offer at least one currently unavailable, such as deceptive positive and large even if compliance alternate cancellation mechanism that or unfair practices involving negative costs have been substantially can be used remotely, e.g., cancellation options in print materials and face-to- underestimated, this regulatory analysis via a website, email, or a toll-free face transactions (i.e., in media not indicates that adoption of the Rule will telephone number and, again, that the covered by ROSCA or the TSR). result in benefits to the public that consumer can cancel the negative
produced by marketers’ compliance and $49.3 billion. Annualized over 10 TABLE 1—SUMMARY OF TOTAL QUANTIFIED BENEFITS AND COSTS [In millions, 2023 dollars] Low High Present Discounted Value over 10 years, 2% discount rate Benefits .................................................................................................................................................................... $6,133.57 $49,315.39 Costs ........................................................................................................................................................................ 100.89 826.15 Net Benefits ...................................................................................................................................................... 5,307.43 49,214.50 Annualized over 10 years, 2% discount rate Benefits .................................................................................................................................................................... 682.83 5,490.11 Costs ........................................................................................................................................................................ 11.23 91.97 Net Benefits ...................................................................................................................................................... 590.86 5,478.88 (b) Benefits of the Final Rule number of consumers who are willing to Marketers’ compliance with the final subscribe and obtain the convenience, Rule, and the consumer confidence that This section describes the beneficial and often cost savings, that compliance inspires, may also ‘‘exert impacts of the Rule, provides subscriptions can provide. Second, additional competitive pressures on quantitative estimates where possible, research in economics and psychology businesses who offer subscription and describes benefits that are only finds the perceived monetary and contracts (and) could increase assessed qualitatively.
multiplied by the number of affected would therefore save the consumer transactions in subsection (3). The Commission then assumes between one minute and four seconds consumers, on average, value their non- and one minute and 34 seconds.
(1) Estimating Per-Cancellation Benefits work time at 82% of the mean hourly Valuing consumers’ time at $25.81 per For each of the four scenarios below, wage of $31.48, or $25.81 (i.e., .82 × the Commission estimates a range of $31.48) per hour.543Accordingly, the 544See Caroline Sinders, ‘‘How Companies Make benefits that a consumer will gain each Commission estimates the faster online It Difficult to Unsubscribe,’’ https://pudding.cool/ time they cancel a negative option cancellations the final Rule will 2023/05/dark-patterns. Among the obstacles noted for otherwise seemingly simple online cancellations subscription. In these scenarios, the provide, relative to ROSCA-compliant were that some websites did not use straight Commission assumes a final Rule- telephonic cancellations, will be valued forward terms, such as ‘‘unsubscribe’’ or ‘‘cancel,’’ compliant online cancellation should at between $2.17 (i.e., 5:03 minutes × and instead put the cancellation path under titles take no more than 30 seconds to one such as ‘‘auto-renew’’ or ‘‘edit plan.’’ $25.81/hour) and $2.39 (i.e., 5:33 545The researcher reported the aggregate time minute, based on the Commission’s minutes × $25.81/hour). expended to cancel all 16 subscriptions was 57 experience that the average time for minutes and 31 seconds. Of the three subscriptions consumers to read required disclosures that required telephonic cancellations, one call took and provide consent to a negative 542See Michelle Hawley and Shane O’Neill, ‘‘21 17 minutes and 36 seconds, one took seven Important Call Center Statistics to Know About,’’ minutes, and the time to cancel the third one was option plan online is 30 seconds to one
to read such disclosures to his or herself 543The Commission uses a mean hourly wage rate The Commission notes this average cancellation of $31.48; see Bureau of Labor Statistics, ‘‘May 2023 online. time, though relevant for this regulatory analysis, National Occupational and Wage Estimates, Unites has not been used as a standard for ROSCA (a) Estimated Per-Cancellation Benefit States,’’ https://www.bls.gov/oes/current/oes_ enforcement and is not intended to set a standard Relative to ROSCA-Compliant nat.htm. A meta-analysis of studies on how here. Moreover, while we have calculated this consumers value time used in traveling (an area in average, the study notes cancellation took under Telephonic Cancellation which ‘‘a huge literature has arisen’’) has one minute for three large sellers of digital For consumers enrolling in negative determined that consumers value time used in that entertainment subscriptions. Last, the Commission matter at 82% of their wage rate. See Daniel S. notes one commenter opined, ‘‘(f)or the most part,’’ option plans online, the existing Hamermesh, ‘‘What’s to Know About Time Use?,’’ companies offer convenient, no-hassle, cancellation 30 J. Econ. Surv. 1, 198–203 (2015). The options that probably take about five clicks on savings to consumers, but we are unable to estimate Commission assumes for the purpose of the final average, though the commenter did not indicate a the frequency of such occurrences or the monetary Rule consumers value transaction costs savings in time duration. See Individual commenter, FTC– savings they would engender. the same way that they value travel time. 2023–0033–0780. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90521 hour, as assumed above, the final Rule consumers. The final Rule requires As noted in the comment submitted would therefore save consumers who sellers who offer in-person enrollment by comment filed by IHRSA,550The enroll online and cancel online time to offer at least one alternate Global Health & Fitness Association, that they value at between $0.46 (i.e., cancellation method that consumers ‘‘many (fitness club) operations allow 1:04 seconds × $25.81/hour) and $0.67 may use remotely, e.g., online546or via several options for agreement (i.e., 1:34 minutes × $25.81/hour). telephone. termination through simple online Providing consumers with an (c) Average Per-Cancellation Benefit solutions including online account alternative to in-person cancellations Relative to TSR-Compliant Cancellation management, email cancellation will give consumers a faster route to requests, and specific online For consumers enrolling in negative cancel a subscription and may also cancellation buttons or forms’’ and option plans via telemarketing, the spare some consumers from incurring ‘‘[m]any of these options are currently existing regulatory baseline is the TSR. additional recurring charges which The TSR does not specify a performance might accrue during the pendency of a available for members who have standard specific to negative option slow cancellation mechanism, enabling purchased their membership either cancellations. Although egregious consumers to reallocate their spending online or in person.’’ IHRSA did not cancellation delays can be pleaded power in directions of greater utility, quantify the share of their member against telemarketers under resulting in allocative efficiencies. organizations that provide such §310.3(a)(1)(vii) (requiring disclosure of Unlike negative option transactions cancellation opportunities or the all material terms and conditions of the entered into online (ROSCA) or by number or share of consumer negative option feature) or telephone (TSR), the Commission lacks cancellation transactions in which §310.3(a)(2)(ix) (prohibiting comprehensive experience with online cancellation is available. misrepresentation directly or by negative option plans that require Accordingly, the Commission assumes implication of any material aspect of a cancellation in person or through the the low-end of the range of quantifiable negative option feature), the final Rule’s mail. However, because many gym/ benefits to consumers who purchased requirement that the cancellation fitness center/health studio negative option plans in person, but mechanism be at least as easy to use as memberships (hereafter, ‘‘gym could currently cancel online is the the consent mechanism provides memberships’’) are sold via negative same as the same the low-end of the cancellation-specificity to negative options547and may require cancellation range for consumers who purchased options sold through telemarketing that via certified mail or in person negative option plans online and had is lacking under the existing regulatory (sometimes even when consumers can access to online cancellations: $0.46 per baseline. Because telemarketers have enroll online548), the Commission cancellation.
substantial discretion in designing and proxies the per-cancellation benefits of implementing consent processes an additional, remote, method of Notwithstanding IHRSA’s assertion specific to their programs, telemarketers cancellation by looking at those benefits that many fitness clubs offer online will have a clear benchmark for the in the context of gym memberships.549 cancellation, at least 25 individual speed with which they must complete a consumers submitted comments final Rule-compliant cancellation. 546At the seller’s choice, an online cancellation attesting to the difficulties of canceling As described at the beginning of this method may be through a website or via email. gym memberships. Some wrote in subsection, the Commission assumes it 547IHRSA, The Global Health & Fitness general terms of the difficulties takes telemarketers between one and Association, commenting on behalf of itself and the consumers experience in canceling such two minutes to read the required industry (see FTC–2023–0033–0863) claimed there were clear distinctions between in-person, brick memberships as something that disclosures to consumers and receive and-mortar health and fitness businesses and online contributed to their support for the their consent for enrollment in a subscription services, explaining a month-to-month Rule.
negative option plan. Using the same contract is a very different risk to consumers than average handle time measure of six a long-term contract that begins after a free trial or auto-renews without notice. IHRSA further claims strengthen the relationship with customers and minutes and three seconds used a short-term (e.g., month-to-month) continuous reduce dependence on cash transactions for these previous scenario to proxy for baseline service agreements should be distinguished from businesses. See FTC–2023–0033–1142. These time spent for a telephonic cancellation, purely online subscription services targeted by the subscriptions may be purchased in person, on the the Commission assumes the final Rule rule. IHRSA further (mis-) characterizes the Rule as world wide web, via a mobile app, or at an will save consumers who consent to a appearing to be concerned with paid contracts that automated teller, which indicates at least some of initiate automatically after a free trial period or those subscriptions are covered by ROSCA. ICA negative option sale via telemarketing, auto-renew without notice after a long, pre-paid asserts cancellation through a means other than in and cancel in the same manner, between initial term. IHRSA notes consumers with person may be burdensome to the generally small four minutes and three seconds and five membership agreements with firms in its industry businesses that operate carwashes. Id. Although are on notice of the recurring cost because of the minutes and three seconds. Evaluating commenter Rocket Money, FTC–2023–0033–0998, monthly charge and have the option to cancel each that time saving in the same manner as month under the terms of their contract. The mentioned ‘‘car wash chains that require consumers to visit a specific location to cancel their above, compliance with the final Rule Commission disagrees with IHRSA’s results in a per-cancellation time saving c in h t a e r n a d c e te d r i t z o a e ti x o c n l u o s f i v th e e ly R , u o l r e e ; v th en e R p u ri l m e a is r i n ly o , t address m ca e n m ce b l e la rs ti h o i n p r a e s q a u n ir e e x m a e m n p ts l e t h o e f y d e ra x c p o e n ri i e a n n c ed that is worth between $1.74 (i.e., 4:03 online subscription services or long-term contracts working with consumers, no individual consumer minutes × $25.81/hour) and $2.17 (i.e., that begin after a free trial or auto-renew without commenter mentioned difficulties with carwash 5:03 minutes × $25.81/hour). notice, but to address all recurring charge plans subscriptions. Because no consumer commenter where the consumer’s silence or failure to cancel is provided any other indication of the number of (d) Estimated Per-Cancellation Benefit interpreted as consent to recurring charges. carwash subscriptions purchased or the costs of Related to In-Person Enrollments Accordingly, consumer memberships with firms in cancelling such subscriptions, even anecdotally, IHRSA’s industry where consumers have the option they are excluded from the analysis. The estimate Some sellers market negative option to cancel each month squarely fit within the Rule’s of the consumer benefits that would flow from the plans in ways that are not covered by coverage of negative option plans. final Rule’s provision that an extra, remote, ROSCA or the TSR. Those that involve 548Individual commenter, FTC–2023–0033–0233. cancellation mechanism be required of marketers in-person enrollment and only offer in- 549The International Carwash Association who currently offer only in person or mail (‘‘ICA’’), however, commented many of its 60,000 cancellation mechanisms may therefore be an person or mail cancellation, in U.S. members offer carwash subscriptions that offer under-estimate of such benefits. particular, may be highly burdensome to a reduced price for carwashes to subscribers and 550FTC–2023–0033–0863. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90522 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations • ‘‘What seems more troublesome considerable uncertainty as to when, involve three failed attempts at tend to be stuff like gym precisely, the consumer must tender a cancellation, each costing one hour of memberships.’’551 cancellation to avoid the next recurring time, and that, because of those • ‘‘I work dispute resolutions for a payment.557 cancellation failures, three unwanted bank. I see so many cases where • ‘‘Years ago, I had signed up for a monthly charges were processed. The someone is trying to cancel something gym membership, and after a change in Commission assumes a fourth like a gym membership and, while they job situation, was no longer able to cancellation attempt, also costing one can sign up in person, they for some make use of it. Repeated attempts to hour of time, succeeds in halting the reason have to mail a certified letter to reach the gym membership department recurring payments. the companies (sic) home office.’’552 and cancel my membership went As above, the Commission values • ‘‘I have experienced so much unheeded—a [sic] got a classic consumers’ time at $25.81/hour. The frustration ending memberships with runaround, and as often forwarded to typical gym membership costs between gyms, online subscriptions, etc. over unattended phone numbers—and I kept $40 and $70 a month.564The many years and welcome help in this racking up monthly bills for a Commission therefore assumes, at the matter. So many friends I speak to share membership I didn’t want . . . . Itw as high-end, consumers incur gym similar stories of how they were roped only through a personal relationship membership cancellation costs of into paying for longer memberships and with someone who worked in the $313.25 (i.e., (4 × $25.81) + (3 × $70)) subscriptions that they no longer corporate office that I was finally able to in the absence of this Rule.565As stated wanted.’’553 get past their automatic renewals and previously, the Commission assumes a • ‘‘Many places, like [specific fitness effect a cancellation.’’558 final Rule-compliant cancellation center chain], require you to go in • ‘‘We wanted to cancel the [gym] should take no more one minute at the person to cancel—they won’t even let membership, but when we called and high end, which has a value of you do it over the phone! This harms emailed, we were told we couldn’t consumers’ non-market time of $0.43. anyone that may have trouble leaving cancel that way. We had to send a Then, to estimate the high-end avoided the house regularly, including disabled certified letter or go in person. We have burden that such consumers would folks and parents of small children and gone in person twice to try to cancel or experience under the final Rule, the those caring for older or ailing family [sic] membership and it has been a Commission takes the difference members, not to mention being horribly nightmare.’’559 between the high-end cancellation costs inconvenient for everyone else.’’554 • ‘‘Personally, I have been impacted in the absence of this Rule ($313.25) and Many others conveyed personal by my local gym’s undisclosed policies the high-end final Rule-compliant experiences with burdensome gym and shady cancelation policies that have cancellation costs ($0.43), which membership cancellation. The costed me hundreds of dollars.’’560 equates to $312.82. Accordingly, the Commission relies upon these • ‘‘They bill you monthly for your low-to-high range of benefits provided comments to estimate the high-end of gym membership but when you want to by the final Rule to consumers who the range of quantifiable benefits that cancel your membership that’s when the purchase negative option plans in the final Rule will provide to consumers problems arise. You cannot do it over person or through the mail ranges from who purchase negative option plans in- phone or on their website. You have to $0.46 to $312.78.566 person. Examples of these include: go into the gym personally to cancel • ‘‘I had to write a letter and said membership. Not only that I was (e) Summary of Per-Cancellation Benefits physically mail it to cancel a gym told that I’d have to go to the gym [home membership I singed [sic] up for on an gym] where I signed up in order to Table 2 presents a summary of the iPad.’’555 cancel membership. I could only per-cancellation benefit the Commission • ‘‘Recently it took me three days and imagine what this would be like had I estimates would result from this final several hours to cancel a gym moved out of the state. Please help us Rule. For subscriptions that are membership (that) had taken less than stop these practices.’’561 currently cancelled over the phone but 20 minutes to join, on line [sic].’’556 • ‘‘I am currently trying to cancel a would be cancelled online under this • ‘‘I had to go in person 3 different gym membership and have been final Rule, the Commission estimates times because the manager wasn’t there overwhelmed by how difficult it has so [sic] to cancel it.’’ This consumer been . . . . Iju st called my gym . . . 564See Dana George, ‘‘This Is How Much the attached a screen shot of the gym’s and the pre-recorded automated Average American Really Spends on Gym cancellation policy, which read, in part, answering message literally says there is Memberships,’’ Jan. 7, 2024, https://www.fool.com/ the-ascent/personal-finance/articles/this-is-how- ‘‘There is no contract and you are free no direct line to the gym! That’s much-the-average-american-really-spends-on-gym- to cancel your Direct Debit at any time. outrageous!!!’’562 memberships. Because this report is from January If you do decide to cancel your • ‘‘My personal experience is with 2024, the Commission assumes it measured gym membership, you must allow at least 7 my gym membership . . . . Getting out membership costs in 2023 dollars. 565Note the avoided recurring payments days before the fifth of the month to of it was terrible, and I’d hate to see it associated with delayed cancellations may overstate ensure your payment is cancelled and happen to anyone else.’’563 the amount of consumer surplus gained attributable advise Reception of the cancellation.’’ Based on these comments, the to the final Rule if consumers continue to use their Both ‘‘(a)t least 7 days before the fifth Commission makes the simplifying gym membership during that period of delayed cancellation. However, it is difficult to estimate the of the month,’’ and the failure to specify assumption that the worst gym extent to which that occurs due to lack of data. A whether ‘‘7 days’’ is seven business days membership cancellation experiences part of those gains may also be transfers of producer or seven calendar days introduce surplus from firms to consumers. 557Individual commenter, FTC–2023–0033–0510. 566Other cancellation methods gyms may 551Individual commenter, FTC–2023–0033–0780. 558Individual commenter, FTC–2023–0033–0968. currently offer, such as in-person visits that succeed in cancellation and cancellation via certified mail, 552Individual commenter, FTC–2023–0033–0007. 559Individual commenter, FTC–2023–0033–0387. would fall in between these low/high endpoints, as 553Individual commenter, FTC–2023–0033–1046. 560Individual commenter, FTC–2023–0033–0572. would the benefits to consumers if those methods 554Individual commenter, FTC–2023–0033–0741. 561Individual commenter, FTC–2023–0033–0299. were augmented under the final Rule not with 555Individual commenter, FTC–2023–0033–0233. 562Individual commenter, FTC–2023–0033–1163. online cancellations but with telephonic 556Individual commenter, FTC–2023–0033–1076. 563Individual commenter, FTC–2023–0033–0545. cancellations. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90523 consumers would experience a benefit a benefit of between $0.46 and $0.67 per $1.74 and $2.17 per cancellation. For of between $2.17 and $2.39 per cancellation. For subscriptions that are subscriptions enrolled in person that cancellation. For subscriptions that are currently cancelled over the phone and would be required to provide online or currently cancelled online and would would move to a simpler telephone telephone cancellation under this Rule, move to a simpler online cancellation cancellation under this Rule, the the Commission estimates consumers under this Rule, the Commission Commission estimates consumers would experience a benefit of between estimates consumers would experience would experience a benefit of between $0.46 and $312.82 per cancellation. TABLE 2—ESTIMATES OF BENEFIT PER CANCELLATION [In 2023 dollars] Low High Phone to Online Cancellation .................................................................................................................................. $2.17 $2.39 Online to Simpler Online Cancellation .................................................................................................................... 0.46 0.67 Phone to Simpler Phone Cancellation .................................................................................................................... 1.74 2.17 In-Person to Online or Phone Cancellation............................................................................................................. 0.46 312.82 (2) Estimating the Number of Consumer Commission assumes, for the purposes rate data. Churn rates can reflect Cancellation Transactions of this analysis, that the percentage of intentional cancellations as when a American consumers with at least one consumer completes a merchant’s (a) Baseline Number of Subscriptions subscription remains constant over ten cancellation process, but can also reflect The Commission regards years. Accordingly, in Year 1 the involuntary or passive cancellations, ‘‘consumers’’ for the purposes of this Commission assumes 223.27 million which occur when the payment analysis as the U.S. population over the consumers (i.e., .83 × 269 million) have mechanism the consumer has on file age of 18;567this is estimated to be 269 at least one subscription. with the merchant is unable to be million in 2025,568the first year in the To estimate the total number of processed by the merchant.571Churn ten-year period over which the subscriptions held by U.S. consumers rates may be calculated on a monthly, Commission estimates the benefits and the Commission looks to data on the quarterly, or annual basis,572and some costs of the final Rule (‘‘Year 1’’). average number of subscriptions per rates do not disclose a time dimension; Because negative option sales are a subscriber. One source, relying upon a mischaracterizing a monthly churn rate form of marketing of goods and services, large sample of U.S. consumers as an annual churn rate could vastly and not an industry or type of output, conducted in late 2023 and early 2024, underestimate the volume of annual and because no occupational category is reported, ‘‘[t]he average subscriber now cancellations. uniquely associated with negative has 4.5 subscriptions.’’570The One source reports an aggregate option marketing, no publicly produced Commission therefore applies a measure of voluntary573churn of 3% data source, such as the Economic multiplier of 4.5 to the number of per month.574The Commission assumes Census, tracks the use of negative option consumers estimated to have at least marketing in the United States.
by consumers.576Continuing with the under the final Rule. To determine the however, if adults are more likely to Year 1 example from above, the number of cancellations for which the have gym memberships than children, Commission therefore estimates 361.70 four categories of per-cancellation the estimates of gym memberships and million cancellations (i.e.,.36 × 1,004.72 benefits estimates would apply, the cancellations among adults will be Commission uses data on its million) will occur in Year 1 of the understated. On the other hand, gym enforcement experience to determine analysis and that this number will memberships are not always individual the share of cancellations likely to occur increase to 384.82 million by Year 10. memberships; multiple family members through online and telephone methods.
Table 3 presents the number of may share a single-family membership. For cancellations of subscriptions that subscriptions and total number of are enrolled in person, the Commission In estimating the number of gym cancellations expected in each year. uses data on gym membership memberships and cancellations, the cancellations as a proxy. Commission has assumed each adult TABLE 3—NUMBER OF SUBSCRIPTIONS gym member has their own AND TOTAL CANCELLATIONS PER YEAR (i) In-Person Subscriptions subscription, which may overestimate [In millions] As a proxy for the number of the number of subscriptions and subscriptions entered into in person, the cancellations. Year Subscriptions Cancellations Commission uses a report from Renew (ii) Online and Telephone Subscriptions Bariatrics that claims 19 percent of the 1 ................ 1,004.72 361.70 U.S. population are members of gyms or The Commission assumes all 2 ................ 1,012.48 364.49 health clubs.577The Commission subscriptions that are not entered into 3 ................ 1,020.25 367.29 assumes gym members are uniformly in person are instead entered into either 4 ................ 1,028.02 370.09 distributed by age and multiplies the online or over the phone. Subtracting 5 ................ 1,035.79 372.88 U.S. adult population by 19 percent to the in-person subscription, as proxied 6 ................ 1,043.56 375.68 estimate that 51.11 million adults will by gym membership cancellations, from 7 ................ 1,049.91 377.97 have active gym membership the total number of cancellations, the 8 ................ 1,056.26 380.25 subscriptions when this final Rule goes Commission estimates 347.08 million 9 ................ 1,062.61 382.54 into effect. An IHRSA article from 2019 subscriptions entered into either online 10 .............. 1,068.96 384.82 stated the average health club has an or over the phone will be canceled in annual attrition rate of 28.6 percent.578 the first year of this Rule. This number Interpreting this to mean 28.6 percent of would increase to 369.27 million data underlying their churn rate estimates or do not all adult gym members cancel their cancellations in Year 10. distinguish voluntary from involuntary churn rates. memberships each year, the To estimate the distribution of 575Because consumers may cancel a subscription Commission estimates 14.62 million cancellation methods for these and then enroll in a different subscription (or even re-enroll in a recently canceled subscription), the gym membership subscriptions will be subscriptions that are entered into Commission assumes average, aggregate, monthly cancelled in the first year of this Rule. online and over the phone, the voluntary churn rates are additive across months In Year 10, the Commission estimates Commission reviewed matters it has and that the number of consumers with 15.55 million gym membership brought and resolved579in which subscriptions do not ‘‘decay’’ at a rate of 3% per subscriptions will be cancelled. The complaints specifically alleged negative month. Indeed, another report found one-quarter of Commission uses these estimates as a option cancellation mechanisms that U.S. consumers cancelled a streaming video service in the past 12 months and resubscribed to the same proxy for the total number of violated ROSCA, the TSR, or section service, with younger generations significantly subscriptions that are entered into in 5.580The Commission found 54 matters more likely to return. See Deloitte, Digital Media person and cancelled each year. met these criteria. Trends Survey: 16th Edition (2022), https:// The Commission acknowledges Online581enrollment was possible in www2.deloitte.com/us/en/insights/industry/ several limitations with this proxy. To 42 of 54 matters that met the review technology/digital-media-trends-consumption- begin, there are likely many other types habits-survey/summary.html. The Deloitte report also notes the average churn cancellation rate has of businesses, such as car washes, lawn 579This tally does not include ongoing matters or remained consistent since 2020 at about 37% across care, pest control, and personal care and matters that obtained ‘‘fencing-in’’ relief encompassing the sale of negative options without all paid streaming video on demand services. grooming establishments, that may offer expressly pleading complaint counts related to Similarly, a comment from NCTA, FTC–2023– cancellation mechanisms.
0073–0008, quotes Congressional testimony from 577See ‘‘28 Gym Membership Statistics: Average 580In many instances, ROSCA and TSR counts Consumer Reports that 36% of consumers who Cost of Memberships,’’ Renew Bariatrics (Jan. 4, were cross-pled as section 5 counts; in parsing subscribed to streaming services, switched and 2024), https://renewbariatrics.com/gym- cancellation transactions by their enrollment resubscribed multiple times over a period of 12 membership-statistics/. methods, we use ‘‘section 5’’ to refer to instances months.
54) offered telephone enrollment and each of these categories. In Year 1, the cancellation; and in-person enrollment. TABLE 4—CANCELLATIONS BY ENROLLMENT AND BASELINE CANCELLATION METHOD [In millions] Online Online Telephone enrollment, enrollment, enrollment, In-person Year telephone online telephone enrollment cancellation cancellation cancellation 1 ....................................................................................................................... 231.39 38.56 77.13 14.62 2 ....................................................................................................................... 233.18 38.86 77.73 14.73 3 ....................................................................................................................... 234.96 39.16 78.32 14.84 4 ....................................................................................................................... 236.75 39.46 78.92 14.96 5 ....................................................................................................................... 238.54 39.76 79.51 15.07 6 ....................................................................................................................... 240.33 40.06 80.11 15.18 7 ....................................................................................................................... 241.79 40.30 80.60 15.27 8 ....................................................................................................................... 243.26 40.54 81.09 15.37 9 ....................................................................................................................... 244.72 40.79 81.57 15.46 10 ..................................................................................................................... 246.18 41.03 82.06 15.55 (3) Total Quantified Benefits phone in the baseline would move to Next, the Commission multiplies the online cancellations; subscriptions number of cancellations in each To estimate total benefits from this final Rule, the Commission first matches enrolled online and cancelled online baseline category by the matched per- the enrollment and baseline would move to simpler online cancellation benefit on the low- and the cancellation method categories from the cancellation; subscriptions enrolled high-end and then sums across all four previous section to the four scenarios over the phone and cancelled over the categories to obtain total benefits each used to estimate the per-cancellation phone would move to simpler telephone year. Those totals are presented in Table benefit. The Commission assumes that, cancellation; and subscriptions enrolled 5. In the first year following under this final Rule, subscriptions in person would allow online or phone implementation of the final Rule, the enrolled online and cancelled over the cancellation. Commission estimates the benefits will marketers’ conduct that occurred prior to the that sold subscriptions online. When two from rolling over into a subscription or to obtain a passage of ROSCA), as ROSCA matters for the ‘‘personas’’ created by the researchers subscribed to refund for merchandise that was shipped to a purposes of assessing the incremental benefits of each of the nine publications, and then attempted consumer, and for which the consumer was the final Rule relative a regulatory baseline of to cancel, 17 of the 18 subscriptions could be charged. Such instances generally occurred before ROSCA’s simple cancellation mechanism. canceled online; one publication permitted only the the passage of ROSCA, and it is highly unlikely that 582In a few of these matters, online cancellation California resident persona to cancel online and an online marketer who offered only a mailed-in was offered in addition to telephonic cancellation, offered only telephonic cancellation to the persona cancellation could be in compliance with ROSCA’s and to simplify the analysis, the Commission posing as a Texas resident. See Ashley Sheil, et al., requirement that cancellation mechanisms be attributed half to the measure of telephonic ‘‘Staying at the Roach Motel: Cross-Country ‘‘simple.’’ Without loss of generality, the cancellations and half to the measure of online Analysis of Manipulative Subscription and Commission therefore treats instances in which cancellations. In a few other instances the Cancellation Flows,’’ in Mueller, F.F. (ed.), CHI ‘24: online cancellation was not offered as instances in Commission’s designation of ‘‘online’’ cancellation Proceedings of the CHI Conference on Human which only telephonic cancellation was offered to includes cancellation by email or within the Factors in Computing Systems (May 11–16, 2024), consumers. marketer’s app. https://repository.ubn.ru.nl/handle/2066/30690. 585Some required the return of merchandise 583In contrast, other evidence indicated that 584In some of the 36 matters, no cancellation through the mail if consumers wanted refunds. In 81.25% of U.S. online marketers offered online method was disclosed by the seller, and in a few two matters, no cancellation mechanism was cancellation. See, e.g., Sinders (2023). Different other matters consumers were required to return revealed. Without loss of generality, we assume that research looked at nine U.S. news media publishers merchandise through the mail to prevent a free trial cancellation could take place telephonically. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90526 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations range between $661.52 million and rate, the Commission estimates the the Commission estimates the benefits $5.32 billion. In Year 10, the present discounted value of benefits to range between $682.83 million and Commission estimates the benefits will over 10 years to range between $6.13 $5.49 billion per year. range between $703.82 million and and $49.32 billion. Annualized over 10 $5.66 billion. Using a 2 percent discount years using a 2 percent discount rate, TABLE 5—TOTAL QUANTIFIED BENEFITS [In millions, 2023 dollars] Year Low High 1 ............................................................................................................................................................................... $661.52 $5,318.76 2 ............................................................................................................................................................................... 666.63 5,359.88 3 ............................................................................................................................................................................... 671.75 5,401.01 4 ............................................................................................................................................................................... 676.86 5,442.14 5 ............................................................................................................................................................................... 681.98 5,483.26 6 ............................................................................................................................................................................... 687.09 5,524.39 7 ............................................................................................................................................................................... 691.27 5,558.00 8 ............................................................................................................................................................................... 695.45 5,591.62 9 ............................................................................................................................................................................... 699.63 5,625.23 10 ............................................................................................................................................................................. 703.82 5,658.84 Present Discounted Value of Benefits over 10 years, 2% discount rate......................................................... 6,133.57 49,315.39 Annualized Benefits over 10 years, 2% discount rate ..................................................................................... 682.83 5,490.11 (c) Estimated Costs of the Final Rule generally true of testimony and expert This section describes the costs Additionally, estimates of the annual costs of reports submitted in conjunction with maintaining systems may be blanket costs that the informal hearing. Those materials associated with firms coming into include a host of programming maintenance did not focus on providing specific, compliance with the final Rule, features that are unrelated to the specific relevant, data that would permit provides quantitative estimates where disclosures and ‘‘click to cancel’’ features of the possible, and describes costs that are final Rule. Moreover, NCTA’s comment indicated estimating compliance costs of the final customers of top cable operators enrolled over the Rule.587 only assessed qualitatively. Whereas phone (43%), online (30%), and in person (24%)
benefits were estimated based on and calls to customer service are answered within cancellation transactions, compliance 30 seconds and lines are available 24 hours a day, costs the aggregate, non-specific, and possibly idiosyncratic compliance costs NCTA cites.
costs are estimated on the basis of firms 7 days a week. Accordingly, no extra compliance Similarly, an expert’s survey submitted by IAB covered by the final Rule. The steps may be necessary with respect to offering final (attachment B to FTC–2024–0001–0010) found only Commission first examines the Rule-compliant cancellations for enrollments made six respondents (out of more than 100,000 by telephone, and compliance with the final Rule’s companies subject to the proposed Rule) indicated comment record on compliance costs requirement that firms offer an extra cancellation the annual cost of compliance would be a total of and then estimates the compliance costs mechanism for in-person enrollments likely could $50 million, but provided no itemization of these for the initial year and subsequent nine be met through reliance on these firms’ existing costs, such that they cannot be disaggregated to years following implementation of the telephonic cancellation capabilities. Accordingly, comport with the narrower scope of the final Rule. the provision of an online cancellation mechanism 587For example, an expert report (Christopher final Rule.
(1) The Comment Record has not provided estimates of compliance costs that Rule, if finalized, on the U.S. economy would The comment record has not provided are specifically tailored to that segment of their surpass $100 million annually. The Commission specific data useful to the estimation of consumer base. Because NCTA members who enroll agrees with this conclusion. The Commission consumers online already, clearly, have websites, disagrees, however, with both the initial and on- the costs of compliance with the the Commission rejects the notion that adding going compliance costs used by Carrigan-Walster; disclosure, cancellation, and ‘‘click to cancel’’ functionality to websites that both were liberally based on replicating recordkeeping requirements of the final already include an order path for enrolling, and assumptions made in the preliminary regulatory analysis in the NPRM. Further, their assumptions Rule. likely also include functionality for registering a are inappropriate to this cost analysis because they Some industry commenters addressed payment mechanism for automated billing, would fail to account for the fact firms subject to the final cost $12–$25 million, particularly in light of compliance costs by providing broad, Rule, unlike firms subject to the proposed Unfair or NCTA’s discussion of compliance with the 2019 aggregate, conclusory cost estimates; Television Viewer Protection Act (‘‘TVPA’’) which, Deceptive Fees Rule, are already required to provide clear and conspicuous disclosures of all because those costs were not itemized NCTA claims, already regulates the very same material facts relating to the sale of negative option by specific features of the Rule as practices the FTC is attempting to regulate here. contracts under the totality of ROSCA, the TSR, and proposed in the NPRM, the Commission NCTA further claims major cable operators estimate section 5 of the FTC Act, and to provide simple is unable to use those comments to that it cost approximately $2.5 to 4 million per cancellation mechanisms under ROSCA for those company and took about one year for TVPA firms covered by ROSCA. In addition, firms subject estimate compliance costs relevant to compliance. However, having already incurred the to the final Rule are also required to comply with the substantially narrowed scope of the costs to comply with ‘‘the very same practices’’ the a variety of other laws relating to negative option final Rule in comparison to the Rule final Rule addresses in the course of complying sales, including the current Prenotification Rule, proposed in the NPRM.586The same is with the TVPA, there would appear to be no EFTA, the Unordered Merchandise Statute, incremental costs to comply with the final Rule. numerous State laws, various laws and regulations Therefore, because the final Rule is narrower in that effect specific industries, such as the 586For example, NCTA, FTC–2023–0073–0008, scope than as proposed in the NPRM and because Television Viewer Protection Act of 2019 (TVPA), indicated some major cable operators estimate it it offers firms the opportunity to apply to be other FCC regulations, and, for multi-national could cost $12–$25 million per company and take excluded, the Commission rejects NCTA’s claim entities, various foreign laws. Accordingly, the 2–3 years to rebuild their systems and one of its compliance with the Rule would be multiples of units of specialized labor, e.g., lawyer, web members thought annual costs could be 15–20% of TVPA compliance costs and require building online developer, and business analyst time, that Carrigan- the implementation costs (an industry rule of cancellation systems virtually from the ground up Walster adopt from the Unfair or Deceptive Fees thumb). This comment does not itemize costs across and expensive ongoing recordkeeping requirements NPRM are not valid representations of the usage of different elements of the specific rules adopted. across all services. Accordingly, the Commission such inputs that are incremental to compliance does not include in the estimates of compliance VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90527 Another commenter addressed the IFA did, however, comment that Commission assumes that to come into Paperwork Reduction Act cost estimate many of its members already offer compliance with the final Rule, all in the NPRM in a way that conflated it consumers the ability to pause or 106,000 firms selling negative option with the totality of compliance costs. ‘‘freeze’’ memberships, noting, plans will need to expend some IFA, which represents firms, including ‘‘consumers take advantage of resources to familiarize themselves with small firms, in the fitness, preventative alternatives to membership cancellation the final Rule and some firms will incur healthcare, personal wellness or at rates of 10% to 40%, with many costs related to improvements in their children’s extracurricular activities consumers electing to reactivate their pre-consent disclosures and industries, commented, ‘‘the FTC’s memberships, saving thousands of cancellation mechanisms. estimate (in the NPRM) that it will cost dollars annually in increased Familiarization costs: No commenters companies merely three hours annually membership rates and additional presented estimates expressly related to at $22.15/hr to comply is grossly initiation fees.’’ While pause/freeze the costs of legal and managerial review understated for IFA’s members.’’588The capabilities are indeed beneficial to of the final Rule and front-line staff Commission agrees the final Rule’s consumers, they do not relieve a firm training needed to come into compliance costs will exceed the from an obligation to offer a cancellation compliance. The U.K. ‘‘Impact Paperwork Reduction Act costs mechanism. IFA did not provide similar Assessment,’’ using surveys and discussed in the NPRM because the data on what percentage of its member interviews with managers of firms that Paperwork Reduction Act costs only firms’ consumers are dissatisfied with sold goods and services via negative include burden associated with pause/freeze opportunities and seek options, found that firms would need information collection requirements, authentic cancellations or what between four and 16 hours of ‘‘senior such as recordkeeping and disclosure cancellation mechanisms its member staff’’ time, depending upon the size of costs, while the total compliance costs firms make available to consumers. the firm, to gain familiarization with include those costs as well as costs of The technological capability to pause their proposed rule, and between zero familiarization with the Rule and costs or freeze subscriptions suggests the and 80 hours of ‘‘service staff’’ time, to bring cancellation mechanisms into presence of software architecture again depending upon the size of the compliance. IFA did not, however, ‘‘scaffolding’’ upon which a cancellation firm.592The Commission assumes that provide a sufficiently detailed mechanism could be built at a modest similarities between American and alternative estimate of annual or incremental cost. Alternatively, the British firms are such that the same ongoing general compliance or offering of subscription pauses or units of time are relevant for American recordkeeping costs for its members.589 freezes by some IFA members may firms to gain familiarity with the final Similarly, IFA provided no information suggest those members use the services Rule. In the American context, the on the enrollment mechanisms used by of third-party e-commerce hosting Commission assumes ‘‘senior staff time’’ its members nor an estimate of what platforms or payment processors who is proxied by ‘‘attorney time,’’ and uses share of its members offer negative routinely provide consumer the mean hourly wage for attorneys, option plans.590 subscription account management tools $84.84 per hour, to estimate those relied on by businesses, including small costs.593Similarly, the Commission with the final Rule relative to its existing regulatory businesses. As discussed, below, assumes ‘‘service staff time’’ is proxied baseline.
negative option sellers that lacked such developers, which, as noted previously, 606To the extent that a marketer uses the easy easy-to-use cancellation mechanisms have a mean wage rate of $45.95. subscription account management and cancellation also performed less well in making the Accordingly, the Commission assumes tools offered by hosting platforms or payment disclosures required by the final Rule, each firm that needs to relabel existing processors and the presence of such tools reduces such that they would incur initial year cancellation mechanisms to make those consumers’ perception of the risks of entering into a subscription agreement with the marketer, the compliance costs of improving their mechanisms easy for consumers to marketer’s sales may increase along with any disclosures as indicated by the range locate and use will spend between payments to the platform or processor that are estimated above. $45.95 (i.e., 1 × $45.95) and $367.60 based on the number of transactions or aggregate The same research found that 62.5% (i.e., 8 × $45.95) to come into sales. (i.e., 100 × 10/16) of sampled online compliance with the final Rule’s 607See, for example, Shopify’s help page at https://help.shopify.com/en/manual/products/ negative option sellers had cancellation cancellation requirements. purchase-options/shopify-subscriptions/customer- paths that took longer for consumers to Lastly, the aforementioned research experience#subscription-management-for- complete as a result of nomenclature, found that 18.75% (i.e., 100 × 3/16) of customers, ‘‘Shopify Subscriptions displays subscription information to customers in the not website architecture. These sites, online negative option sellers offered checkout. For example, when buying a subscription rather than using straightforward terms only telephonic cancellation. Such product, the order frequency and discount amount such as ‘‘unsubscribe’’ or ‘‘cancel,’’ put firms, because they were online sellers, for the subscription is displayed in the order the cancellation path under titles such clearly had online ordering and summary . . . . During checkout, your customer needs to agree to the cancellation policy terms to as ‘‘auto-renew’’ or ‘‘edit plan,’’602and payment website architecture in place, confirm that they understand they’re purchasing a locating the cancellation mechanism and so had ‘‘scaffolding’’ upon which subscription. They can’t complete their purchase delayed the researcher in completing online cancellation architecture could without agreeing to this policy . . . . Customers the cancellation task because of the non- be built. No commenter provided can log in to their customer account to view and manage their subscription orders. Customers can relevant data on the costs of building- resume, skip, and cancel their subscriptions, and subscribers-ranking. As of mid-year 2024, the New out a ‘‘click-to-cancel’’ mechanism in manage their payment methods and shipping York Times had 10.8 million subscribers. See such instances, and the U.K ‘‘Impact address.’’ Moreover, Shopify offers a variety of https://www.nytimes.com/2024/08/07/business/ Assessment’’ indicated it ‘‘lacked high consumer subscription management tools to media/new-york-times-earnings.html. The merchants that use Shopify for payment processing quality evidence on the costs businesses Commission was unable to locate subscriber data (‘‘checkout’’) or website hosting at no incremental for some of the other firms sampled (e.g., Savage would incur’’ to integrate ‘‘easy exiting cost to merchants See https://apps.shopify.com/ Fenty, Daily Harvest, Deliveroo) and in some other mechanisms into websites.’’ As a result, categories/selling-products-purchase-options- instances found subscriber data reported only on a the ‘‘Impact Assessment’’ turned to subscriptions. The fees Shopify charges merchants global basis (e.g., Google One, Adobe). varies with a number of merchant-specific features, ‘‘external estimates’’ from ‘‘[t]he U.S.
experience cost-savings associated with sellers, to the full number of firms, Cancellation costs: 19,875 firms (i.e., such resources. Furthermore, no .1875 × 106,000) will incur no costs in telemarketers or call centers that 611Three trade associations, who have some provide services to telemarketers members who either sell or offer cancellation bringing their cancellation mechanisms submitted comments relating to what mechanisms in-person, submitted comments that into compliance with the final Rule. were not sufficiently detailed to permit Commission 66,250 firms (i.e., .625 × 106,000) costs telemarketers would incur to bring staff to estimate the number of firms that both sell collectively will incur costs of between cancellation mechanisms into and cancel in-person or through the mail. For compliance with the final Rule. Because example, IHRSA (FTC–2023–0033–0863) $3.04 million (i.e., 1 × $45.95 × 66,250) commented many of its members allow several and $24.35 million (i.e., 8 × $45.95 × of this, and because the Commission has options for agreement termination through simple 66,250) to bring their online previously found that only 2,000609of online solutions including online account cancellation mechanisms into 106,000 firms selling negative options management, email cancellation requests, and were telemarketers (and no commenter specific online cancellation buttons or forms, compliance with the final Rule by adding many of these options are currently relabeling consumer-facing elements of has disputed this finding), the available for members who have purchased their their existing cancellation architecture. Commission proceeds as if membership either online or in person. The 19,875 firms (i.e., .1875 × 106,000) telemarketers face no incremental costs International Carwash Association (‘‘ICA’’), FTC– in complying with the final Rule’s 2023–0033–1142, commented on subscription- collectively will incur costs of between related revenues of member firms (noting more than $0 and $10.57 million (i.e., 19,875 × cancellation requirements. However, to half, and sometimes more than 80%, of store $532.05) to bring their telephonic reduce any potential downward bias610 revenues can be attributable to subscription sales), cancellation mechanisms into this might introduce into the but not on the number of firms that sell subscriptions or how many subscriptions they sell. compliance with the final Rule. Similarly, although it commented subscriptions The Commission notes that this social media platforms in addition to the could be purchased in person, on the world wide merchant’s own website, how many of the analysis does not quantify costs for the web, via a mobile app, or at an automated teller, merchant’s employees will have the ability to log- it provided no data on the relative shares of firms selling negative option plans that in to the merchant’s Shopify account, etc. (see subscription purchases through these channels or offer only in-person or by-mail https://aureatelabs.com/blog/shopify-website- the cancellation mechanisms made available to cancellation. The Commission assumes development-cost). So, although what merchants consumers. The objections ICA raised to a Rule pay to use Shopify may vary across firms, the that, in complying with this final Rule, requiring its members to offer cancellation by any incremental cost of using Shopify for consumer method other than in-person strongly suggests that these firms will choose to provide the subscription account management is assumed to be most member firms currently only offer cancellation alternative cancellation method (by zero. See also Hoofnagle, FTC–2023–0033–1137 that way, suggesting that those who sell on the phone, online, or both) that makes the (‘‘There are scores of companies like Chargebee that internet, via a mobile app and (possibly) at an help companies manage subscriptions . . . . most economic sense. The Commission automated teller may already be in violation of Compliance with new rules is inexpensive because ROSCA if in-person cancellations are a violation of also assumes that the cost of processing policy changes can be made programmatically in ROSCA’s ‘‘simple cancellation mechanism’’ a cancellation over the phone should be dashboards’’ provided by entities such as requirement. IFA (FTC–2023–0033–0856) provided similar to or less than the cost of Chargebee.’’).
(3) Ongoing Compliance Costs, Years 2 brought under section 5 where civil The experts’ report submitted by IAB Through 10 penalties are not available and where, estimated 10 hours of attorney time for Compliant disclosures, cancellation post-AMG, it is difficult to obtain annual compliance checks for the Rule paths, and consumer-facing information redress. Accordingly, some negative proposed in the NPRM. Because the about cancellation mechanisms will option marketers may pay closer final Rule has removed the most form a ‘‘template’’ that can be used attention to underlying claims made for complex (and, therefore, costly) features without any incremental compliance products marketed using negative of the proposed Rule (e.g., double costs as new subscription products are option sales because of the monetary consent, the treatment of ‘‘saves’’ in added to a marketer’s retinue of relief available for violations of the final cancellation flows, and the issuance of products offered for sale via a negative Rule relative to a section 5 enforcement annual ‘‘reminders’’ for some option plan. The information relevant to action. This, however, is no different subscriptions), the Commission assumes the sale of a new product may be than what any firm should do to assure half of the annual compliance check ‘‘dropped’’ into the template in a fill-in- that it is not in violation of section 5, hours assumed in IAB’s experts’ report, the-blank way. The Commission and the Commission considers the costs five hours, is an upper bound on assumes marketers, in the ordinary of attentiveness to section 5 compliance attorney hours needed for annual course of business, know what is as part of the existing regulatory compliance checks. Moreover, the required for the disclosures (e.g., the baseline, not as costs that are Commission assumes that some firms amounts consumers will be charged, incremental to complying with the final will incur no incremental annual when, by date or frequency, such Rule. compliance check costs, either because charges will occur, when consumers their pre-existing business practices The U.K.’s ‘‘Impact Assessment’’ of its must act to stop recurring charges, etc.) followed what the final Rule requires or regulatory treatment of subscription and consider the costs of entering this because the platforms or payment plans did not estimate ongoing information into established disclosure processors they use provide compliant compliance costs because ‘‘the size of templates to be a routine cost of doing disclosures and cancellation flows.615 these costs . . . are likely small in business, not an incremental cost Accordingly, the Commission comparison to the one-off cost and required by compliance with the final estimates the aggregate annual costs of benefits.’’613In further support of this, Rule. The same will also be true for compliance checks to range between $0 negative option plans that are the ‘‘Impact Assessment’’ cited a report and $44.97 million (i.e., 106,000 × 5 telemarketed or sold in person; once a that found that on-going costs were hours × $84.84/hour). Inclusive of meaningful only in relation to sending telemarketing script or an in-person recordkeeping costs, total ongoing costs reminders to consumers about their sales disclosure form is developed in range between $6.54 million (i.e., $0 + subscriptions, and only for firms that the initial year of compliance, it $6.54 million) and $51.51 million (i.e., used postal mail delivery and not becomes a template that readily can be $44.97 million + $6.54 million). electronically delivered reminders.614 used as new subscription products are The final Rule does not contain a (4) Summary of Total Costs offered over time. Accordingly, once a marketer comes into compliance with ‘‘reminder’’ requirement, and so the Table 7 presents the initial and the final Rule there should be no ongoing costs of sending reminders to recurring costs of this Rule in each year, incremental costs of ongoing consumers, small though they may be, as well as the present discounted value compliance with respect to disclosures are not ongoing costs of compliance and annualized costs over 10 years and cancellation mechanisms, and the with the final Rule. using a 2 percent discount rate. The costs of adding, changing, or deleting Commission estimates that in Year 1, products the marketer offers for sale via 613U.K. ‘‘Impact Assessment’’ (2023) at 30. the initial costs will range between negative option will be no different from 614‘‘We note for example, that Ofcom assessed $49.52 and $422.26 million. In each of . . . the business costs of providing customers with what they would have been absent the the following years, the Commission notifications at the end of their contracts. These final Rule. involved possible ongoing costs related to estimates that the recurring costs will The Commission can seek redress or identifying customers that needed notifications on range between $6.54 and $51.51 million. civil penalties for violations of the final an ongoing basis and providing them with the The Commission estimates that the Rule. Absent the final Rule, enforcement notification. After consultation with stakeholders, Ofcom only estimated the costs of providing actions against unfair or deceptive consumers with letters, on the basis that only this 615See discussion in section VII.B.1.a.2 of this negative option practices would be medium had significant ongoing costs.’’ Id. SBP and n.146. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90532 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations present discounted value of costs over $826.15 million. The Commission discount rate, would range between ten years, using a 2 percent discount estimates that these costs, annualized $11.23 and $91.97 million per year. rate, will range between $100.89 and over ten years using a 2 percent TABLE 7—TOTAL QUANTIFIED COSTS [In millions, 2023 dollars] Year Low High 1 ............................................................................................................................................................................... $49.52 $422.26 2 ............................................................................................................................................................................... 6.54 51.51 3 ............................................................................................................................................................................... 6.54 51.51 4 ............................................................................................................................................................................... 6.54 51.51 5 ............................................................................................................................................................................... 6.54 51.51 6 ............................................................................................................................................................................... 6.54 51.51 7 ............................................................................................................................................................................... 6.54 51.51 8 ............................................................................................................................................................................... 6.54 51.51 9 ............................................................................................................................................................................... 6.54 51.51 10 ............................................................................................................................................................................. 6.54 51.51 Present Discounted Value of Costs over 10 years, 2% discount rate ............................................................ 100.89 826.15 Annualized Costs over 10 years, 2% discount rate ......................................................................................... 11.23 91.97 (d) Sensitivity Analysis The main analysis uses enforcement consented to 16 online subscriptions data to determine the share of between August 2 to October 4, 2022 As a sensitivity analysis, the cancellations likely to occur through and then canceled each one, recording Commission considers an alternative online and telephone methods. This the time it took to cancel along with a method that does not rely on data from data may suffer from selection bias if, variety of other obstacles faced in historical enforcement matters for among other factors, only the more cancelling.618Of the 16 online distributing subscription cancellations egregious violations are pursued subscriptions, three were found to be across the baseline cancellation through enforcement methods. This easy to cancel online, indicating they methods used to estimate quantified approach also assumes no marketers of are likely in compliance with this Rule; benefits. This alternative method negative option plans comply with this three required phone calls to cancel; assumes the majority of subscriptions Rule in the baseline. Further, because and the remaining 10 had a non- are enrolled online and can be cancelled the data only include resolved cases and straightforward online cancellation online in the baseline; whereas, in the resolved cases tend to be older, they are method. Based on these results, the main analysis, the majority of less likely to reflect the current state of Commission assumes 18.75 percent (i.e., subscriptions are enrolled online and the market. 3/16) of online subscriptions have Rule- can only be cancelled by phone in the In this alternative analysis, the compliant cancellation methods in the baseline. Compared with the main Commission uses statistics discussed in baseline; 18.75 percent (i.e., 3/16) of analysis, this alternative method the NPRM—that 106,000 firms offer online subscriptions require telephone produces lower total quantified benefits negative option plans and 2,000 of those cancellation in the baseline; and 62.5 by $419.77 to $449.53 million firms are telemarketers.616Based on percent (i.e., 10/16) of online annualized per year, yet the estimated that, the Commission assumes 1.9 subscription offer non-Rule-compliant range of quantified benefits still exceeds percent (i.e., 2,000/106,000) of online cancellations in the baseline. the estimated range of quantified costs.
(1) Number of Cancellations by enrolled and cancelled over the phone subscription cancellations each year Enrollment and Baseline Cancellation in the baseline. The Commission then distributed across the enrollment and Method assumes the remaining cancellations of regulatory baseline cancellation subscriptions that were not enrolled methods: online enrollment and Under this sensitivity analysis, the over the phone or in person were telephone cancellation; online Commission assumes that the baseline instead enrolled online.617 enrollment and non-Rule-compliant number of subscriptions and To estimate the distribution of online cancellation; online enrollment cancellations is the same as in the main baseline cancellation methods of and Rule-compliant online cancellation; analysis. The Commission also assumes subscriptions enrolled online, the telephone enrollment and telephone the number of in-person subscriptions, Commission uses the results from an cancellation; and in-person enrollment. as proxied for by gym memberships, is experiment in which a researcher the same as in the main analysis. What 618See Sinders (2023). Among the obstacles noted differs here is the approach for 616See NPRM, 88 FR 24733. for otherwise seemingly simple online cancellations 617The Commission acknowledges this excludes were that some websites did not use straight determining the share of cancellations subscriptions that are enrolled by mail, likely forward terms, such as ‘‘unsubscribe’’ or ‘‘cancel,’’ likely to occur through online and resulting in an overestimate of the number of and instead put the cancellation path under titles telephone methods. subscriptions enrolled online. such as ‘‘auto-renew’’ or ‘‘edit plan.’’ VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90533 TABLE 8—SENSITIVITY ANALYSIS: CANCELLATIONS BY ENROLLMENT AND BASELINE CANCELLATION METHOD [In millions] Online Online Online Telephone enrollment, enrollment, enrollment, enrollment, In-person Year non-compliant compliant telephone telephone enrollment online online cancellation cancellation cancellation cancellation 1 ........................................................................................... 63.79 212.63 63.79 6.87 14.62 2 ........................................................................................... 64.28 214.27 64.28 6.93 14.73 3 ........................................................................................... 64.78 215.92 64.78 6.98 14.84 4 ........................................................................................... 65.27 217.56 65.27 7.03 14.96 5 ........................................................................................... 65.76 219.21 65.76 7.08 15.07 6 ........................................................................................... 66.26 220.85 66.26 7.14 15.18 7 ........................................................................................... 66.66 222.19 66.66 7.18 15.27 8 ........................................................................................... 67.06 223.54 67.06 7.22 15.37 9 ........................................................................................... 67.46 224.88 67.46 7.27 15.46 10 ......................................................................................... 67.87 226.23 67.87 7.31 15.55 (2) Estimating Total Benefits As in the main analysis, the benefits will range between $271.15 Commission multiplies the number of million and $5.20 billion. Using a 2 To estimate total quantified benefits cancellations in each category by the percent discount rate, the Commission under this sensitivity analysis, the matched per-cancellation benefit on the estimates the present discounted value Commission uses the same matching of low- and the high-end and then sums of benefits over 10 years to range enrollment and baseline cancellation across all five categories to obtain total between $2.36 and $45.28 billion. methods to per-cancellation benefit quantified benefits each year. Those Annualized over 10 years using a 2 estimates as in the main analysis. The totals are presented in Table 9 below. In percent discount rate, the Commission only difference here is that the the first year following implementation estimates the benefits to range between Commission assumes consumers who of the final Rule, the Commission $263.06 million and $5.04 billion per experience Rule-compliant online estimates the benefits under this year. These annualized benefits cancellations in the baseline will not see sensitivity analysis will range between estimates are between $419.77 and any additional benefit as a result of this $254.85 million and $4.88 billion. In $449.53 million less per year than the final Rule. Year 10, the Commission estimates the estimates from the main analysis. TABLE 9—SENSITIVITY ANALYSIS: ESTIMATES OF BENEFITS [In millions, 2023 dollars] Year Low High 1 ............................................................................................................................................................................... $254.85 $4,883.26 2 ............................................................................................................................................................................... 256.82 4,921.01 3 ............................................................................................................................................................................... 258.79 4,958.77 4 ............................................................................................................................................................................... 260.76 4,996.53 5 ............................................................................................................................................................................... 262.73 5,034.29 6 ............................................................................................................................................................................... 264.70 5,072.05 7 ............................................................................................................................................................................... 266.31 5,102.91 8 ............................................................................................................................................................................... 267.92 5,133.77 9 ............................................................................................................................................................................... 269.54 5,164.63 10 ............................................................................................................................................................................. 271.15 5,195.49 Present Discounted Value of Benefits over 10 years, 2% discount rate......................................................... 2,362.97 45,277.43 Annualized Benefits over 10 years, 2% discount rate ..................................................................................... 263.06 5,040.58 Difference in Annualized Benefits from Main Analysis .................................................................................... ¥419.77 ¥449.53
XI. Final Regulatory Flexibility Act Commission certifies that the final Rule education campaigns about this Rule. Analysis will not have a significant economic Second, in consideration of comments The Regulatory Flexibility Act impact on a substantial number of small regarding regulatory burden, the (‘‘RFA’’), 5 U.S.C. 601–612, requires the entities. Nevertheless, because the Commission clarifies or modifies the Commission to conduct an Initial Commission included an IFRA in the Rule in several significant ways: (1) it Regulatory Flexibility Analysis NPRM, the Commission has also defines ‘‘material’’ and provides several (‘‘IRFA’’) with a proposed rule and a performed an FRFA below, and concrete categories of material facts to Final Regulatory Flexibility Analysis comments to the IFRA are discussed ensure businesses have a clear (‘‘FRFA’’), if any, with a final rule, below. understanding of how it will interpret
the Rule will apply or an explanation of regarding the disclosure requirements, In formulating the proposed why no such estimate is available.
industry could incorporate a negative As explained above, in response to and thus subject to similar disclosure option feature into a sales comments regarding regulatory burden, requirements.
transaction.630The Commission is Commenters provided additional the Commission clarifies or modifies the unaware, however, of any source of data Rule in several significant ways: (1) it comments, suggesting small businesses identifying across every industry the defines ‘‘material’’ and provides several will be significantly impacted, and the number of small entities that routinely concrete categories of material facts to Commission underestimated the utilize negative option features. ensure businesses have a clear burdens. Recordkeeping and disclosure Although the NPRM requested understanding of how it will interpret costs associated with the Rule became comments on the percentage of affected materiality under the Rule; (2) it limits one of the issues designated for the companies that qualify as small the number of terms that must informal hearing, after which the businesses, and some trade association mandatorily appear ‘‘immediately presiding officer determined ‘‘the issue commenters indicated that some of their adjacent’’ to the request for consent to is not genuinely disputed,’’ noting the members were small businesses, these the negative option feature; (3) it failure of interested parties to ‘‘provide comments did not identify either the removes the requirement to obtain any evidence to establish what the costs number or share of their small business separate affirmative consent to ‘‘the rest would be,’’ as opposed to generalized members that sold negative option of the transaction’’ and modifies the complaints ‘‘costs will be higher than contracts. recordkeeping requirement; (4) it the NPRM’s estimates.’’631As explained
small entities which will be subject to the effective date of the final Rule for Specifically, the Commission the requirement and the type of 180 days to allow time for determined to specify and thereby limit professional skills necessary for implementation (except for the preparation of the report or record. provisions related to misrepresentations 631Recommended Decision by Presiding Officer, and other procedural requirements, https://www.regulations.gov/comment/FTC-2024- 629Rule §425.2(g). 0001-0042 (emphasis in original). which should not be an added burden VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90536 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations for businesses already complying with plans, and continuity plans. Based on with making these disclosures do not the law and which take effect 60 days NAICS information as well as its own constitute a ‘‘burden’’ under the PRA after publication of the final Rule). research and industry knowledge, FTC because they are a usual and customary staff identified an estimated total of part of regular business practice. 5 CFR XII. Paperwork Reduction Act 530,000 firms involved in such 1320.3(b)(2). Moreover, many State laws The Paperwork Reduction Act industries.634However, FTC staff require the same or similar disclosures (‘‘PRA’’), 44 U.S.C. 3501 et seq., requires estimated that only a fraction of the total as the Rule mandates. In addition, Federal agencies to obtain Office of firms in these industry categories offer approximately 2,000 negative option Management and Budget (‘‘OMB’’) negative option features to consumers. sellers are already covered by the TSR approval before collecting information For example, few grocery stores and and subject to its disclosure directed to ten or more persons. The clothing retailers, which account for requirements. Accordingly, FTC current Rule contains various provisions approximately a third of the of the total estimated the disclosure burden that constitute information collection as estimate from all industry categories, are required by the Rule will be, on average, defined by 5 CFR 1320.3(c), the OMB likely to regularly offer negative option two hours each year for each seller regulations implementing the PRA. In features. In addition, some entities subject estimated to be subject the Rule, January 2024, OMB approved included in the total may qualify as for a total estimated annual burden of continuation of the Rule’s existing common carriers, exempt from the 212,000 hours. information collection (OMB Control Commission’s authority under the FTC Estimated Annual Labor Cost. To No. 3084–0104). The final Rule makes Act. Accordingly, the Commission estimate labor costs for recordkeeping changes in the Rule’s recordkeeping and estimated approximately 106,000 requirements, staff multiplied the disclosure requirements that will business entities (20%) offer negative 53,000 hours to comply with the increase the PRA burden as detailed option features to consumers. proposed Rule’s recordkeeping below. Accordingly, the Commission is Recordkeeping Hours. FTC staff provisions by a clerical wage rate of submitting the final Rule and a estimated the majority of firms subject $18.75/hour.636The result is an annual Supplemental Supporting Statement to to the Rule already retain the types of cost of approximately $993,750. OMB for review under the PRA.632The records in the normal course of business To estimate annual labor costs for associated burden analysis follows. that would be required by the proposed disclosures for all entities, staff Rule. Under such conditions, the time multiplied the 212,000 hours to comply A. The Proposed Rule and financial resources needed to with the proposed Rule’s disclosure In the NPRM, the Commission comply with disclosure requirements do provisions by a sales personnel wage provided time and cost estimates for the not constitute ‘‘burden’’ under the rate of $22.15/hour.637The result is an proposed Rule’s recordkeeping and PRA.635Moreover, staff anticipated that annual cost of approximately disclosure requirements, and solicited many transactions subject to the Rule $4,695,800. comments about their associated costs, are conducted via the internet and most Thus, the estimated annual labor costs including on: (1) whether the entities subject to the Rule are likely to were $5,689,550 [($993,750 disclosure, recordkeeping, and reporting store data though automated means, recordkeeping) + ($4,695,800 requirements are necessary, including which reduces compliance burdens disclosure)]. whether the resulting information will associated with record retention. Estimated Annual Non-Labor Cost. be practically useful; (2) the accuracy of Accordingly, staff estimated that 53,000 The NPRM stated capital and start-up our burden estimates, including entities subject to the Rule will require costs associated with the Rule’s whether the methodology and approximately one hour per year to recordkeeping provisions are de assumptions used are valid; (3) how to comply with the Rule’s recordkeeping minimis. Any disclosure or improve the quality, utility, and clarity requirements, for an annual total of recordkeeping capital costs involved of the disclosure requirements; and (4) 53,000 burden hours. with the Rule, such as equipment and how to minimize the burden of Disclosure Hours. Staff anticipated office supplies, would be costs borne by providing the required information to that the substantial majority of sellers sellers in the normal course of business. consumers.633 already routinely provide the The NPRM also included staff’s disclosures that would be required by B. Comments Received and Informal estimate that the burden for the proposed Rule. For these sellers, the Hearing recordkeeping compliance would be time and financial resources associated The NPRM sought comments on the 53,000 hours and the estimated burden PRA analysis and stated, ‘‘comments for disclosures would be 212,000 hours, 634Examples of these industries include sellers of should provide any available evidence for a total of 265,000 hours. These software, streaming media, social media services, and data that supports their position, estimates are explained below. financial monitoring, computer security, fitness such as empirical data.’’638The Number of Respondents. FTC staff services, groceries and meal kits, dietary Commission did not receive such supplements, sporting goods, home service estimated there are 106,000 entities contracts, home security systems, office supplies, evidence. A few commenters from offering negative option features to pet food, computer supplies, cleaning supplies, businesses and industry groups, consumers. This estimate is based home/lawn maintenance services, personal care however, raised generalized concerns primarily on data from the U.S. Census products, clothing sales, energy providers, newspapers, magazines, and books. The NAICS North American Industry Classification does not provide estimates for all of these 636This figure is derived from the mean hourly System (NAICS) for firms and categories. Where such data is unavailable, the staff wage shown for Information and Record Clerks. See establishments in industry categories has used its own estimates based on its knowledge Bureau of Labor Statistics, ‘‘Occupational wherein some sellers offer free trials, of these industry categories. Employment and Wages—May 2021,’’ at Table 1 automatic renewal, prenotification 635Under the PRA, the time, effort, and financial (Mar. 31, 2022) (National employment and wage resources necessary to comply with the collection data from the Occupational Employment Statistics of information that would be incurred by persons survey by occupation, May 2021), https:// 632The PRA analysis for this rulemaking focuses in the normal course of their activities (e.g., in www.bls.gov/news.release/pdf/ocwage.pdf. strictly on the information collection requirements compiling and maintaining business records) does 637This figure is derived from the mean hourly created by and/or otherwise affected by the not constitute a burden under the Rule where the wage shown for Sales and related occupations. See amendments. associated recordkeeping is a usual and customary id. 63388 FR 24734. part of business activities. 5 CFR 1320.3(b)(2). 63888 FR 24730. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90537 that the NPRM underestimated PRA- to dispute the specific PRA-related with the Rule’s recordkeeping related costs.639 figures in the NPRM. For the final Rule, provisions by a clerical wage rate of As noted earlier, the Commission set the Commission adopts the following $20.94/hour,645to yield an annual cost an informal hearing, at the request of PRA analysis. of approximately $1,109,820. For interested parties, and appointed Number of Respondents. The disclosure compliance, staff multiplied Administrative Law Judge Carol Fox Commission received no evidence to the 212,000 estimated hours by an Foelak as the presiding officer.640Based dispute the NPRM’s statements on the hourly wage rate for sales personnel of on submissions by interested parties, number of entities offering negative $25.62,646to yield an annual cost of and other information in the record, the option features to consumers, so the $5,431,440. Thus, the estimated total presiding officer designated two Commission adopts the NPRM estimate annual labor costs are $6,541,260 disputed issues of material fact, that there are 106,000 such entities. [($1,109,820 recordkeeping) + including, ‘‘What will the recordkeeping Although the final Rule is narrower in ($5,431,440 disclosure)]. and disclosure costs associated with the that it excludes the term ‘‘promote’’ Estimated Annual Non-Labor Cost. proposed rule be?’’641 from its scope, the Commission retains The Commission received no evidence Based on the record, the presiding the estimate of 106,000 entities for the to dispute the NPRM’s statements that officer concluded, ‘‘There is insufficient purposes of this analysis, which would capital and start-up costs associated evidence to make a finding concerning be more conservative and tend to with the Rule’s recordkeeping the . . . recordkeeping and disclosure overstate the burden. provisions are de minimis under the costs associated with the proposed Recordkeeping Hours. The PRA. The Commission adopts those rule,’’ and ‘‘in the absence of evidence, Commission received no evidence to findings. the issue is not genuinely disputed.’’642 dispute the NPRM’s statements on The presiding officer further explained: recordkeeping under the PRA. As the List of Subjects in 16 CFR Part 425 ‘‘IAB made a well-reasoned argument final Rule is narrower, the time and Advertising, Consumer protection, that the costs will be higher than the financial resources needed to comply Trade practices. NPRM’s estimates, generalizing from with disclosure requirements still do ■For the reasons stated in the preamble, limited estimates that it, IFA, and NCTA not constitute ‘‘burden’’ under the the Federal Trade Commission revises provided. However, it did not provide PRA.644Accordingly, the Commission 16 CFR part 425 to read as follows:
any evidence to establish what the costs adopts the NPRM estimate that 53,000 would be.’’643 entities subject to the Rule will require PART 425—RULE CONCERNING C. Final PRA Analysis approximately one hour per year to RECURRING SUBSCRIPTIONS AND comply with the Rule’s recordkeeping OTHER NEGATIVE OPTION As previously discussed, the requirements, for an annual total of PROGRAMS Commission made changes to the Rule 53,000 burden hours.
based on the record. Some of these Disclosure Hours. Similarly, the Sec.
changes, in turn, affect the PRA Commission received no evidence to 425.1 Scope. analysis. Specifically, the Commission dispute the NPRM’s statements on 425.2 Definitions. determined to specify and thereby limit 425.3 Misrepresentations. disclosure hours under the PRA. As the the types of disclosures required, 425.4 Important information. final Rule narrowed and delineated the narrow the scope of entities covered (by 425.5 Consent. types of disclosures required, the time excluding those solely involved in 425.6 Simple cancellation (‘‘Click to ‘‘promoting’’ negative option plans), and financial resources associated with Cancel’’). making these disclosures is even less 425.7 Relation to State laws. curtail the length of time for retaining than under the proposed Rule, which 425.8 Exemptions.
records (to only three years), and also did not constitute a ‘‘burden’’ 425.9 Severability. establish an option for sellers to eliminate having to keep records of under the PRA because they are a usual Authority: 15 U.S.C. 41 through 58. and customary part of regular business consent if they have the requisite practice. 5 CFR 1320.3(b)(2). §425.1 Scope.
processes in place. Neither the Accordingly, the Commission adopts This Rule contains requirements Commission nor the presiding officer at the NPRM estimate that the disclosure related to any form of negative option the informal hearing received evidence burden required by the Rule will be, on program in any media, including, but average, two hours each year for each not limited to, Interactive Electronic 639Sirius XM, FTC–2023–0033–0857; SCIC, FTC– seller subject estimated to be subject the Media, telephone, print, and in-person 2023–0033–0879; Coalition, FTC–2023–0033–0884;
ETA, FTC–2023–0033–1004; Direct Marketing Rule, for a total estimated annual transactions. Companies, FTC–2023–0033–1016. In addition, one burden of 212,000 hours. commenter seemingly confused PRA-related costs Estimated Annual Labor Cost. The §425.2 Definitions. with full implementation of the Rule, but still Commission received no evidence to Billing Information means any data offered only generalized points. See Asurion, FTC– 2023–0033–0878. Another commenter queried dispute the NPRM’s statements on labor that enables any person to access a whether the Commission’s estimate of the number costs under the PRA. For the final Rule, consumer’s account, such as a credit of firms offering negative option features include the Commission updates its labor cost card, checking, savings, share or similar B2B sales with automatic renewal clauses. ETA, estimates by using more recent wage account, utility bill, mortgage loan FTC–2023–0033–1004. The staff estimate did not seek to exclude such sellers. data. For recordkeeping, staff multiplied account, or debit card. 640Hr’g Notice, 88 FR 85525. the 53,000 estimated hours to comply 641Recommended Decision by Presiding Officer, 645This figure is derived from the mean hourly https://www.regulations.gov/comment/FTC-2024- 644Under the PRA, the time, effort, and financial wage shown for Information and Record Clerks. See 0001-0042. resources necessary to comply with the collection Bureau of Labor Statistics, ‘‘Occupational 642Recommended Decision by Presiding Officer, of information that would be incurred by persons Employment and Wages, May 2023, 43–9061 Office https://www.regulations.gov/comment/FTC-2024- in the normal course of their activities (e.g., in Clerks, General,’’ https://www.bls.gov/oes/currenT/ 0001-0042. compiling and maintaining business records) does oes439061.htm. 643Recommended Decision by Presiding Officer, not constitute a burden under the Rule where the 646This figure is derived from the mean hourly https://www.regulations.gov/comment/FTC-2024- associated recordkeeping is a usual and customary wage shown for Sales and related occupations. See 0001-0042. part of business activities. 5 CFR 1320.3(b)(2). id. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90538 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations Charge, Charged, or Charging means Material means likely to affect a (2) Each deadline (by date or any attempt to collect money or other person’s choice of, or conduct regarding, frequency) by which the consumer must consideration from a consumer, goods or services. act to prevent or stop the Charges; including but not limited to causing Negative Option Feature is a (3) The amount (or range of costs) the Billing Information to be submitted for provision of a contract under which the consumer will be Charged and, if payment, including against the consumer’s silence or failure to take applicable, the frequency of the Charges consumer’s credit card, debit card, bank affirmative action to reject a good or a consumer will incur unless the account, telephone bill, or other service or to cancel the agreement is consumer takes timely steps to prevent account. interpreted by the negative option seller or stop those Charges; and Clear and Conspicuous means that a as acceptance or continuing acceptance (4) The information necessary for the required disclosure is easily noticeable of the offer, including, but not limited consumer to find the simple (i.e., difficult to miss) and easily to: cancellation mechanism required understandable by ordinary consumers, (1) An automatic renewal; pursuant to §425.6. including in all of the following ways: (2) A continuity plan; (b) Form and content of required
same means through which the Conspicuous.
television advertisement, the disclosure section must appear immediately must be presented simultaneously in §425.3 Misrepresentations. adjacent to the means of recording the both the visual and audible portions of In connection with promoting or consumer’s consent for the Negative the communication even if the offering for sale any good or service Option Feature; and representation requiring the disclosure with a Negative Option Feature, it is a (ii) The disclosures required by is made in only one means. violation of this part and an unfair or paragraph (a) of this section (including,
by telephone or streaming video, must (a) The Negative Option Feature or must not contain any other information be delivered in a volume, speed, and any term of the Negative Option that interferes with, detracts from, cadence sufficient for ordinary Feature, including consumer consent, contradicts, or otherwise undermines consumers to easily hear and any deadline to prevent or stop a the ability of consumers to read, hear, understand it. Charge, or the cancellation of the see, or otherwise understand the
Interactive Electronic Medium, such as (b) Cost; this section. the internet, mobile application, or (c) Purpose or efficacy of the §425.5 Consent.
software, the disclosure must be underlying good or service; unavoidable. (d) Health or safety; or (a) Express informed consent. In
(4) digits of the account number to be with a live or virtual representative §425.9 Severability. charged and making and maintaining an (such as a chatbot) to cancel if the The provisions of this part are audio recording of the entire consumer did not do so to consent to separate and severable from one telemarketing transaction as required by the Negative Option Feature. another. If any provision is stayed or 16 CFR part 310. (2) For cancellation by telephone call, determined to be invalid, the remaining
1005.10), a Negative Option Seller will costly to use than the telephone call the be deemed in compliance with the consumer used to consent to the Note: The following statements will not appear in the Code of Federal Regulations.
requirements of paragraph (a)(1) of this Negative Option Feature. section for all written offers (including (3) For cancellation of consent Statement of Commissioner Rebecca over the internet or phone applications), obtained in person, in addition to Kelly Slaughter if that seller obtains the required offering cancellation, where practical, consent through a check box, signature, via an in-person method similar to that As is common in rulemaking proceedings, or other substantially similar method, the consumer used to consent to the this Final Rule that the Commission which the consumer must affirmatively Negative Option Feature, the Negative promulgates is somewhat different from what select or sign to accept the Negative Option Seller must offer the simple it originally proposed—clarified, narrowed, and ultimately improved by the process of Option Feature and no other portion of mechanism through an Interactive grappling with the substantial record of the transaction. The consent request Electronic Medium or by providing a comments submitted by the public. I extend must be presented in a manner and telephone number. The alternate simple my heartfelt thanks to everyone who format that is clear, unambiguous, non- mechanism required by this paragraph submitted comments; to the talented staff in deceptive, and free of any information must satisfy all requirements of our Division of Enforcement and the East not directly related to the consumer’s paragraphs (c)(1) and (2) of this section, Central Regional Office who diligently acceptance of the Negative Option as applicable. If the Negative Option shepherded this proceeding, thoroughly Feature. Seller offers the alternate mechanism by considered all those comments, and recommended thoughtful revisions; and to providing a telephone number, the §425.6 Simple cancellation (‘‘Click to seller shall not erect a cost-barrier to my colleagues for their deep engagement Cancel’’). with this issue of great importance, including cancellation by imposing any former Chairman Joe Simons, under whose
to effectively manage their subscriptions.’’), https:// non-compete agreements. To the contrary, I would Today’s rulemaking did not need to end www.regulations.gov/comment/FTC-2023-0033- support the Commission’s prosecution of anti- 0886; Cmt. of Consumer Action, Consumer competitive non-compete agreements, where the this way. Had political leadership at the Federation of America, Demand Progress Education facts and law support such enforcement. That is Commission taken more time to engage with Fund, National Association of Consumer why I am particularly disappointed that the other Commissioners to refine and improve Advocates, National Consumer Law Center (on Commission dedicated the Commission’s limited the Rule, my vote and statement would look behalf of its low-income clients), and National resources to a broad rulemaking that exceeds very different. Instead, less than a month Consumer League (June 23, 2023), at 7 (‘‘Consumers congressional authorization and will likely not from November 5, the Chair has put political deserve to know when they are about to be charged survive legal challenge.’’) (citation omitted). expediency over getting things right.
automatically, with a chance to opt out.’’), https:// 4See, e.g., A New Way Forward for the Middle Unfortunately, pushing politically motivated www.regulations.gov/comment/FTC-2023-0033- Class: A Plan to Lower Costs and Create an 0880; Cmt. of Profs. Caruso, Raghavan, Sovern, Opportunity Economy, KamalaHarris.com, at 33 rulemakings has not been the exception with Vladeck, Pridgen, Janger, Ondersma, and Block-Lieb (Sept. 2024) (‘‘Under her leadership as Vice the Majority.9Today, I believe we are seeing (June 23, 2023), at 7–8 (encouraging the President, the Administration has launched a another low in our abuse and misuse of the Commission to adopt the reminder requirement historic effort to crack down on junk fees and save tools Congress has given us. Rather than without narrowing it), https://www.regulations.gov/ consumers time and money. This includes [a rule] engage in blatant electioneering to advance comment/FTC-2023-0033-0861. to . . . make it as easy to cancel a subscription as political ends, the Commission should have 3See Fed. Trade Comm’n, Negative Option Rule, it is to subscribe. . . . A Harris-Walz Final Rule Statement of Basis and Purpose (Oct. 16, Administration will . . . continue to take on the 2024) (draft as submitted to the Office of the Federal everyday hassles that waste Americans’ time and 616 CFR part 310. Register), at 138–44. money, [including] subscriptions. . . .’’) (citing 712 CFR 1005.10. 4See 2024 Va. Acts, H. 744, Apr. 4, 2024 (to be FTC press release), https://kamalaharris.com/wp- 815 U.S.C. 57a. codified at section 59.1–207.46(E)), https:// content/uploads/2024/09/Policy-Book-Economic- 9See generally Dissenting Statement of Comm’r legacylis.virginia.gov/cgi-bin/legp604.exe?241+ Opportunity.pdf. Melissa Holyoak, Joined by Comm’r Andrew N. ful+CHAP0452+pdf. 515 U.S.C. 8401–8405. Ferguson, supra note 1. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90541 instead focused on stewarding its resources As an initial matter, this Rule’s procedural negotiation related to the final Rule’s effectively and in ways that restore our irregularities begin with how the Rule was language and statement of basis and purpose, institutional legitimacy, not further finalized in a compressed time frame. Given as the final Rule differs in important ways undermine it. the rigorous demands of section 18 from the rule as proposed. The push to
budget. Indeed, section 18’s rulemaking of weeks. Those weeks were also packed with 24See, e.g., A New Way Forward, requirements, while demanding, are the dozens of cases, one other rulemaking, and KamalaHarris.com, supra note 4.
means of assuring that we act within the other policy matters. (Remarkably, the Chair 25See, e.g., President Biden (@POTUS), X.com parameters established by Congress. had this draft final Rule for some time before (Aug. 12, 2024) (‘‘We’re making it easier to cancel it was circulated to the other subscriptions and memberships. You shouldn’t 10Magnuson-Moss Warranty Act of 1975, Public Commissioners.) Reviewing the NPRM was have to navigate a maze just to cancel unwanted Law 93–637, 88 Stat. 2183. no substitute for robust discussion and subscriptions and recurring payments. The FTC is 11See J. Howard Beales III, The Fed. Trade hard at work finalizing its ‘Click to Cancel’ rule that Comm’n’s Use of Unfairness Authority: Its Rise, 17Jeffrey S. Lubbers, It’s Time To Remove the it proposed to make this process a requirement.’’), Fall, and Resurrection, 22 J. of Pub. Pol’y & Mktg. ‘‘Mossified’’ Procedures for Removing FTC https://x.com/POTUS/status/ 192, 193 (2003) (citing FTC Staff Report on Rulemaking, 83 Geo. Wash. L. Rev. 1979, 1997 1823037212885414107; see also FACT SHEET: Television Advertising to Children (Feb. 1978); (2015). Biden-Harris Administration Launches New Effort N A o d t v i e c r e t i o s f i n P g r o t p o o C s h e i d l d R r u e l n e , m 43 ak F in R g 1 o 7 n 9 6 T 7 e l ( e A v p is r. i o 2 n 7 , to 1 U 8 p P d re a s t s e R R e u l l e e a m se a , k F in ed g . P T ro ra c d e e d u C r o e m s, m Se ’n ts , F S T ta C g e V f o o t r e s t T o h C a r t a W ck a s D te o w A n m o e n ri c E a v n e s r ’ y T da im y e H a e n ad d a M ch o e n s e y a , n T d h H e assles 1978)). In the 1970s, the Commission aggressively Stronger Deterrence of Corporate Misconduct (July White House (Aug. 12, 2024) (‘‘Today, President used its rulemaking authority—so aggressively that 1, 2021), https://www.ftc.gov/news-events/news/ Biden and Vice President Harris are launching it has been called the ‘‘second most powerful press-releases/2021/07/ftc-votes-update- ‘Time Is Money,’ a new governmentwide effort to legislature in America.’’ Timothy J. Muris, The rulemaking-procedures-sets-stage-stronger- crack down on all the ways that corporations . . . Consumer Protection Mission: Guiding Principles deterrence-corporate-misconduct. add unnecessary headaches and hassles to people’s a ( t a 1 o p n 9 p t d 8 u r 2 F r o n ) u a . c t b T u h a h r . c e e k D a t p i h r p e e r c c o t l i a o o c c n h k , o 5 to f 1 t t A o h d i n s a t y i e t ’ a r s u r l M s i t e a r L j , o . i J r l . i l 6 t - y a 2 d 5 th v , i r 6 s e 2 e a 5 d te ns S C S . e o 1 c W m 9 ti S m i o l e n s ’ e o n 1 n D S 8 i a t s R a n s t u d e e n l m e N t m i e o n n a a g t h k S O i J n t o n a g s t h t e P h m u r e o a e c A n P e d t h d o o i u l p f l r i t e C p i s o o s n ( m , J R u o m l e f y ’ g R r a 9 s e r , v C d 2 i h i s 0 n e r 2 g i d s 1 t t ) h i , n e e d F r c s u u o a e l b m y d e s s e p c t r a h r a a n i a n l p d t i T , t e i d r i s o f a e n t d f g o i e r o n a m r a C d l s a o i e e k z m r t e e v h m d i i e t c i a i e s a r s s s q a i p s o e u r a n a o i s t l p ( y i w F t o y t T s a o e s o C d c f t ) a , o l h n i w f s a c e i o s e g . u l n p . l a r d u o . p p re . o f q T o s u e h r i d e o r e n a e. 12Id. at 193. https://www.ftc.gov/system/files/documents/ The agency is currently reviewing public comments 13Id. public_statements/1591702/p210100_ about its proposal.’’), https://www.whitehouse.gov/ 14S. Rep. No. 96–500, at 3 (1979). wilsonphillips_joint_statement_-_rules_of_ briefing-room/statements-releases/2024/08/12/fact- 15Federal Trade Commission Improvements Act practice.pdf. sheet-biden-harris-administration-launches-new- of 1980, Public Law 96–252, 94 Stat. 374. 20Id. at 3–5. effort-to-crack-down-on-everyday-headaches-and- 16Id. 21Id. at 3. hassles-that-waste-americans-time-and-money/. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 3SELUR htiw 90542 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations and related statements from the Chair26 possibility that foreordained outcomes and current Majority took the bipartisan ANPR concerning this rule—and other matters political goals curtailed considering the and politically supercharged it. related to her tenure or connected to her rulemaking record with an open mind and Importantly, the ANPR did not party’s campaign efforts27—raise the without prejudgment, as law requires.28 contemplate broader regulation prohibiting Today’s sprint to the finish line has all misrepresentations of material fact related 26See, e.g., Lina Khan (@linakhanFTC), X.com shortchanged the kind of deliberation and to products that have negative option (Aug. 12, 2024) (‘‘As @POTUS notes, @FTC’s thoughtful engagement Congress deemed features. The ANPR tailored its inquiry by proposal would require that firms make it as easy appropriate when it established rulemaking ‘‘. . . highlighting five basic section 5 to cancel a subscription as it is to sign up. Too often requirements under the Magnuson-Moss Act. requirements that negative option marketing people have to jump through endless hoops—or end In addition to my concern about these must follow to avoid deception’’: (1) up stuck paying for services they don’t want. Our irregularities, I am convinced that this disclosure of material terms of a negative rule would end this tax on your time & money.’’), rulemaking has failed to satisfy section 18’s option offer; (2) clear and conspicuous https://x.com/linakhanFTC/status/ requirements for rulemaking in three ways. disclosures; (3) pre-purchase disclosures; (4) 1823094653962289640. That Tweet came in response to the President unequivocally saying, First, the Commission is issuing a broad final consent; (5) cancellation.32Absent from this ‘‘[w]e’re making it easier to cancel subscriptions rule even though the ANPR was far narrower. list is anything about prohibiting all and memberships,’’ and signaling the proposal This mismatch means that the Commission misrepresentations of material fact related to would be finalized consistent with the NPRM. See failed to provide in its ANPR the ‘‘brief any product that happens to have a negative President Biden (@POTUS), supra note 25. Other description of the area of inquiry under option feature. Similarly, when the ANPR statements are similarly probative of apparent consideration, the objectives which the stated that the Commission was seeking conclusions being reached about the contours of the Commission seeks to achieve, and possible comment ‘‘to reduce consumer harm created final rule. See, e.g., Chair Lina M. Khan, Remarks at Center for American Progress, at 3–4 (Sept. 25, regulatory alternatives under consideration by deceptive or unfair negative option 2024) (‘‘We’ve also unfortunately seen a rise in by the Commission’’ that section 18 marketing,’’ it specified the Commission’s subscription traps. We’ve all been there. Every requires.29The mismatch is the result of interest pertained to ‘‘disclosures, consumer month, you’re paying for that gym membership you leadership changes and priorities. The ANPR consent, and cancellation.’’33Again, absent don’t really use, or streaming services you never was voted out in 2019 by a bipartisan from that list was anything about prohibiting signed up for in the first place. But it’s absurdly Commission under then-Chair Joseph J. all misrepresentations of material fact related difficult to actually cancel these services. You have Simons.30It sought public comments about to marketing of any product that has a to call customer service and spend an hour on the centralizing existing legal requirements negative option feature. phone with a bot before you finally get through to a human being. Customer Service then transfers you regarding negative options and filling gaps When Commission leadership changed in to Memberships. They transfer you to Cancellations. via section 18 rulemaking related to 2021, the ‘‘area of inquiry’’ changed as well. And then suddenly the call drops and you have to disclosures, consent, and cancellation.31The Almost immediately, the Commission under do it all over again. It can feel like you’re stuck in Chair Khan disrupted this particular some type of endless doom loop. And many people affiliation’’), https://oversight.house.gov/wp- rulemaking process to issue an Enforcement understandably just give up—and pay dozens if not content/uploads/2024/10/FTC-re-Chair-Khan- Policy Statement Regarding Negative Option hundreds of dollars for subscriptions they don’t Campaign-Season-Events_10.8.202423.pdf. Marketing34—sub-regulatory guidance on the want or need. And of course, that’s kind of the point: to wear you down and keep taking your 28See generally 15 U.S.C. 57a(b)(1); 5 U.S.C. very same topic as the rulemaking itself. The money, month after month. I’m excited that the 553(c); cf. Air Transport Ass’n of Am. Inc. v. Nat’ Commission then issued a Notice of Mediation Bd., 663 F.3d 476 (D.C. Cir. 2011); Int’l Commission will be considering finalization of a Proposed Rulemaking (‘‘NPRM’’) in 2023 that Snowmobile Mfrs. Ass’n v. Norton, 340 F. Supp. 2d ‘click to cancel’ rule that would require companies introduced into the rulemaking—for the first 1249 (D. Wyo. 2004); Nehemiah Corp. of Am. v.
to make it just as easy to cancel a subscription as Jackson, 546 F. Supp. 2d 830 (E.D. Cal. 2008). The time—the notion of prohibiting i s t y i s s t e t m o / s f i i g l n es u /f p tc f _ o g r o o v n /p e. d ’’ f ) / , 2 h 0 t 2 tp 40 s: 9 / 2 /w 5- w re w m .f a tc r . k g s o - v c / h air- Chair’s approach is highly unusual, given this legal misrepresentations related to marketing of risk and the Commission’s responsibility to keep an products with negative option features.35 khan-center-for-american-progress.pdf; see also Chair Lina M. Khan, Remarks at Strike Force on open mind—which is why, typically, Former Commissioner Christine S. Wilson Unfair and Illegal Pricing Public Convening, at 2 Commissioners do not comment on pending dissented from the issuance of the NPRM for (Aug. 1, 2024) (‘‘We’re currently working toward rulemakings. this (among other) reasons. In her dissenting finalizing our ‘click to cancel’ rule. Too often, 2915 U.S.C. 57a(b)(2)(A). statement, Commissioner Wilson explained: businesses require people to jump through endless 30Fed. Trade Comm’n, Press Release, FTC Seeks ‘‘Importantly, we did not seek comment in hoops just to cancel a subscription. Customers end Public Comment on Ways to Improve Current the ANPR about whether an expanded up paying dozens if not hundreds of dollars a Requirements for Negative Option Marketing (Sept. negative option rule should address general month in subscriptions they want to escape. Our 25, 2019), https://www.ftc.gov/news-events/news/ proposed rule would require that companies make press-releases/2019/09/ftc-seeks-public-comment- misrepresentations; no comments are cited in it as easy to cancel a subscription as it is to sign ways-improve-current-requirements-negative- the NPRM to support the inclusion of these up for one—ending this tax on people’s time and option-marketing. provisions.’’36 money.’’), https://www.ftc.gov/system/files/ftc_gov/ 3184 FR 52393, 52394 (Oct. 2, 2019) (‘‘The pdf/2024.08.01-remarks-chair-khan-strike-force- Commission seeks comments on ways to improve and coverage of the existing Negative Option public-convening.pdf. In light of such statements its existing regulations for negative option Rule.’’). unambiguously reflecting a firm belief in the need marketing, a common form of marketing where the 32Id. at 52395.
for regulatory action—and all but committing to the absence of affirmative consumer action constitutes proposed solution—it is risible to suggest this rule assent to be charged for goods or services. Negative 33Id. at 52396. was not effectively baked well before the option offers are widespread in the marketplace and 34Fed. Trade Comm’n, Press Release, FTC To Commission’s vote. can provide substantial benefits for sellers and Ramp Up Enforcement Against Illegal Dark Patterns 27See, e.g., Talmon Joseph Smith, Lina Khan consumers. However, consumers cannot reap such that Trick or Trap Consumers Into Subscriptions Ends FTC Term. What’s Next for Her?, Seattle benefits when marketers fail to make adequate (Oct. 28, 2021), https://www.ftc.gov/news-events/ Times (Oct. 1, 2024) (‘‘Q: You’ve not gotten any disclosures, bill consumers without their consent, news/press-releases/2021/10/ftc-ramp-enforcement- whispers, any word that you will not be wanted in or make cancellation difficult or impossible. Over against-illegal-dark-patterns-trick-or-trap- a Harris administration? A. No, I think to the the years, such problematic negative option consumers-subscriptions. contrary.’’), https://www.seattletimes.com/business/ practices have remained a persistent source of 35Fed. Trade Comm’n, Press Release, Federal lina-khan-ends-ftc-term-whats-next-for-her/; see consumer harm, often saddling consumers with Trade Comm’n Proposes Rule Provision Making It generally Ben Brody, Lina Khan Hits the Road with recurring payments for products and programs they Easier for Consumers to ‘‘Click to Cancel’’ Recurring Democrats Ahead of Election, Punchbowl News did not intend to purchase or did not want. In the Subscriptions and Memberships (Mar. 23, 2023), (Oct. 2, 2024), https://punchbowl.news/article/ past, the Commission has sought to address such https://www.ftc.gov/news-events/news/press- campaigns/ftc-lina-khan-campaigns-with- practices through individual law enforcement cases releases/2023/03/federal-trade-commission- democrats/; cf. Letter from James Comer, Chair, and a patchwork of regulations. Nevertheless, proposes-rule-provision-making-it-easier- Committee on Oversight and Accountability to Lina problems persist, and consumers continue to consumers-click-cancel-recurring. Khan, Chair, Fed. Trade Comm’n, at 1 (Oct. 8, 2024) submit thousands of complaints to the FTC each 36Dissenting Statement of Comm’r Christine S. (‘‘During this election season, you have engaged in year about negative option marketing. To address Wilson, Notice of Proposed Rulemaking, Negative partisan political activities with numerous these concerns, the Commission seeks comments on Option Rule, at 3 (Mar. 23, 2023), https:// Democrat congressional candidates, undermining ways to improve existing regulatory requirements, www.ftc.gov/system/files/ftc_gov/pdf/p064202_ the FTC’s independence and its mission to protect including whether it should use its rulemaking commissioner_wilson_dissent_negative_option_ American consumers regardless of partisan authority under the FTC Act to expand the scope rule_finalrevd_0.pdf. VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90543 The Statement of Basis and Purpose Unfairness explicitly requires a cost-benefit that would grant the FTC authority under (‘‘SBP’’) accompanying the final Rule analysis relating to the practices at issue.45 Section 13(b) to obtain court orders for cursorily dismisses concerns about the Meanwhile, deception is a subset of the redress or disgorgement (with whatever ANPR’s adequacy, dubiously arguing that broader unfairness authority. With its focus guardrails Congress deems fit), the section 18 requires no such ‘‘specificity’’ in on reasonableness and materiality, no cost- Commission should not circumvent describing the area of inquiry.37But the benefit analysis is required because the legislative prerogative via improper Section whole purpose of section 18’s requirement of Commission has historically argued that 18 rulemaking. a description of what the Commission aims deceptive practices are always harmful. So The third significant procedural flaw in to do is to elicit public comment to inform far, so good. But both unfairness, and this rulemaking is that the Commission failed the Commission about its choices. Indeed, particularly deception, require the to appropriately establish the ‘‘prevalence’’ of section 18 requires an ANPR to invite Commission to provide sufficient evidence unfair and deceptive practices related to all interested parties to provide ‘‘suggestions or for a reviewing court to evaluate whether the negative option features for all products in all alternative methods for achieving such Commission has met the legal predicate for markets and all media (i.e., with respect to objectives.’’38Parties cannot possibly either theory (particularly as it relates to the scope of this rule). According to Section include alternative methods if the ANPR reasonableness and materiality). While the 18, the Commission may issue an NPRM Rule provides examples of material wholly fails to identify the objective, i.e., ‘‘only where it has reason to believe that the misrepresentations, those are merely regulating misrepresentations in marketing of unfair or deceptive acts or practices which examples. Indeed, the Commission ignores products with negative option features. are the subject of the proposed rulemaking the specificity requirement by generalizing It is telling that the ANPR here only are prevalent.’’50Section 18 further provides: from poorly sampled past agency cases.
elicited 17 comments,39while the NPRM The Commission shall make a Whatever the merits of the past cases, the (which made clear that the Commission was determination that unfair or deceptive acts or Majority does not remotely come close to significantly expanding its focus) elicited practices are prevalent under this paragraph explaining how the evidence in those limited 16,000 comments.40The narrowness of the only if— cases is similar to the myriad contexts an ANPR meant the Commission could not, (A) it has issued cease and desist orders economy-wide rule would inevitably apply consistent with section 18, proceed to a regarding such acts or practices, or to.
much broader NPRM.41In choosing to (B) any other information available to the Indeed, the Rule is not limited to interpret the ANPR (and the 17 comments it Commission indicates a widespread pattern misrepresentations relating to deceptive elicited) as sufficient predicate for the much- of unfair or deceptive acts or practices.51 terms of negative option features (or some expanded NPRM, the Commission cut itself In the SBP, the Commission argues that it other specific, deceptive conduct), but off from valuable public comments at instead, applies broadly to any material fact. has satisfied this standard for its economy- important early stages (especially as to Nor does the Rule require that the consumer wide rulemaking because it has issued more regulatory alternatives) and ignored the actually use the negative option feature; the than 35 cases ‘‘challenging harmful negative rulemaking guardrails that Congress carefully mere presence of a negative option feature option practices’’ and has received ‘‘tens of established to forestall nondelegation would render any misrepresentation of thousands of consumers complaints.’’52This concerns that might otherwise exist.42 material fact subject to the Rule. Taken evidence may well suggest that some unfair The second procedural failing lies in the together, the Rule is nothing more than a and deceptive acts related to negative option Commission’s failure to ‘‘prescribe . . . rules back-door effort at obtaining civil penalties in offers are indeed prevalent. But these which define with specificity acts or any industry where negative option is a statistics do not establish prevalence of practices which are unfair or deceptive acts method to secure payment. The Rule’s misrepresentations of material fact related to or practices’’ as Section 18 requires.43 application to any misrepresentation products with negative option features, any ‘‘Because the prohibitions of section 5 of the therefore fails to meet Section 18’s more than the number of FTC cases and Act are quite broad, trade regulation rules are ‘‘specificity’’ requirement,46and will no consumer complaints involving the internet needed to define with specificity conduct doubt invite serious legal challenge on this means that the entire internet should be the that violates the statute and to establish basis.47 subject of a Section 18 rulemaking requirements to prevent unlawful The Supreme Court’s decision in AMG, prohibiting misrepresentations. conduct.’’44Section 425.3 of the Rule fails which held the language of Section 13(b) If similarity among complaints and cases Section 18’s specificity requirements. Section does not authorize the Commission to obtain only at the highest level of generality 425.3 prohibits any misrepresentation of equitable monetary relief,48limited the constitutes the ‘‘prevalence’’ sufficient to material fact made in connection with the Commission’s ability to seek money for first- ground an economy-wide rulemaking, then a sale or promotion of a product that has a time violations of the FTC Act. The ‘‘prevalence’’ determination is in fact no negative option feature. Commission is still able, however, to seek meaningful guardrail on the Commission’s monetary remedies for violation of rules conduct at all, creating precisely the type of 37SBP at 37–38. issued under Section 18.49Here, the Final non-delegation concerns that Section 18’s 3815 U.S.C. 57a(b)(2)(A)(ii). Rule effectively transforms Section 5’s broad guardrails were meant to prevent. Canons of 39See Regulations.gov, Negative Option Rule prohibition on unfair or deceptive practices ‘‘avoidance’’ warn us to avoid adopting (ANPR), FTC–2019–0082, https:// into a Section 18 rule, allowing the interpretations that would render statutes www.regulations.gov/docket/FTC-2019-0082. Commission to expand its ability to seek unconstitutional.53To avoid precisely that 40The Commission published 1,162 unique money. Indeed, because negative option fate, ‘‘prevalence’’ must require more than comments. SBP at 18. See Regulations.gov, Negative features are widely used in a variety of what the Commission has shown here. Option Rule (NPRM), FTC–2023–0033–0001, industries, the Rule greatly expands that A final concern here. The Rule’s failure to https://www.regulations.gov/document/FTC-2023- ability. While I generally support legislation define with specificity the acts or practices 0033-0001. which are unfair or deceptive, combined 4115 U.S.C. 57a(b)(2)(A) (‘‘Prior to the publication with the rule’s preemption of inconsistent of any notice of proposed rulemaking pursuant to 4515 U.S.C. 45(n). paragraph (1)(A), the Commission shall publish an 46Cf. Katharine Gibbs School (Inc.) v. FTC, 612 advance notice of proposed rulemaking in the F.2d 658, 661–62 (2d Cir. 1979) (setting aside FTC 50Id. 57a(b)(3). Federal Register.’’). rule under section 18 that did not, among other 51Id. 42Cf. Dissenting Statement of Comm’r Andrew N. things, define unfair practices with sufficient 52SBP at 8. Ferguson, Joined by Comm’r Melissa Holyoak, In re specificity). 53See Clark v. Martinez, 543 U.S. 371, 381 (2005) Non-Compete Clause Rule, FTC Matter No. 47See, e.g., id. at 663 (‘‘When Congress provided (describing the canon of constitutional avoidance as P201200, at 20–22 (June 28, 2024), https:// that the Commission’s rules must define unfair and ‘‘resting on the reasonable presumption that www.ftc.gov/system/files/ftc_gov/pdf/ferguson- deceptive acts with specificity, it clearly intended Congress did not intend the alternative which raises noncompete-dissent.pdf (describing nondelegation that the Commission’s definition would be subject serious constitutional doubts’’); see also Adrian doctrine). to judicial review.’’). Vermeule, Saving Constructions, 85 Geo. L. J. 1945, 4315 U.S.C. 57a(a)(1)(B). 48AMG Capital Mgmt., LLC v. FTC, 593 U.S. 67, 1949 (1997) (providing examples of cases in which 44S. Rep. No. 93–1408 at 7702, 7755, 7763 (1974) 70 (2021). the Supreme Court construed a statute so as to (Conf. Rep.). 4915 U.S.C. 57b(a)(1). avoid a constitutional question). VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 90544 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations State laws,54seems likely to create confusion other billing models or less prescriptive Raising potential costs for consumers through and, ultimately, may harm consumers. The under existing law, such as ROSCA. an improperly promulgated rule is not a Second Circuit rebuked the Commission for These shifting incentives matter to desirable outcome at any time, but especially a similar approach in a prior rulemaking after consumers because the reason that honest not in an inflationary economy. Businesses the Commission had ‘‘fail[ed] . . . to define businesses adopt negative option billing is to and consumers will not be alone in bearing with specificity the acts or practices which lower transaction costs between consumers increased costs. Conducting the exemption are unfair or deceptive.’’55Absent ‘‘a and firms. For example, say I want to watch process will continue to drain FTC staff specification of the acts or practices which a particular streaming service at my resources—reducing the time that our the Commission deems deceptive,’’ the Court convenience. I don’t want to be bothered talented staff could devote to enforcing the explained that ‘‘the breadth of the with signing up and paying a fee each month clear authorities Congress has given us, such preemption provision is such that it places in that I log on; I want negative option billing— as ROSCA.63 issue an indefinite variety of [S]tate laws and a subscription—to reduce the friction in my A final point here. I also have concerns regulations’’ that were relevant to the streaming experience. Raising the transaction about the Commission’s economic analysis of underlying contractual relationships. costs will reduce a business’s sales and the the quantifiable benefits that may result from Similarly, here, State laws govern the types utility consumers derive from these services. the Rule’s substantive requirements. For of conduct today’s Rule attempts to In other words, in our good intentions, we example, the Commission’s estimate related regulate.56One risk of misguided Federal may harm the consumers and competition we to the upper bound of the Rule’s benefits for regulation is that it can confuse or jeopardize are supposed to protect.59 consumers who cancel subscriptions with in- State laws and enforcement. Given the Rule’s The Rule purports to address any person enrollment is based in part on the lack of specificity, it raises that concern. overbreadth by including, consistent with the complaints of 25 individual consumers in a
VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\15NOR3.SGM 15NOR3 Federal Register/Vol. 89, No. 221/Friday, November 15, 2024/Rules and Regulations 90545 issuing the ANPR, which was intended to (1) using clear legal authorities like ROSCA and the Commission is at its best when it focuses consolidate the requirements from various TSR. In my time at the Commission, I have on enforcing the law, not writing it.74But I laws the FTC enforces, providing businesses voted in support of numerous ROSCA cases, am not reflexively opposed to rulemaking who have to navigate this patchwork with including NGL,68Care.com,69and Legion where Congress has delegated the greater clarity, thereby benefiting both Media,70and numerous TSR cases, including Commission relevant authority and we act consumers and businesses; and (2) explore Career Step,71Carshield,72and Panda Benefit consistent with that authority.75 whether a Section 18 rule should fill any Services.73As I have said elsewhere, I believe Unfortunately, that is not what today’s Rule gaps ‘‘when marketers fail to make adequate
The second missed opportunity has taken 2423034, https://www.ftc.gov/legal-library/browse/ [FR Doc. 2024–25534 Filed 11–14–24; 8:45 am] place every day since the Commission cases-proceedings/242-3034-legion-media-llc-et-al- expanded the scope of the rulemaking. This ftc-v. BILLING CODE 6750–01–P Commission chose to devote scarce staff 71FTC v. Career Step, LLC, FTC Matter No. resources to this overbroad rulemaking—one 2323019, https://www.ftc.gov/legal-library/browse/ 74Prepared Statement of Comm’r Melissa that seems likely to be challenged in court, cases-proceedings/232-3019-career-step-llc-ftc-v. Holyoak, Fed. Trade Comm’n, Before the Subcomm. which will lead to even more taxpayer- 72FTC v. NRRM, LLC, FTC Matter No. 2223031, on Innovation, Data, and Commerce of the Energy funded expenses—rather than direct our https://www.ftc.gov/legal-library/browse/cases- and Commerce Comm., U.S. House of talented staff to draft a rule within the scope proceedings/2223031-carshield. Representatives, Concerning ‘‘The Fiscal Year 2025 of our authority or bring enforcement actions 73FTC v. Panda Benefit Servs., LLC, FTC Matter Federal Trade Commission Budget,’’ at 2–4 (July 9,
6784 FR 52393, 52394. services-llc-ftc-v.
VerDate Sep<11>2014 16:41 Nov 14, 2024 Jkt 265001 PO 00000 Frm 00071 Fmt 4701 Sfmt 9990 E:\FR\FM\15NOR3.SGM 15NOR3 2066 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations FEDERAL TRADE COMMISSION III. Section-by-Section Analysis 1. Comments on Costs
I. Background Commission Considered, Reasons for the (c) Foreign Hotels and Home Shares With
II. The Legal Standard for Promulgating the Alternative Was Chosen Abandoned Transactions Rule C. The NPRM’s Preliminary Regulatory ii. Short-Term Lodging: Estimated Costs of
VI. Paperwork Reduction Act home to see a sick loved one—that’s just
VII. Regulatory Flexibility Act—Final when businesses employ these pricing low price. As studies confirm, in such Regulatory Flexibility Analysis tactics. Often consumers finish the instances, consumers cannot shop for
I. Background misleading. These practices are switch pricing tactics for years. The rule frustrating for consumers when they When shopping for a good or service, ensures that when businesses advertise shop for travel and entertainment consumers want to know: how much? It a price for live-event tickets or short- especially because these purchases can is a bedrock principle of FTC law that term lodging, it is the total price, and be significant expenditures. This price is material to a consumer’s when they explain a fee or charge, the rulemaking record is replete with decision about whether to purchase a description is truthful. In simple terms: individual stories of consumers good or service. Consumers look for tell consumers the real price and do not inundated by bait-and-switch pricing prices to comparison shop and to weigh lie about the fees or charges. The final and misleading fees and charges.
what a good or service might be worth. rule does this by addressing two specific For example, an individual Most consumers also rely on price to and prevalent unfair and deceptive commenter lamented the pervasiveness answer critical budgeting questions practices: (1) bait-and-switch pricing of bait-and-switch pricing tactics across such as: Can I afford this hotel or short- that hides the total price of live-event everyday purchases:
term rental for my upcoming vacation? tickets and short-term lodging by Can I afford these concert tickets? Like almost every American consumer, I omitting mandatory fees and charges Unfortunately, consumers face have had to pay these ‘‘junk fees’’ in various from advertised prices, including widespread and growing unfair and circumstances. I consider myself reasonably through drip pricing, and (2) well informed, yet have been surprised by deceptive fee practices that make it misrepresenting the nature, purpose, them, because they keep [c]ropping up in much harder to find out: how much will amount, and refundability of fees or unexpected places. Like many, I’ve this cost? experienced them in hotels, with car rentals charges. The rule has two main There is nothing new about and telecom providers. In these instances, the businesses using bait-and-switch tactics consumer has no real recourse, as the 1FTC–2023–0064–0886 (Individual Commenter). to reel in and deceive consumers. The bargaining power is wholly unequal. 2FTC–2023–0064–1576 (Individual Commenter). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2068 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations components. First, the final rule actions, workshops, research, and information, on November 9, 2023, the requires businesses that offer a price for consumer education: (a) Commission published an NPRM, live-event tickets or short-term lodging misrepresenting or failing to disclose which proposed an industry-neutral to disclose the total price, inclusive of clearly and conspicuously, on any rule that would prohibit most mandatory charges, and to make advertisement or in any marketing, the misrepresenting the total price of goods sure that the total price is disclosed total price of any good or service for or services by omitting mandatory fees more prominently than other pricing sale; (b) misrepresenting or failing to from advertised prices and information, except the final amount of disclose clearly and conspicuously, on misrepresenting the nature and purpose payment. Second, the final rule any advertisement or in any marketing, of fees.7The NPRM described the prohibits misrepresentations about fees the existence of any fees, interest, comments received in response to the or charges in any offer, display, or charges, or other costs that are not ANPR and examined the Commission’s advertisement for live-event tickets and reasonably avoidable for any good or prior enforcement actions and other short-term lodging. service; (c) misrepresenting or failing to responses concerning unfair and The final rule is tailored to target disclose clearly and conspicuously deceptive fees. In the NPRM, the these specific unfair and deceptive whether fees, interest, charges, Commission stated that it has reason to pricing practices, while preserving products, or services are optional or believe that certain unfair or deceptive flexibility for live-event ticket and short- required; (d) misrepresenting or failing acts or practices involving fees are term lodging businesses. The rule does to disclose clearly and conspicuously prevalent, specifically: (1) not prohibit any one type of fee, nor any material restriction, limitation, or misrepresenting the total price of goods does it prohibit specific pricing condition concerning any good or and services by omitting mandatory fees practices such as itemization of fees or service that may result in a mandatory from advertised prices and (2) dynamic pricing. The rule does not charge in addition to the cost of the misrepresenting the nature and purpose require that all fees be included when good or service or that may diminish the of fees. After discussing the comments offering a price—just mandatory ones. consumer’s use of the good or service, and explaining its considerations in The rule gives businesses discretion to including the amount the consumer developing a proposed rule, the list optional fees selected by the receives; (e) misrepresenting that a Commission also posed specific consumer and government and shipping consumer owes payments for any questions for comment and provided charges separately. The discretion to set product or service the consumer did not explanation of the proposed rule text. prices remains squarely with agree to purchase; (f) billing or charging Finally, the NPRM set out the businesses; the rule simply requires that consumers for fees, interest, goods, Commission’s proposed regulatory text.8 they tell consumers the truth about services, or programs without express The Commission took public comments prices for live-event tickets and short- and informed consent; (g) billing or for sixty days, and extended the term lodging. charging consumers for fees, interest, comment period for an additional thirty goods, services, or programs that have days.9 A. Advance Notice of Proposed little or no added value to the consumer In response to the NPRM, the Rulemaking or that consumers would reasonably Commission received over 60,800 The Commission published, on assume to be included within the comments from stakeholders November 8, 2022, an advance notice of overall advertised price;and (h) representing a wide range of viewpoints proposed rulemaking (‘‘ANPR’’)3under misrepresenting or failing to disclose and industries.10These stakeholders the authority of section 18 of the Federal clearly and conspicuously, on any Trade Commission Act (‘‘FTC Act’’)4to advertisement or in any marketing, the 7Notice of proposed rulemaking; request for address certain unfair or deceptive acts nature or purpose of any fees, interest, public comment: Trade Regulation Rule on Unfair or practices involving fees. The ANPR charges, or other costs. or Deceptive Fees, 88 FR 77420 (Nov. 9, 2023). In accordance with section 18(b)(2)(C) of the FTC Act, described the Commission’s history of The Commission specifically sought 15 U.S.C. 57a(b)(2)(C), on October 10, 2023, the taking law enforcement action against, public comment on the prevalence of Commission sent notices to the House Committee and educating consumers about, unfair such practices and the costs and on Energy and Commerce and the Senate or deceptive practices relating to fees, benefits of a rule that would require Committee on Commerce, Science and Transportation seeking comment concerning the and it asked a series of questions to help upfront inclusion of mandatory fees utility and scope of the trade regulation rule inform the Commission about whether whenever consumers are quoted a price, proposed in the NPRM and including the full text such practices are prevalent and, if so, including by asking a series of questions of the NPRM. whether and how to proceed with a to solicit data and commentary. The 8NPRM, 88 FR 77483. notice of proposed rulemaking Commission took comments for sixty 9Notice of proposed rulemaking; extension of public comment period: Trade Regulation Rule on (‘‘NPRM’’). The Commission was days, extended the comment period by Unfair or Deceptive Fees, 89 FR 38 (Jan. 2, 2024). particularly interested in the following an additional thirty days,5and carefully 10Publicly available comments are available to practices that it identified as the considered the more than 12,000 view through Regulations.gov under Docket ID subjects of investigations, enforcement comments received.6 FTC–2023–0064 at https://www.regulations.gov/ document/FTC-2023-0064-0001/comment. As noted
Sen. Robert P. Casey, Jr.); FTC–2023–0064–3271 Justice on behalf of Fair Price, Fair Wage Coalition);
(U.S. Senate, Sen. Amy Klobuchar); FTC–2023– FTC–2023–0064–3259 (National Women’s Law 0064–2858 (U.S. House of Representatives, Rep. Center); FTC–2023–0064–3270 (Consumer 21See, e.g., FTC–2023–0064–2862 (Legal Aid Maxwell Alejandro Frost, Rep. Jimmy Gomez, Rep. Federation of America, National Consumer Law Foundation of Los Angeles); FTC–2023–0064–2892 Barbara Lee, Rep. Rashida Tlaib, Rep. Kevin Mullin, Center, and National Association of Consumer (Community Legal Services of Philadelphia); FTC– Rep. Dwight Evans, Rep. Judy Chu, Rep. Greg Casar, Advocates); FTC–2023–0064–3290 (U.S. Public 2023–0064–2920 (Colorado Poverty Law Project);
Rep. Dan Goldman, Rep. Salud Carbajal). Interest Research Group Education Fund); FTC– FTC–2023–0064–3090 (Atlanta Legal Aid Society, 12See, e.g., FTC–2023–0064–1411 (Arizona 2023–0064–3302 (Public Citizen). Inc.); FTC–2023–0064–3225 (CED Law); FTC–2023– House of Representatives, Rep. Analise Ortiz); FTC– 0064–3278 (Southeast Louisiana Legal Services). 17See, e.g., FTC–2023–0064–1431 (McPherson 2023–0064–2938 (Colorado House of Housing Coalition); FTC–2023–0064–2851 (Housing 22See, e.g., FTC–2023–0064–2840 (Indie Sellers Representatives, Rep. Naquetta Ricks); FTC–2023– Action Illinois); FTC–2023–0064–3102 (Corporation Guild); FTC–2023–0064–2901 (E-Merchants Trade 0064–2926 (Florida House of Representatives, Rep. for Supportive Housing); FTC–2023–0064–3235 Council, Inc.). Rita Harris); FTC–2023–0064–3081 (Florida House (National Housing Law Project). 23See, e.g., FTC–2023–0064–2856 (National of Representatives, Rep. Anna V. Eskamani); FTC– 18See, e.g., FTC–2023–0064–2915 (Voice of the Football League); FTC–2023–0064–3108 (Christian 2023–0064–3103 (Florida House of Representatives, Experienced); FTC–2023–0064–2696 (Safe Return L. Castle, Esq.; Mala Sharma, President, Georgia Rep. Angela Nixon); FTC–2023–0064–3117 Project); FTC–2023–0064–3253 (Fortune Society); Music Partners; and Dr. David C. Lowery, founder (Maryland House of Delegates, Del. Julie Palakovich FTC–2023–0064–3260 (Formerly Incarcerated, of musical groups Cracker and Camper Van Carr); FTC–2023–0064–2341 (Massachusetts House Convicted People & Families Movement, in Beethoven, and a lecturer at the University of of Representatives, Rep. Lindsay Sabadosa); FTC– collaboration with the Partnership for Just Georgia Terry College of Business); FTC–2023– 2023–0064–3072 (Michigan Senate and House of Housing); FTC–2023–0064–3283 (National 0064–3122 (Vivid Seats); FTC–2023–0064–3195 Representatives, Sen. Darrin Camilleri, Sen. Mary Consumer Law Center, Prison Policy Initiative, and (League of American Orchestras on behalf of itself Cavanagh, and Rep. Betsy Coffia); FTC–2023–0064– advocate Stephen Raher). and Association of Performing Arts Professionals, 3079 (Montana State Senate, Senate Democratic 19See, e.g., FTC–2023–0064–1939 (Tzedek DC, Carnegie Hall, Dance/USA, Folk Alliance Caucus, Sen. Pat Flowers, Sen. Susan Webber, Sen. David A. Clarke School of Law, University of the International, Future of Music Coalition, National Andrea Olsen, Sen. Edie McClafferty, Sen. Jen District of Columbia); FTC–2023–0064–2888 Performance Network, OPERA America, PAVA— Gross, Sen. Janet Ellis, Sen. Shane Morigeau, Sen. (Housing Policy Clinic, University of Texas School Performing Arts Venues Alliance, Performing Arts Ellie Boldman, Sen. Ryan Lynch, Sen. Christopher of Law); FTC–2023–0064–3146 (Institute for Policy Alliance, and Theatre Communications Group); Pope, Sen. Mike Fox, Sen. Denise Hayman, Sen. Integrity, New York University School of Law); FTC–2023–0064–3212 (TickPick, LLC); FTC–2023– Willis Curdy, and Sen. Mary Ann Dunwell); FTC– FTC–2023–0064–3255 (Carrie Floyd, Clinical 0064–3230 (Future of Music Coalition); FTC–2023– 2023–0064–3184 (New York Senate, Sen. Michael Teaching Fellow, Veterans Legal Clinic, and Mira 0064–3250 (National Independent Talent Gianaris); FTC–2023–0064–3123 (Syracuse, New Edmonds, Clinical Assistant Professor of Law, Civil- Organization); FTC–2023–0064–3266 (StubHub, York, City Auditor Alexander Marion); FTC–2023– Criminal Litigation Clinic, University of Michigan Inc.); FTC–2023–0064–3292 (National Association 0064–3149 (North Carolina House of Law School); FTC–2023–0064–3275 (Berkeley of Theatre Owners); FTC–2023–0064–3304 Representatives, Rep. Julie von Haefen); FTC–2023– Center for Consumer Law & Economic Justice, (Recording Academy); FTC–2023–0064–3306 (Live 0064–3237 (North Carolina House of University of California, Berkeley School of Law, Nation Entertainment and its subsidiary Representatives, Rep. Pricey Harrison). and Consumer Law Advocates, Scholars & Students Ticketmaster North America); FTC–2023–0064– 13See, e.g., FTC–2023–0064–3150 (Attorney Network); FTC–2023–0064–3268 (Housing & 3105 (Charleston Symphony); FTC–2023–0064– General of the State of California); FTC–2023–0064– Eviction Defense Clinic, University of Connecticut 3241 (National Association of Ticket Brokers). 3215 (Attorneys General of the States of North School of Law). 24See, e.g., FTC–2023–0064–3077 (Far Horizons Carolina and Pennsylvania, along with Attorneys 20See, e.g., FTC–2023–0064–1294 (James J. Travel); FTC–2023–0064–3094 (American Hotel & General of the States or Territories of Arizona, Angel, Ph.D., CFP, CFA, Professor, Georgetown Lodging Association); FTC–2023–0064–3106 Colorado, Connecticut, Delaware, District of University, McDonough School of Business); FTC– (American Society of Travel Advisors, Inc.); FTC– Columbia, Hawaii, Illinois, Maine, Michigan, 2023–0064–1467 (Richard J. Peltz-Steele, 2023–0064–3204 (Expedia Group); FTC–2023– Minnesota, New Jersey, New York, Oklahoma, Chancellor Professor, University of Massachusetts 0064–3244 (Vacation Rental Management Oregon, Vermont, Washington, and Wisconsin). Law School). Association). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2070 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations fees.’’25Other mass mailings contained advisors;32academics;33 advertising platform;40hospitality similar comments in support. In a mass representatives from auto dealers and groups, including hotel41and restaurant mailing of about 344 comments, service providers;34app-based delivery associations;42funeral and cemetery consumer commenters made near- platforms;35financial and real estate providers;43gaming associations;44 identical statements to the settlement services;36franchised telecommunications providers;45live- aforementioned mass mailing and businesses;37representatives of housing event venues;46a law firm;47providers added: ‘‘Junk fees are monies a business providers,38including apartment of communications services to tacks on at the end of the purchasing associations39and a housing incarcerated people;48and other process instead of being transparent sectors.49The commenters argued that about the full price upfront. These fees 0064–3208 (FreedomWorks); FTC–2023–0064–3267 the FTC failed to establish the are common when people are (National Retail Federation). prevalence of the defined unfair and purchasing airline and concert tickets, 32See, e.g., FTC–2023–0064–3100 (Civitas deceptive practices and failed to Advisors, Inc.); FTC–2023–0064–3126 (Tax booking hotel rooms, paying utility conduct an adequate cost-benefit Foundation); FTC–2023–0064–3258 (National bills, and renting apartments.’’26A mass Taxpayers Union Foundation). analysis, and that the proposed rule mailing submitted by about 315 33See, e.g., FTC–2023–0064–2891 (Mary would interfere with established pricing consumer commenters stated, ‘‘I support Sullivan, George Washington University, Regulatory models, could not be applied to all cracking down on hidden junk fees that Studies Center); FTC–2023–0064–3264 (Mark J. pricing scenarios, would overlap with Perry, Ph.D., Professor Emeritus of Economics at cost Americans billions of dollars each other laws and regulations, or would University of Michigan-Flint and Senior Fellow year.’’27A mass mailing by about Emeritus at the American Enterprise Institute). exceed the FTC’s rulemaking authority nineteen consumer commenters stated, 34See, e.g., FTC–2023–0064–3121 (National or jurisdiction. ‘‘For too long, individuals have been Independent Automobile Dealers Association); Members of the restaurant industry subjected to misleading practices, such FTC–2023–0064–3189 (National Automobile voiced opposition to the proposal. A Dealers Association); FTC–2023–0064–3206 (Motor as the omission of mandatory fees from Vehicle Protection Products Association, mass mailing from about 4,650 advertised prices and misrepresentation Guaranteed Asset Protection Alliance, and Service of the nature and purpose of fees. These Contract Industry Council); FTC–2023–0064–3276 2023–0064–3313 (Property Management practices not only erode trust but also (Automotive Service Association). Association of Michigan). hinder informed decision-making by 35See, e.g., FTC–2023–0064–3263 (Flex 40FTC–2023–0064–3289 (Zillow Group). Association); FTC–2023–0064–3202 (TechNet). 41See, e.g., FTC–2023–0064–3262 (Skyscanner); consumers.’’28A mass mailing by about 36See, e.g., FTC–2023–0064–1425 (Iowa Bankers FTC–2023–0064–3293 (Travel Technology thirteen consumer commenters simply Association); FTC–2023–0064–1941 (Independent Association). urged: ‘‘Stop junk fees!’’29Additional Bankers Association of Texas); FTC–2023–0064– 42See, e.g., FTC–2023–0064–2918 (Elite Catering comments from individual consumers 2574 (BattleLine LLC via Investor Protection + Event Professionals); FTC–2023–0064–3078 Initiative); FTC–2023–0064–2893 (America’s Credit (Washington Hospitality Association); FTC–2023– also supported the rule.
C. Informal Public Hearing lodging industries. As documented by raised in response to the NPRM.
requested the opportunity to make an 53The interested parties were: ACA Connects— The Commission notes that the harms oral presentation if the Commission was America’s Communication Association; American of bait-and-switch pricing and the to hold an informal hearing at others’ Bankers Association and Consumer Bankers misrepresentation of fees and charges requests. A number of commenters, Association; U.S. Chamber of Commerce; NCTA— including several who requested an The internet & Television Association; International are particularly pronounced in Franchise Association; BattleLine LLC; IHRSA— industries such as these, in which most informal hearing, proposed potential The Global Health & Fitness Association; National transactions occur online. Consumers disputed issues of material fact for the Taxpayers Union Foundation; Consumer Federation trying to comparison shop across Commission’s consideration.52The of America, representing a coalition of 52 national Commission reviewed these potential and state consumer advocacy groups; Consumer multiple websites, or even on the same Federation of America with National Consumer website, when deciding what tickets to issues and concluded in its Informal Law Center and National Association of Consumer purchase or where to travel are unable Hearing Notice that there were no Advocates; Community Catalyst, representing a to do so effectively because some disputed issues of material fact to coalition of 33 health and consumer protection resolve at the hearing. advocacy groups; National Housing Law Project, businesses hide the true total price and representing a coalition of 39 housing justice instead force consumers to go to On April 24, 2024, the Commission advocacy organizations; National Consumer Law different sites and click through conducted an informal public hearing. Center, Prison Policy Initiative, and Stephen Raher; multiple web pages for each offer to In the Informal Hearing Notice, which Formerly Incarcerated, Convicted People & Families Movement; Truth in Advertising, Inc.; National learn the true total price. was formally approved by vote of the Consumer Law Center; and Fair Price, Fair Wage Commission, the Commission’s Chief Coalition. Consumer harm is also pronounced in Presiding Officer, the Chair, designated 54The interested parties that made documentary these industries because the offered the Honorable Jay L. Himes, an submissions in connection with the informal goods and services are often identical Administrative Law Judge for the hearing were: National Taxpayers Union (as is the case with live-event tickets), Foundation; Community Catalyst; National Housing or nearly identical (as is the case with Law Project; Consumer Federation of America; U.S.
Connects); FTC–2023–0064–3139 (American 56American Bankers Association and Consumer Bankers Association and Consumer Bankers Bankers Association and the U.S. Chamber of 5815 U.S.C. 57a(b)(3). In addition, section 22(b)(2) Association); FTC–2023–0064–3294 (International Commerce did not appear at the Informal Hearing of the FTC Act, 15 U.S.C. 57b–3(b)(2), requires the Franchise Association); FTC–2023–0064–3233 despite being given the opportunity to do so. Commission to prepare a final regulatory analysis, (NCTA—The internet & Television Association). 57See 15 U.S.C. 57a(a)(1)(B). which it discusses in section V. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2072 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations across offers, and what matters most is legislative and regulatory action taken misrepresentations regarding the nature the total price. by multiple States to address unfair or and purpose of fees.62The takeaway In the future, the Commission may deceptive fees.
address these unfair and deceptive To support its prevalence (alleging defendant did not adequately disclose the practices across industries as discussed determination herein as to the economy limitations of defendant’s data plan offerings and in the NPRM. For now, however, the generally, and as to the live-event subsequently charged high cancellation fees for consumers who chose to end their contracts);
Commission will address unfair and ticketing and short-term lodging Complaint ¶¶1, 26, 39–40, FTC v. Millennium deceptive pricing practices in other industries specifically, the Commission Telecard, Inc., No. 2:11–cv–02479 (D.N.J. May 2, industries using its existing section 5 reiterates that it has a long history of 2011) (alleging defendants deceptively marketed authority. enforcement actions, as well as a prepaid credit calling cards by failing to adequately disclose fees that substantially limited the number plethora of other information, indicating A. Prevalence of Acts or Practices of minutes consumers had purchased); Complaint a widespread pattern of bait-and-switch ¶15, FTC v. CompuCredit Corp., No. 1:08–cv– Addressed by the Rule pricing practices, including drip pricing 01976 (N.D. Ga. June 10, 2008) (alleging in part that As discussed herein, and in the and misleading fees or charges. In defendants misrepresented the credit limits on various credit cards and failed to disclose fees NPRM, the Commission finds that addition, the Commission’s prevalence charged upfront). unfair or deceptive pricing practices determination is further supported by 62See, e.g., Complaint ¶¶4–5, 106–14, 118–23, involving bait-and-switch pricing and the Commission’s workshops and Invitation Homes, Inc., No. 24–cv–04280 (alleging misleading fees or charges are prevalent warning letters relating to bait-and- that defendant, among other deceptive and unfair throughout the economy and affect, or switch pricing and misleading fees or practices, misled consumers about fees by using confusing and buried language); Complaint ¶¶39– have the potential to affect, virtually charges; the behavioral and economic 46, Vonage Holdings Corp., No. 3:22–cv–6435; every purchasing transaction a research documenting consumer harm Complaint ¶¶61–63, FTC v. Benefytt Techs., Inc., consumer undertakes, including from these practices; and consumer No. 8:22–cv–1794 (M.D. Fla. Aug. 8, 2022) (alleging in part that defendants bundled and charged fees decisions about basic goods or services; surveys and reports. The Commission for unwanted products with sham health insurance where to live, dine, stay, or travel; and also relies on the great majority of the plans); Complaint ¶¶17–20, FTC v. Passport Auto what events to attend. Specifically, the more than 60,800 comments filed in Grp., Inc., No. 8:22–cv–02670 (D. Md. Oct. 18, 2022) Commission finds that the following response to the NPRM—one of the (alleging in part that defendants advertised vehicle prices that did not include redundant fees ranging unfair or deceptive practices relating to largest number of comments filed in any from hundreds to thousands of dollars for fees are prevalent generally throughout Commission rulemaking to date— inspection, reconditioning, preparation, and the economy and specifically in the including comments by consumers, certification); Complaint ¶¶3, 33, 41, FTC v. N. Am. live-event ticketing and short-term consumer groups, academics, Auto. Serv., Inc. (‘‘Napleton Auto’’), No. 1:22–cv– 01690 (E.D. Ill. Mar. 31, 2022) (alleging defendants lodging industries: (1) bait-and-switch businesses, and government officials charged consumers for additional products and pricing practices that hide the total highlighting the prevalence of these services without their consent and misrepresented price of goods or services by omitting unfair and deceptive practices and the fees as mandatory, resulting in artificially low mandatory fees and charges from urging the Commission to promulgate a advertised prices); Complaint ¶¶50–51, Amazon.com, Inc. (‘‘Amazon Flex’’), No. C–4746 advertised prices, including through final rule to combat them. (FTC June 9, 2021) (alleging respondents falsely drip pricing, and (2) misrepresenting the As explained in the NPRM, the represented that 100% of tips would go to the nature, purpose, amount, and Commission has a long history of driver in addition to the pay respondents offered drivers); Complaint ¶¶37–39, FTC v. Lead Express, refundability of fees or charges. enforcement actions targeting unfair and Inc., No. 2:20–cv–00840 (D. Nev. May 11, 2020)
(ANPR) (Consumer Federation of America noted 11, 2017) (alleging in part that defendant charged third-party charges to the telephone bills of that the Washington Attorney General’s Hidden Fee maintenance and usage fees to consumers who were consumers); Amended Complaint ¶¶21–22, FTC v. Survey showed that consumers experienced unable to use all, or even a portion of, the funds Websource Media, LLC, No. 4:06–cv–01980 (S.D. unexpected fees in a wide range of industries.); of their prepaid debit cards); see also Complaint Tex. June 21, 2006) (alleging defendants placed FTC–2022–0069–6113 (ANPR) (UnidosUS cited ¶¶24–25, 29, 40–42, FTC v. AT&T Mobility LLC, charges on consumer telephone bills despite surveys or studies by itself, the Financial Health No. 3:14–cv–04785 (N.D. Cal. Oct. 28, 2014) representations that there would be no charges or VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2073 from this enforcement history is clear— conference, titled ‘‘The Economics of hotel’s price. Separating the room rate from businesses cannot hide or misrepresent Drip Pricing,’’ to bring together the resort fee increases the cognitive costs of the true cost of a good or service or economists and marketing academics to remembering the hotel’s price. When it mislead consumers about the nature, ‘‘examine the theoretical motivation for becomes more costly to search and evaluate an additional hotel, a consumer’s choice is purpose, amount, or refundability of drip pricing and its impact on either to incur higher total search and fees or charges. Some commenters consumers, empirical studies, and cognitive costs or to make an incomplete, less suggested consent orders are not cease- policy issues pertaining to drip informed decision that may result in a more and-desist orders that the Commission pricing.’’64Several psychological costly room, or both.69 can rely upon to support a finding of theories were discussed at this The report observed that hotels could prevalence, but that is incorrect. The conference, and these theories explain eliminate these costs to consumers by FTC Act makes clear when it intends to why consumers cannot reasonably avoid including the resort fee in the advertised exclude consent orders from the ambit making errors when the total price is not price; bundling the same resort services of ‘‘cease and desist orders,’’ and does revealed upfront.65Following the with the room and charging the same not do so in section 18.63 workshop, Commission staff sent In addition to the Commission’s warning letters to hotels and online total price; listing the components of the enforcement actions, for more than a travel agents that were not adequately total price separately, as long as the total decade, the Commission has engaged disclosing resort fees or including those price is the most prominently disclosed with the public and issued guidance to fees in the total price.66These hotels price; or changing to unbundled, industry on issues related to bait-and- and online travel agents were employing optional resort services which would switch tactics, including drip pricing, drip pricing tactics as well as another not be included in the advertised and the misrepresentation of fees or bait-and-switch pricing tactic, price.70Finally, the report did not find charges. The Commission first engaged partitioned pricing, to inadequately ‘‘any benefits to consumers from with the public on the concept of drip disclose resort fees and hide the total separately-disclosed mandatory resort pricing in 2012 by convening a price of a hotel stay. Partitioned pricing fees that could not be achieved by first consists of dividing a price into listing the total price and then obligations); FTC v. Mercury Mktg. of Del., Inc., No. multiple components without ever disclosing the resort fee.’’71 00–cv–3281, 2004 WL 2677177, *1 (E.D. Pa. Nov. disclosing the total and leaving In 2019, the Commission hosted a 22, 2004) (finding defendants billed consumers consumers to figure out the true total workshop and issued a staff perspective without their consent after misleading consumers price on their own. Hotels, for example, report that examined pricing and fees in about introductory internet packages); Complaint ¶¶25–27, FTC v. Stewart Fin. Co., No. 1:03–cv– might separately list the room rate and the live-event tickets market.72The 02648 (N.D. Ga. Sept. 4, 2003) (alleging in part that ‘‘resort fee’’ but never add them up and report observed, d w e i f t e h n c d o a n n s t u s m pa e c r k lo ag a e n s u a n n d d is i c n lo s s o e m d e a d c d as -o es n d p e r s o c d r u ib c e ts quote an all-inclusive total price. In On most primary and resale those add-on products as mandatory); Complaint 2017, the Commission’s Bureau of platforms, the ticket price a consumer ¶¶19–21, 24, FTC v. Hold Billing Serv., Ltd., No. Economics published a report that first sees is not what the consumer will SA–98–CA–0629–FB (W.D. Tex. July 16, 1998) reviewed the existing literature on drip pay. Mandatory fees, such as ‘venue’ (alleging defendants had previously added third- pricing and partitioned pricing and party charges to consumers’ phone bills without and ‘ticket processing’ fees, bulk up the examined the costs and benefits of permission by using sweepstakes entry forms as price–often by as much as thirty percent contracts to authorize charges); Complaint ¶¶18, disclosing hotel resort fees.67The report . . . . The late disclosure of fees 33, 56–58, FTC v. Lake, No. 8:15–cv–00585–CJC– found that ‘‘[u]nless the total price is increases search costs for consumers JPR (C.D. Cal. Apr. 14, 2015) (alleging defendants disclosed up front, separating resort fees misrepresented that trial loan payments or and makes it harder to comparison from the room rate is unlikely to result reinstatement fee payments would be held in shop.73 escrow and refunded to the consumer if the loan in benefits that offset the likely harm to modification was not approved); FTC v. Hope for consumers.’’68Specifically, The report remarked that ‘‘[a]ll of the Car Owners, LLC, No. 2:12–CV–778–GEB–EFB, workshop panelists who discussed the separating mandatory resort fees from posted 2013 WL 322895, at *3–4 (E.D. Cal. Jan. 24, 2013) fees issue, including each participating (finding that the FTC sufficiently stated a claim for room rates without first disclosing the total ticket seller that does not currently misrepresentation of the refundability of vehicle price is likely to harm consumers by loan modification fees and entering default increasing the search costs and cognitive provide upfront all-in pricing, favored judgment); Amended Complaint ¶¶38–39, 58–60, costs of finding and choosing hotel requiring all-in pricing through federal FTC v. U.S. Mortg. Funding, Inc., No. 9:11–cv– accommodations. Forcing consumers to click legislation or rulemaking.’’74 80155–JIC (S.D. Fla. July 26, 2011) (alleging through additional web pages to see a hotel’s The Commission’s finding of defendants misrepresented that an upfront loan resort fee increases the cost of learning the modification fee was refundable); FTC v. Nat’l Bus. prevalence is further supported by the Consultants, Inc., 781 F. Supp. 1136, 1143 (E.D. La. complementary enforcement actions 1991) (finding that ‘‘defendants’ misrepresentations 64Fed. Trade Comm’n, The Economics of Drip brought by its law enforcement partners, regarding the ease with which the ‘performance Pricing (May 21, 2012), https://www.ftc.gov/news- deposit’ could be refunded composed a large part events/events/2012/05/economics-drip-pricing. most of which have resulted in orders of the various and sundry misrepresentations’’). 65See, e.g., Fed. Trade Comm’n, The Economics prohibiting bait-and-switch pricing and 63Compare 15 U.S.C. 45(m) (excluding consent of Drip Pricing: Conference Transcript 76–111 (May misrepresenting fees and charges in the orders from the type of cease and desist orders that 21, 2012), https://www.ftc.gov/sites/default/files/ short-term lodging, live-event ticketing, could support an action for civil penalties under 15 documents/public_events/economics-drip-pricing/ delivery services, rental cars, travel, and U.S.C. 45(m)(1)(B)) and 108 Stat. 1691 (1994) transcript.pdf. (amending 15 U.S.C. 45(m) to add ‘‘other than a 66Press Release, Fed. Trade Comm’n, FTC Warns tax filing preparation services consent order’’ after the term ‘‘cease and desist Hotel Operators that Price Quotes that Exclude order’’) with 15 U.S.C. 57a(b)(3) (stating that the ‘‘Resort Fees’’ and Other Mandatory Surcharges 69Id. Commission may make a determination of May Be Deceptive (Nov. 28, 2012), https:// prevalence if ‘‘it has issued cease and desist orders www.ftc.gov/news-events/news/press-releases/2012/ 70Id. regarding such acts or practices or any other 11/ftc-warns-hotel-operators-price-quotes-exclude- 71Id. information available to the Commission resort-fees-other-mandatory-surcharges-may-be. 72Fed. Trade Comm’n, ‘‘That’s the Ticket’’ indicat[ing] a widespread pattern of unfair or 67Mary Sullivan, Fed. Trade Comm’n, Economic Workshop: Staff Perspective 4 (May 2020), https:// deceptive acts or practices’’). Even if consent orders Analysis of Hotel Resort Fees 4 (2017), https:// www.ftc.gov/system/files/documents/reports/thats- and the investigations that lead up to them are not www.ftc.gov/system/files/documents/reports/ ticket-workshop-staff-perspective/staffperspective_ ‘‘cease and desist orders,’’ in making a economic-analysis-hotel-resort-fees/p115503_hotel_ tickets_final-508.pdf. determination of prevalence, the Commission can resort_fees_economic_issues_paper.pdf. 73Id. still rely upon them as ‘‘other information.’’ 68Id. 74Id. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2074 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations industries.75Indeed, a group of State Attorneys General wrote in support of a which further support its finding of finding of prevalence of these practices prevalence.
Aug. 13, 2024) (alleging in part that defendant lodging providers.76They have widespread practice of misleading charges a fee as a tax, fails to disclose prices until after consumers have elected to use defendant’s attempted to address some, but not all, consumers about total prices and fees or service, and advertises hourly prices and then of these fees in their own States.77The charges further strengthen the requires consumers to pay for multiple hours at a State Attorneys General cited a number Commission’s prevalence finding. For minimum); Complaint ¶¶3–4, District of Columbia of cases across industries demonstrating example, U.S. Senator Amy Klobuchar v. StubHub, Inc., No. 2024–CAB–004794 (D.C.
Super. Ct. July 31, 2024) (alleging defendant uses that bait-and-switch pricing and stated that she held a hearing focusing drip pricing and entices consumers to shop for misleading fees are ‘‘a chronic, prolific on the lack of transparency in the live- tickets by displaying artificially low prices and problem confronting many consumers event ticketing industry as well as a revealing mandatory fees later in the checkout across numerous sectors of the hearing on fees in the rental housing process which defendant also misrepresents the purpose of); Consent Decree ¶¶10–24, Arizona v. economy.’’78Further, they agreed with market that prevent renters from having Cox Enterprises, Inc., No. CV–2023–019752 (Ariz. the Commission’s assertion that meaningful opportunities to compare Sup. Ct. Jan. 2, 2024) (alleging defendants failed to ‘‘charges that misrepresent their nature prices.81U.S. Senator Robert Casey disclose additional fees to consumers who and purpose are unfair and deceptive discussed a report released on January purchased services through long-term contracts based on ‘‘price-lock’’ guarantee); Assurance of because they mislead consumers and 24, 2024, ‘‘Additional Charges May Voluntary Compliance ¶2, Texas v. Marriott Int’l, make it more difficult for truthful Apply: How Big Corporations Use Inc., No. 2023–CI09717 (Tex. Dist. Ct. May 16, businesses to compete on price.’’79The 2023) (alleging defendant misrepresented various fees, including resort fees, and did not include all Commission takes note of legislative that the sellers and resellers of live-event tickets disclose the total cost of a ticket, upfront, and mandatory fees in the advertised room rate in and regulatory efforts in Minnesota, clearly and conspicuously disclose the amount of violation of the Texas Deceptive Trade Practices California, Pennsylvania, New York, the price that is made up of fees and other charges); Act); Plaintiff’s Original Pet. ¶1, Texas v. Hyatt Massachusetts, and North Carolina to An Act Ensuring Transparent Ticket Pricing, H. Hotels Corp., No. C2023–0884D (TX. Dist. Ct. May 15, 2023) (alleging defendant did not include combat hidden and misleading fees80 259, 193rd Gen. Court (Mass. 2023) (proposed legislation requiring in part that the sellers and mandatory fees in advertised room rates in violation resellers of live-event tickets disclose the total cost of the Texas Deceptive Trade Practices Act); services and used a complex pricing scheme to inclusive of all ancillary fees that must be paid and Consent Order ¶20, District of Columbia v. mislead consumers), https://www.ag.state.mn.us/ the portion of the ticket price that represents a Grubhub Holdings, Inc., No. 2022 CA 001199 B Office/Communications/2020/01/08_ service charge or any other fee or surcharge); H.B. (D.C. Super. Ct. Jan. 4, 2023) (alleging in part that CenturyLinkSettlement.asp.; Assurance of 714 (2023–2024 Session) (N.C. 2023) (proposed defendants misrepresented menu prices to Voluntary Compliance ¶¶1–12, Commonwealth v. legislation that requires, among other things, that consumers and deceptively advertised that Event Ticket Sales, LLC, No. 201101873 (Pa. providers of short-term lodging and live-event consumers could ‘‘order online for free’’); Commw. Ct. Nov. 19, 2020) (alleging defendants ticketing clearly display the total price of goods and Assurance of Voluntary Compliance ¶4, failed to advertise ticket prices including service services inclusive of mandatory fees a consumer Commonwealth v. Omni Hotels Mgmt., GD–23– fees and failed to clearly disclose an itemization of would incur during a transaction); see also 2023 013056 (Pa. Commw. Ct. Nov. 9, 2023) (alleging the total cost); Assurance of Voluntary Compliance Minn. H.B. 3438 (Enacted May 20, 2024) (stating defendants failed to advertise room prices including ¶7, CenturyLink, Inc., No. 19–CV–56401 (Or. Cir. that it is a deceptive trade practice for a business mandatory fees, misleading consumers); Assurance Ct., 2019) (alleging defendants charged undisclosed to not include all mandatory fees or surcharges of Voluntary Compliance ¶2, Commonwealth v. fees and failing to disclose all mandatory fees and when advertising, displaying or offering a price for Choice Hotels Intl., Inc., GD–23–011023 (Pa. charges); Agreed Final J. ¶8, Texas v. Guided goods or services); Cal. S.B. 478 (2023–2024 Regular Commw. Ct. Sept. 21, 2023) (alleging defendants Tourist, LLC, No. D–1–GN–19–001618 (Tex. Dist. Session) (Enacted Oct. 7, 2023) (amending the failed to advertise room prices including mandatory Ct. Mar. 26, 2019) (enjoining defendant from California Consumer Legal Remedies Act to state fees misleading consumers); Assurance of advertising ticket prices other than the total ticket that it is unlawful to advertise, display, or offer a Voluntary Compliance ¶¶1–5, Commonwealth v. price, including all mandatory fees); Settlement price for a good or service that does not include all RYADD, Inc., No. 2022–07262 (Pa. Commw. Ct. Agreement ¶8(b)–(c), Florida v. Dollar Thrifty Auto. mandatory fees or charges other than taxes or fees Sept. 8, 2022) (alleging defendants failed to Grp., Inc., No. 16–2018–cv–005938 (Fla. Cir. Ct., imposed by a government on the transaction); Cal. advertise ticket prices including service fees and Jan. 14, 2019) (alleging in part that defendant S.B. 1524 (2023–2024 Regular Session) (clarifying failed to clearly disclose an itemization of the total misrepresented optional charges as mandatory and and amending S.B. 478 to include that additional cost); Complaint ¶1, Commonwealth v. Mariner did not sufficiently disclose toll-related fees). fees such as service charges for food services Finance, LLC, No. 2:22–cv–03235–MAK (E.D. Pa. Additionally, Intuit recently entered a multistate businesses including bars and restaurants could Sept. 6, 2022) (alleging defendant charged settlement of allegations that it misrepresented its appear separately so long as they were displayed on consumers for hidden add-on products without tax filing products would come at no cost. the menu); H.B. 636 (2023–2024) (Pa. 2023) consumer knowledge and in some cases after Assurance of Voluntary Compliance, (Engrossed Oct. 19, 2023) (proposed legislation explicit rejection); Consent Order ¶6, District of Commonwealth v. Intuit Inc., No. 220500324 (Pa. amending the Pennsylvania Unfair Trade Practices Columbia v. Maplebear, Inc., No. 2020 CA 003777B Ct. C.P. May 4, 2022). and Consumer Protection Law to require the (D.C. Super. Ct. Aug. 19, 2022) (prohibiting 76FTC–2023–0064–3215 (Attorneys General of disclosure of all mandatory fees and charges defendant from misrepresenting the nature and the States of North Carolina and Pennsylvania, included in the advertised and displayed price of purpose of fees applied to consumers’ orders); along with Attorneys General of the States or any good or service); Conn. Gen. Stat. sec. 53–289a Assurance of Voluntary Compliance ¶2, Territories of Arizona, Colorado, Connecticut, (2023) (requiring conspicuous disclosure in the Commonwealth v. Marriott Int’l, Inc., No. GD–21– Delaware, District of Columbia, Hawaii, Illinois, advertisement of total price of live-event tickets 014016 (Pa. Ct. C.P. Nov. 16, 2021) (alleging including service charges); Conn. Gen. Stat. sec. 53– Maine, Michigan, Minnesota, New Jersey, New defendant misrepresented its room rates by failing 289a (2023) (requiring conspicuous disclosure in York, Oklahoma, Oregon, Vermont, Washington, to include items such as mandatory fees in its the advertisement of total price of live-event tickets and Wisconsin). The Attorneys General also pricing); Consent Order ¶3.1–3.18, Drivo LLC, N.J. including service charges); SB 329 (2024 Reg. Sess.) pointed to prevalence of these practices in Div. Consumer Aff. (Sept. 16, 2020) (prohibiting (Md.) (requiring all-in pricing throughout the residential leasing, payday lending, internet unfair and deceptive practices relating to damage purchase process of a live-event ticket); SB 329 applications, online shopping, automobile rentals, fees and third party reservation fees for rental (2024 Reg. Sess.) (Md.) (requiring all-in pricing carpet cleaners, dietary supplement sellers, moving vehicles); Press Release, Off. Minn. Att’y Gen., throughout the purchase process of a live-event companies, gyms, travel companies, outlet stores, Attorney General Ellison Obtains Relief for More ticket); 1510 Mass. Reg. 5 (Dec. 8, 2023) (Proposed and online auctions.
than 30,000 Comcast/Xfinity Customers (Jan. 15, Regulations 940 C.M.R. 38.00: Unfair and Deceptive 2020) (alleging in part that defendants 77Id. (The Attorneys General highlighted actions Fees) (proposed regulation stating that it is an misrepresented prices for their services and added each has taken in their own states to address unfair and deceptive practice to misrepresent or fail services without consumer consent), https:// financial services fees, hotel fees, live-event ticket to disclose at the time of initial presentation of the www.ag.state.mn.us/Office/Communications/2020/ fees, rental housing fees, auto rental fees, and price of any product the total price of that product 01/15_ComcastXfinity.asp; Press Release, Off. telecommunication fees.) inclusive of all fees, interest, charges, or other Minn. Att’y Gen., Attorney General Ellison Obtains 78Id. expenses necessary or required in order to complete Nearly $9 Million Settlement with CenturyLink for 79Id. the transaction). Overcharging Minnesota Customers (Jan. 8, 2020) 80N.Y. Arts & Cult. Aff. Law sec. 25.01–25.33 81FTC–2023–0064–3271 (U.S. Senate, Sen. Amy (alleging defendant misrepresented the price of its (McKinney 2023) (Effective Jun. 30, 2022) (requiring Klobuchar). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2075 Hidden Fees to Nickel, Dime, and The Commission also takes notice of filed against businesses in the live-event Deceive American Families,’’ tracking the work of its international ticketing, short-term lodging, banking, the variety of junk fees facing counterparts, as well as private lawsuits and delivery service industries Pennsylvania families, including in the in the United States concerning unfair challenging these practices lend further short-term lodging industry.82A group and deceptive fee practices. Regulatory support to the Commission’s prevalence of Congressional representatives raised actions in Canada, Australia, the determination.90 concerns regarding misleading fees and European Union, and the United a lack of price transparency in the rental Kingdom with respect to such conduct f000dc6f448/estimating-the-prevalence-and-impact- housing market.83Concerns over unfair include paragraph 74.01(1.1) of the of-online-drip-pricing.pdf; and UK Department for and deceptive pricing were also raised Canadian Competition Act,86the Business & Trade, Government response to consultation on ‘‘Smarter Regulation: Consultation by a variety of State legislators and Australian Competition and Consumer on Improving Price Transparency and Product officials.84There has also been Protection Act of 2010,87EU Directive Information for Consumers’’ (2023), https:// significant bipartisan interest in passing 2005/29/EC of the European Parliament www.gov.uk/government/consultations/smarter- legislation targeting fees in the live- and of the Council,88and the UK Digital regulation-improving-price-transparency-and- product-information-for-consumers/outcome/ event ticketing and short-term lodging Markets, Competition and Consumers government-response-to-consultation-on-smarter- industries.85 Act 2024.89In addition, private lawsuits regulation-improving-consumer-price-transparency- and-product-information-for- consumers#introduction.
Rep. Jimmy Gomez, Rep. Barbara Lee, Rep. Rashida price that is not attainable due to fixed obligatory 2021–CA–00477–B (D.C. Super. Ct. Feb. 18, 2021)
Tlaib, Rep. Kevin Mullin, Rep. Dwight Evans, Rep. charges or fees constitutes a false or misleading (alleging defendant misled consumers into Judy Chu, Rep. Greg Casar, Rep. Dan Goldman, and representation’’), https://laws.justice.gc.ca/eng/acts/ believing hotel rooms were cheaper that they Rep. Salud Carbajal stated that the rule would help C-34/FullText.html. actually were by using drip pricing that hid resort eliminate some of the barriers to those seeking 87Competition and Consumer Act 2010, Vol. 4, fees from advertised daily room rates); Class Action rental housing as renters ‘‘often face ambiguous or Sched. 2, Ch. 3, P. 3–1, Sec. 48, Ch. 4, P. 4–1, Sec. Complaint ¶¶18, 31, 43, 69–71, Lee v. Ticketmaster misleading fees’’ and ‘‘bring much needed 166 (Austl.) (prohibiting ‘‘mak[ing] a representation LLC, No. 3:18–cv–05987–VC (N.D. Cal. Sept. 28, transparency to the rental housing market.’’). with respect to an amount that, if paid, would 2018) (alleging, in part, that defendants were 84FTC–2023–0064–2341 (Massachusetts House of constitute a part of the consideration for the supply unjustly enriched through service charges added to Representatives, Rep. Lindsay Sabadosa); FTC– of the goods or services unless the person also resale tickets); Second Amended Class Action 2023–0064–1411 (Arizona House of specifies, in a prominent way and as a single figure, Complaint ¶¶1–2, Wang v. StubHub, Inc., No. Representatives, Rep. Analise Ortiz); FTC–2023– the single price for the goods or services’’), https:// CGC–18564120 (Cal. Super. Ct. Feb. 25, 2019) 0064–3072 (Michigan Senate and House of www.legislation.gov.au/C2004A00109/latest/text. (alleging defendant intentionally hid additional fees Representatives, Sen. Darrin Camilleri, Sen. Mary 88Directive 2005/29/EC of the European in order to advertise artificially low-ticket prices); Cavanagh, and Rep. Betsy Coffia); FTC–2023–0064– Parliament and of the Council of 11 May 2005 Class Action Complaint ¶¶1–3, 33–34, Holl v. 3079 (Montana State Senate, Senate Democratic concerning unfair business-to-consumer United Parcel Service, Inc., No. 4:16–cv–05856– Caucus, Sen. Pat Flowers, Sen. Susan Webber, Sen. commercial practices in the internal market, art. 7, HSG (N.D. Cal., Oct. 11, 2016) (alleging defendant Andrea Olsen, Sen. Edie McClafferty, Sen. Jen 2005 O.J. (L 149) (providing that it is a misleading created a bait and switch by falsely advertising low Gross, Sen. Janet Ellis, Sen. Shane Morigeau, Sen. commercial practice to engage in ‘‘bait advertising’’ published rates that were later inflated); (Truth in Ellie Boldman, Sen. Ryan Lynch, Sen. Christopher or offering products at a specified price if not able Advertising, Inc., submitted information about its Pope, Sen. Mike Fox, Sen. Denise Hayman, Sen. to provide the products at that price for a period tracking of class action cases related to unfair and Willis Curdy, and Sen. Mary Ann Dunwell); FTC– and in quantities reasonable with regard to the deceptive fees, including cases involving event 2023–0064–3103 (Florida House of Representatives, product, the scale of advertising of the product and ticket sellers charging and misrepresenting the Rep. Angela Nixon); FTC–2023–0064–3123 the price offered), https://eur-lex.europa.eu/legal- purpose of ‘‘junk fees’’ and hotels advertising a low (Syracuse, New York, City Auditor Alexander content/EN/TXT/?uri=celex%3A32005L0029; see base rate for rooms and then charging consumers Marion); FTC–2023–0064–3117 (Maryland House of also Directive 2011/83/EU of the European more than the advertised rate by imposing Delegates, Del. Julie Palakovich Carr); FTC–2023– Parliament and of the Council of 25 October 2011 additional fees.); see also Second Amended Class 0064–3149 (North Carolina House of on consumer rights, art. 5 and art. 6, 2011 O.J. (L Action Complaint ¶¶5–7, Hecox v. DoorDash, Inc., Representatives, Rep. Julie von Haefen); FTC–2023– 304), https://eur-lex.europa.eu/legal-content/EN/ No. 1:23–cv–01006–JRR (D. Md. Sept. 5, 2023) 0064–3237 (North Carolina House of TXT/?uri=CELEX%3A32011L0083& (alleging in part that defendant employed Representatives, Rep. Pricey Harrison). qid=1726109600968. Additionally, a 1998 Directive deceptively named fees misleading consumers to 85See, e.g., Transparency In Charges for Key required that the selling price should be indicated believe the fees were for delivery personnel or for Events Ticketing Act (‘‘TICKET Act’’), H.R. 3950, for all products referred to in the Article, which government imposed fees); Class Action Complaint sec. 2, 118th Cong. (as engrossed in the House, May means a price that is the final price for a unit of ¶¶7–16, Ramirez v. Bank of Am., N.A., No. 4:22– 15, 2024) (among other provisions, requiring ticket the product including VAT and all other taxes. See cv–00859–YGR (N.D. Cal., Feb. 10, 2022) (alleging sellers, including secondary markets and Directive 98/6/EC of the European Parliament and misrepresentations about the refundability of fees); exchanges, to clearly and conspicuously disclose of the Council of 16 February 1998 on consumer Class Action Complaint ¶¶27, 36, 46–51, Cross v. the total ticket price for an event in any protection in the indication of the prices of Point and Pay LLC, No. 6:16–cv–01182 (M.D. Fla., advertisement and each time the ticket is displayed products offered to consumers, 1998 O.J. (L 80), June 29, 2016) (alleging defendant made in the purchasing process, and to provide an https://eur-lex.europa.eu/legal-content/EN/TXT/ representations about its services and fees that itemized list of the base ticket price and each fee ?uri=CELEX%3A31998L0006&qid=1726109951386. contained false, misleading, and deceptive and or charge prior to completion of the purchase; 89Digital Markets, Competition and Consumers unfair statements and omissions about fees for violations of the TICKET Act would be treated as Act 2024, c. 13, sec. 230 (providing that an online payment processing services); Class Action violation of a rule defining an unfair or deceptive invitation to purchase omits material information if Complaint ¶¶1–2, 9–12, DeSimone v. LOOK act or practice under section 18(a)(1)(B) of the FTC it omits the total price of the product or, if the Brands, LLC, No. 23–cv–11144 (S.D.N.Y. Dec. 22, Act); No Hidden Fees on Extra Expenses for Stays nature of the product prevents all or a part of the 2023) (alleging defendant failed to disclose the total Act of 2023 (‘‘No Hidden FEES Act of 2023’’), H.R. total price from reasonably being calculated in cost of movie ticket prices, inclusive of all fees, in 6543, sec. 2(a), 118th Cong. (as engrossed in the advance, how the price (or that part of it) will be violation of New York state law); Class Action House, June 11, 2024) (among other provisions, calculated), https://www.legislation.gov.uk/ukpga/ Complaint ¶¶1–2, 9–15, Jones v. Regal Cinemas, prohibiting providers of short-term lodging, 2024/13/section/230. Reports preceding this Inc., No. 23–CV–11145 (S.D.N.Y. Dec. 22, 2023) including providers of a website or other legislation included: UK Department for Business & (alleging defendant failed to disclose total cost of centralized platform that advertises or otherwise Trade, Estimating the Prevalence and Impact of movie ticket prices, inclusive of all fees, in offers the price of a reservation for short-term Online Drip Pricing (2023), https://assets. violation of New York state law); see also FTC– lodging, from advertising, displaying, marketing, or publishing.service.gov.uk/media/64f1ebd7a78c5 2022–0069–6042 (ANPR). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2076 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations The Commission takes notice of Commenters also noted that instances of commenters contended that the additional indications of prevalence unfair and deceptive fees or charges Commission’s evidence focuses on a identified in response to the NPRM. have increased over time.97 small number of problematic industries Commenters to the NPRM noted that Commenters also raised concerns and does not demonstrate prevalence in unfair or deceptive pricing practices about the prevalence of hidden fees in every single industry across the exist economy-wide.91For instance, specific industries such as live-event economy.100Some commenters Consumer Reports conducted a ticketing and short-term lodging. The similarly contended that the proposed nationally representative survey and American Society of Travel Advisors, rule was an attempt to impose a ‘‘one- found that many consumers Travel Technology Association, and a size-fits-all’’ solution on distinct experienced unexpected fees in a travel agent observed that, despite industries, not all of which are engaging variety of industries and that more than increased scrutiny over hotel resort fees, in unfair or deceptive practices, and two-thirds of Americans report paying there remains little uniformity in thus the proposed rule is overbroad and more in hidden fees now than they did pricing practices, and bait-and-switch not supported by the requisite evidence five years ago.92Similarly, Consumer pricing remains an issue.98Multiple of prevalence.101 Federation of American submitted an commenters raised continued concerns First, the Commission disagrees that it extensive compilation of stories from over hidden fee pricing practices in the must find that the unfair or deceptive consumers about their experiences with live-event ticketing market. TickPick, act or practice is widespread within junk fees that recounted hidden and LLC observed the ‘‘widespread’’ every individual context or industry to misleading fees being applied across a deceptive practice of bait-and-switch issue a rule targeting a specific practice wide range of industries.93Truth in pricing rampant in this industry. across industries. To begin with, the Advertising, Inc. provided a sampling of Chamber of Progress noted that Commission’s prevalence findings need consumer complaints it had received deceptive and unfair fees are ‘‘rampant only have ‘‘some basis or evidence’’ to over the years and noted the in some industries and pose clear show ‘‘the practice the FTC rule seeks pervasiveness of hidden and misleading threats to consumers,’’ including ‘‘hotel to regulate does indeed occur.’’102 fees in multiple industries, including stays, live sports or concert tickets, and While many trade regulation rules event ticket sales, hotel and travel airline tickets.’’ Future of Music promulgated under section 18 focus on companies, short-term lodging, internet Coalition commented that they have a particular industry, as discussed in apps, automobile rentals, worked to ‘‘deal[] with the scourge of communication services, carpet junk fees in various parts of the 100FTC–2023–0064–3143 (ACA Connects— cleaning, auto/truck sales, dietary economy,’’ including live touring. The America’s Communication Association argued that supplement orders, food services, Charleston Symphony affirmed that the NPRM contained no meaningful discussion of airlines, moving services, credit unions ‘‘requiring sellers to disclose the total prevalence of unfair or deceptive pricing disclosures with respect to communication and banks, payday lending services, price clearly and conspicuously[] services.); FTC–2023–0064–3186 (National LGBT gym memberships, outlet stores, sports addresses a pressing issue in the Chamber of Commerce and the National Asian/ betting, and online auctions.94Public nonprofit performing arts sector.’’99 Pacific Islander American Chamber of Commerce & Citizen commented about ‘‘the Despite the overwhelming evidence Entrepreneurship argued that ‘‘prepared food and grocery delivery applications . . . have widespread use of the deceptive supporting the prevalence of bait-and- demonstrated transparency and accessibility, practice of charging undisclosed fees by switch pricing and misleading fee providing clear explanations about fees.’’); FTC– major industries . . . including practices economy-wide, a minority of 2023–0064–3292 (National Association of Theatre communication carriers, air carriers, commenters argued that the Owners argued that the NPRM failed to demonstrate prevalence with respect to the theatre industry, ticket sales, auto dealers, credit card Commission has failed to meet its identifying only fifty comments received in companies, cable giants, and property burden of establishing prevalence. Some response to the ANPR that reference movie theatre owners,’’ as well as ‘‘event ticketing, convenience fees.); FTC–2023–0064–3238 (Gibson, hotels, funeral homes,’’ and other common area fees, guest fees, trash fees, notice fees, Dunn & Crutcher LLP argued that the Commission industries.95Additionally, AARP security deposit fees, check cashing fees, cleaning has failed to reliably demonstrate the prevalence of or repair fees, and other mandatory fees for services unfair or deceptive fees across any industry or pointed to a myriad of confusing fees that a renter does not need or want.’’). sector.); FTC–2023–0064–3233 (NCTA—The charged by assisted living facilities.96 97See, e.g., FTC–2023–0064–3290 (U.S. Public Internet & Television Association argued that the Interest Research Group Education Fund only mention of telecommunication fees is 91See, e.g., FTC–2023–0064–3216 (Demand commented that consumers have faced more unfair anecdotal, and the Commission has failed to show Progress Education Fund noted that consumers face and deceptive fees as consumers ‘‘have become prevalence with respect to any NCTA member.); surprise or ‘‘bogus’’ fees across industries, accustomed to online transactions.’’); FTC–2023– FTC–2023–0064–3263 (Flex Association stated that including rental housing, cell phone service, 0064–3090 (Atlanta Legal Aid Society, Inc. noted ‘‘[t]he Commission has not pointed to evidence of utilities, and ticketing, and cited a Consumer the ubiquity of unfair and deceptive fees and that any prevalent consumer harm that justifies these types of fees in the rental housing context imposing new pricing and disclosure rules on app- Reports study finding that 85% of Americans have have been steadily rising for years.). based delivery platforms.’’); FTC–2023–0064–3130 dealt with fees of this nature.).
(1984) (hereinafter ‘‘Deception Policy Statement’’), decision_volumes/volume-60/ftcd-vol60january- Advertisements 7 n.25 (2015), https://www.ftc.gov/ h co tt m ps m :/ i / s w si w o w n_ .f d tc e . c g i o si v o / n si _ t v e o s/ lu d m efa es u / l v t/ o f l i u le m s/ e d -1 o 0 cu 3/ m ft e c n _ ts/ june1962pages107-211.pdf (collecting cases and system/files/documents/public_statements/896923/ volume_decision_103_january_-_june_1984pages_ finding that advertisements including 151222deceptiveenforcement.pdf; see also Opinion manufacturer’s suggested list prices that were of the Commission at 28–30, In re Intuit Inc., No. 103-203.pdf. higher than the customary retail prices were 9408, https://www.ftc.gov/system/files/ftc_gov/pdf/ 109Deception Policy Statement, 103 F.T.C. at deceptive). d09408_commission_opinion_redacted_public.pdf 182–83 (listing claims or omissions involving cost among those that are presumptively material); see 113See, e.g., In re Filderman Corp., 64 F.T.C. 427, (finding that disclosures on Intuit’s websites were also, e.g., FTC v. FleetCor Techs., Inc., 620 F. Supp. 442–43, 461 (1964), https://www.ftc.gov/sites/ ‘‘inadequate to cure a misimpression for Intuit’s 3d 1268, 1303–04, 1311 (N.D. Ga. 2022) (finding default/files/documents/commission_decision_ ads,’’ which used ‘‘false claims to engage consumers that representations about discounts and volumes/volume-64/ftcd-vol64january-march and induce them to further interact with the transaction fees were material). 1964pages409-511.pdf (finding, among other things, company’’); Resort Car Rental Sys, 518 F.2d at 964 110Deception Policy Statement, 103 F.T.C. at 175 that respondents unlawfully advertised prices that (‘‘The Federal Trade [Commission] Act is violated (listing ‘‘misleading price claims’’ among those were later inflated with mandatory service charges); if it induces first contact through deception, even claims that the FTC has found to be deceptive); see In re Resort Car Rental Sys., 83 F.T.C. at 281–82, if the buyer later becomes fully informed before also, e.g., In re Resort Car Rental Sys., Inc., 83 300; Opinion of the Commission at 37–40, 47–50, entering the contract.’’) (bracketed text added); F.T.C. 234, 281–82, 300 (1973), https://www.ftc.gov/ In re Intuit Inc., No. 9408 (finding that respondent’s Exposition Press, Inc. v. FTC, 295 F.2d 869 (2d Cir. system/files/ftc_gov/pdf/Resort%20Car%20 advertising that falsely claimed that consumers can 1961) (‘‘The law is violated if the first contact is Rental%20System%2C%20Inc.%2083%20FTC file their taxes for free with TurboTax was secured by deception, even though the true facts are %20234%20%281973%29.pdf (finding that using deceptive); Complaint ¶¶12, 46–49, In re LCA- made known to the buyer before he enters into the the name ‘‘Dollar-A-Day’’ misrepresented the price Vision, No. C–4789 (alleging respondent’s contract of purchase.’’ (citations omitted)); FTC v. of car rentals in violation of section 5 of the FTC advertisements misrepresented the price of surgery City W. Advantage, Inc., No. 2:08–cv–00609–BES– Act where a rental could not be attained for one and failed to disclose eligibility limitations for a GWF, 2008 WL 2844696, at *3 (D. Nev., 123 July dollar per day due to mileage, insurance, and other promotional price). See also cases cited supra note 22, 2008) (finding defendant likely employed mandatory charges), aff’d sub. nom. Resort Car 61 (collecting FTC enforcement actions alleging that ‘‘deceptive door openers . . . to induce consumers Rental Sys., Inc. v. FTC, 518 F.2d 962, 964 (9th Cir. bait-and-switch pricing tactics concerning hidden to stay on the line’’). 1975). fees violated section 5). 11615 U.S.C. 45(n).
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2079 throughout the buying process.117 event ticketing websites. As TickPick, understanding of the fee or charge is Where mandatory fees or charges are LLC noted, ‘‘[m]ajor ticketing predicated on false, vague, or otherwise disclosed at the same time as, but marketplaces often require consumers to misleading information. As such, separately from, the base price, enter their credit card or other payment consumers are unable to understand consumers are still harmed. The information prior to disclosing what they have purchased, or to which practice of dividing the price into mandatory fees. On these marketplaces, charges they have consented.125 multiple components without disclosing the full purchase price is only disclosed Consumers cannot reasonably avoid the total, generally referred to as after payment information is these harms. As explained in the NPRM, partitioned pricing, distorts consumer collected.’’122Under such studies suggest that cognitive bias may choice.118Consumers confronted with circumstances, consumers waste time partitioned pricing, on average, and effort pursuing an offer that is not prevent consumers from reasonably underestimate the total price of the good actually available at the promised price. avoiding injury caused by unfair and or service, likely because they use Such search costs that result from unfair deceptive pricing practices.126Several mental shortcuts to estimate price that or deceptive practices are legally behavioral studies explain why do not fully account for each cognizable injuries under the FTC consumers cannot reasonably avoid component.119 Act.123 making errors when the true price is not In addition, consumers who wish to Misrepresented fees also cause or are displayed upfront. Behavioral research compare prices incur additional search likely to cause substantial injury—they shows that consumers who first learn of costs to make direct comparisons of harm consumers as well as businesses a lower price do not properly adjust goods or services when the full price is that do not engage in these practices. their calculations when additional fees not disclosed upfront.120For example, For example, as discussed in section are added, thereby underestimating the in an online transaction to book a hotel III.C, a hotel might charge a resort fee total price.127It also shows that room, consumers cannot simply view when only typical and ordinary consumers attach value to things they the first price displayed on each accommodations and amenities are perceive to be theirs and, once website, but instead need to navigate to offered, an environmental fee that serves consumers begin the purchase process, subsequent pages or even enter all their no environmental purpose, or a fee their perception shifts so that stopping payment information and reach the misrepresented as a government charge. the transaction feels like a loss.128The checkout page for each website to As TickPick, LLC put it, misrepresented research shows that consumers who determine the true total price of their fees trick consumers into paying more hotel stay.121The same is true on live- and ultimately inhibit competition by already have invested in an endeavor, providing an unfair advantage to such as by taking time to make 117Alexander Rasch et al., Drip Pricing and its businesses that misrepresent their selections on a travel or live-event ticket Regulation: Experimental Evidence, 176 J. Econ. fees.124Likewise, when businesses website, continue that endeavor even if Behav. & Org. 353 (2020) (‘‘[E]xperimental evidence misrepresent fees, consumers are unable they would pay less if they began again suggests that consumers indeed strongly and systematically underestimate the total price under to make informed choices about the elsewhere.129Lastly, consumers drip pricing, and that they make mistakes when value of the fee or charge, or the good necessarily incur search costs when searching’’); Shelle Santana et al., Consumer or service it represents, because their mandatory fees are obscured because it Reactions to Drip Pricing, 39 Mktg. Sci. 188 (2020)
(‘‘Across six studies, we find that drip pricing takes them longer to discover the full (versus nondrip pricing) increases the likelihood 122FTC–2023–0064–3212 (TickPick, LLC) (‘‘[On] price within a single transaction and to that consumers will both initially and ultimately StubHub’s website, for example, a consumer can be comparison shop across transactions.130 select a lower base price option, even though the required to click 12 times after being shown the first surcharges for optional add-ons cause this base price before being shown the total price they will Notably, it is unlikely that the market price to balloon—making the lower base fare option pay.’’) can correct for these injuries because more expensive than the alternative’’); Tom Blake 123See, e.g., Decision & Order at 3–4, In re LCA- once the practice of displaying et al., Price Salience and Product Choice, 40 Mktg. Vision, No. C–4789 (FTC Mar. 13, 2023) (settling incomplete initial prices takes hold, Sci. 619 (2021); Steffen Huck et al., The Impact of allegations that deceptive advertising caused Price Frames on Consumer Decision Making: consumers to ‘‘waste[] 90 minutes to two hours of honest businesses will struggle to Experimental Evidence (2015); Meghan R. Busse & their time’’ responding to a deceptive promotion, compete. For example, as noted in the Jorge M. Silva-Risso, ‘‘One Discriminatory Rent’’ or Complaint ¶35, and prohibiting misrepresentations NPRM, one market participant in the ‘‘Double Jeopardy’’: Multi-component Negotiation of price and requiring disclosure of price or for New Car Purchases, 100 a.m. Econ. Rev. 470 discount qualification requirements), https:// live-event ticketing industry, StubHub, (2010); Raj Chetty et al., Salience and Taxation: www.ftc.gov/system/files/ftc_gov/pdf/1923157-lca- unilaterally adopted all-in pricing in Theory and Evidence, 99 a.m. Econ. Rev. 1145 vision-consent-package.pdf; Decision & Order at 2– 2014 but soon reverted back to its (2009) (‘‘[C]ommodity taxes that are included in 3, In re Credit Karma, LLC, No. C–4781 (FTC, Jan. posted prices reduce demand significantly more 19, 2023) (settling allegations that deceptive original model after it lost significant than taxes that are not included in posted prices.’’); advertising caused consumers to waste significant market share when customers see also FTC–2023–0064–3247 (Private Law Clinic time in applying for ‘‘pre-approved’’ offers that at Yale Law School). were denied, Complaint ¶13, and requiring Credit 118Sullivan, supra note 67, at 4; FTC–2023–0064– Karma to pay $3 million in monetary relief), https:// 125Id. 3271 (U.S. Senate, Sen. Amy Klobuchar). www.ftc.gov/system/files/ftc_gov/pdf/2023138- 126NPRM, 88 FR 77434 (discussing various 119Sullivan, supra note 67, at 22–24; Vicki G. credit-karma-combined-final-consent-without- cognitive biases that contribute to the Morowitz et al., Divide and Prosper: Consumers’ signatures.pdf; FTC v. Amazon.com, Inc., No. C14– unavoidability of consumer injury, including the Reactions to Partitioned Prices, 35 J. Mktg. Rsch. 1038–JCC, 2016 U.S. Dist. LEXIS 55569, at *17 anchoring theory, the endowment theory, and the 453 (1998) (subjects exposed to partitioned prices (W.D. Wash., Apr. 26, 2016) (finding consumer sunken cost fallacy). recalled significantly lower total product costs than injury included ‘‘time spent pursuing those 127Inst. for Policy Integrity, Pet. for Rulemaking subjects exposed to combined prices). refunds’’); FTC v. Neovi, Inc., 598 F. Supp. 2d 1104, Concerning Drip Pricing 18 (2021), https://policy 120Sullivan, supra note 67, at 4; Fed. Trade 1115 (S.D. Cal. 2008) (finding ‘‘no genuine issue of integrity.org/documents/Petition_for_Rulemaking_ Comm’n, ‘‘That’s the Ticket’’ Workshop: Staff material fact that consumers suffered substantial Concerning_Drip_Pricing.pdf. Perspective 4 (May 2020), https://www.ftc.gov/ injury’’ based on ‘‘considerable amount of time’’ system/files/documents/reports/thats-ticket- spent by consumers); FTC v. Accusearch, Inc., No. 128Steffen Huck et al., The Impact of Price workshop-staff-perspective/staffperspective_tickets_ 06–cv–105–D, 2007 U.S. Dist. LEXIS 74905, at *22– Frames on Consumer Decision Making: final-508.pdf; see also Han Hong et al., Using Price 23 (D. Wyo., Sept. 28, 2007) (granting summary Experimental Evidence (2015). Distributions to Estimate Search Costs, 37 RAND J. judgment in favor of FTC based in part on finding 129David A. Friedman, Regulating Drip Pricing, Econ. 257 (2006) (describing methods of estimating of consumer injury for ‘‘lost time and 31 Stan. L. & Pol’y Rev. 51, 55 n.13 (2020). search costs). productivity’’). 130See NPRM, 88 FR 77447 (discussing 121NPRM, 88 FR 77433 n.170. 124FTC–2023–0064–3212 (TickPick, LLC). reductions in search costs from the proposed rule). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2080 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations incorrectly perceived StubHub’s prices For example, TickPick, LLC prohibit the use of dynamic pricing to be higher.131 commended the Commission for strategies, itemization, or offering The consumer injury caused by these proposing to curb the widespread optional goods or services for bait-and-switch pricing practices is not practice of bait-and-switch pricing and consumers to select; it simply prohibits outweighed by any benefits to observed that ‘‘the proposed rule would offering a price that is not inclusive of consumers or competition. Consumers significantly benefit consumers and all mandatory fees and charges, as well receive no benefit from businesses that competition in the live-event ticketing as prohibiting misrepresented fees and use drip pricing, partitioned pricing, or industry.’’133The American Society of charges. misleading price presentation while Travel Advisors argued that, in addition As stated herein, the Commission and they obscure the total price. To the to consumer harm, ‘‘the imposition of courts have previously recognized that extent that consumers could benefit undisclosed fees also unfairly places price is a material term139and that it is from itemized information about price honest retailers—those that do disclose a violation of section 5 of the FTC Act components, such itemization can be the full, all-in price upfront—at a to misrepresent the price of a good or done in conjunction with clear total competitive disadvantage relative to service.140Commenters emphasized the price information. Consumers receive those that do not.’’134 materiality of price to consumers.141 no benefit from businesses partitioning A minority of commenters stated that The commenters who argue that bait- or breaking up mandatory price hidden and misleading fees do not harm and-switch pricing does not harm components while they obscuring the consumers. For instance, the consumers ignore the large body of total price. Competitive Enterprise Institute argued literature demonstrating that drip Likewise, as discussed in section V.E, that consumers’ search costs do not pricing and partitioned pricing have a there is no benefit to competition, as increase when advertisements lack a negative impact on consumers and honest businesses that disclose all- single total price, as the consumer is competition. The economic analysis in inclusive total prices lose market share better informed after watching the Section V provides additional to businesses that do not. Bait-and- advertisement despite the omission.135 discussion regarding the economic switch pricing and misleading fees While the commenter conceded that harms from bait-and-switch pricing undermine the ability of honest consumers may benefit more if a total tactics, including drip pricing and businesses to compete on price and price is disclosed, the commenter partitioned pricing in the live-event and therefore diminish the competitive argued that any harm could be easily short-term lodging industries.
pressure in a market that pushes prices avoidable by consumers calculating the downward. As a result, these practices total themselves.136Some commenters C. The Economic Effect of the Rule lead to higher prices than would be also argued that these types of fees often As part of the rulemaking proceeding, supported in a competitive marketplace. benefit consumers and are openly the Commission solicited public The Antitrust Division of the U.S. disclosed.137Indeed, the American comment and data (both qualitative and Department of Justice noted that Gaming Association stated that resort quantitative) on the economic impact of ‘‘companies that impose mandatory fees enhance a consumer’s stay, the proposed rule and its costs and hidden fees’’ have ‘‘an unfair advantage distinguish resorts from more standard benefits. In issuing this final rule, the over honest brokers’’ and interfere with lodging offerings, are openly disclosed Commission has carefully considered consumers’ ability to ‘‘choose between to consumers, and often appear several the comments received and the costs competitors based on the important times throughout the search and and benefits of each provision, taking considerations of price and what, purchasing process. As the Commission into account the effects on small exactly, the consumer is already noted, drip and partitioned businesses and consumers, as discussed purchasing.’’132Some commenters, pricing and other bait-and-switch in more detail in sections V and VII.
including those from the live-event pricing harm consumers for numerous The record demonstrates that the most ticketing and short-term lodging reasons, including because consumers significant anticipated benefits of the industries, noted that bait-and-switch underestimate the total price of a good final rule are promoting transparent pricing not only confuses consumers, or service, overconsume, overpay, and pricing, facilitating comparison but harms honest businesses that offer waste time. The U.S. Chamber of shopping for consumers, and leveling truthful, timely, and transparent pricing Commerce argued that there are pro- because their prices initially may seem consumer and pro-competitive 139Deception Policy Statement, 103 F.T.C. at higher than competitors that use bait- justifications for this type of pricing, 182–183, 183 n.55 (listing claims or omissions and-switch pricing and misleading fees. including allowing for dynamic pricing involving cost among those that are presumptively strategies and preventing consumers material); see also, e.g., FleetCor Techs., Inc., 620 131See NPRM, 88 FR 77434 (quoting Fed. Trade from paying for services that they do not F. Supp. 3d at 1303–04, 1311 (finding that Comm’n, ‘‘That’s the Ticket’’ Workshop: Staff use.138The rule, however, does not representations about discounts and transaction Perspective 4 (May 2020), https://www.ftc.gov/ fees were material); FTC v. Windward Marketing, system/files/documents/reports/thats-ticket- Inc., No. 1:96–CV–615F, 1997 WL–33642380, at *10 workshop-staff-perspective/staffperspective_tickets_ 133FTC–2023–0064–3212 (TickPick, LLC). (N.D. Ga., Sept. 30, 1997) (‘‘[A]ny representations final-508.pdf.). See also, e.g., https://www.contact 134FTC–2023–0064–3106 (American Society of concerning the price of a product or service are lensking.com/faq.aspx (describing a contact lens Travel Advisors). presumptively material’’). company’s decrease in traffic and total orders when 135FTC–2023–0064–3028 (Competitive Enterprise 140Deception Policy Statement, 103 F.T.C. at 175 it displayed a total price while competitors Institute argued that consumers already bear a (listing ‘‘misleading price claims’’ among those implemented ‘‘processing’’ fees). search cost merely by looking for a product, and claims that the FTC has found to be deceptive); see 132FTC–2023–0064–3187 (U.S. Department of that any advertisement that includes some, but not also, e.g., Resort Car Rental Sys., 518 F.2d at 964 Justice, Antitrust Division, observed that ‘‘[w]hen all, pricing information, benefits the searching (upholding the Commission’s order finding that consumers lack choice and information, and are consumer if the information is accurate and non- using the name ‘‘Dollar-A-Day’’ misrepresented the saddled with mandatory hidden fees, the benefits deceptive.). price of car rentals in violation of section 5 of the of the competitive process break down.’’); see also 136Id. FTC Act). FTC–2023–0064–3106 (American Society of Travel 137FTC–2023–0064–2886. 141See, e.g., FTC–2023–0064–3162 (BBB National Advisors); FTC–2023–0064–3184 (New York State 138FTC–2023–0064–3127 (U.S. Chamber of Programs Inc. stated that BBB National Advertising Sen. Michael Gianaris); FTC–2023–0064–1294 Commerce noted that, among these pricing Division ‘‘precedent is clear that the advertised (James J. Angel, Ph.D., CFP, CFA, Professor, practices, dynamic pricing strategies provide these price for a product or service is among one of the Georgetown University, McDonough School of benefits to consumers and this was ignored in the most material terms to a consumer’s purchasing Business). conclusions of the NPRM.). decision.’’).
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2081 the playing field for businesses in the under section 19(a)(2).146By allowing analysis contains an estimated cost- live-event ticketing and short-term the Commission to secure redress more benefit analysis of the final rule, as well lodging industries. By prohibiting drip efficiently, this rule will also allow the as a more in-depth discussion of the pricing, the final rule also will promote Commission to conserve its limited comments the Commission received in social trust, which is a necessary enforcement resources for other mission response to the NPRM. In addition, the component of successful market priorities. Commission’s final regulatory flexibility interactions.142Most participants in a As an additional benefit, the rule will analysis, which is contained in section market transaction do not have prior enable the Commission to seek civil VII, discusses the final rule’s economic experience with one another and penalties against violators. The FTC Act impact on small entities. consumers must rely on some degree of generally does not allow the
term lodging. This is particularly critical competition.148 Numerous public comments in given the U.S. Supreme Court’s decision When promulgating a final rule, the support of and in opposition to the rule in AMG Capital Mgmt., LLC v. FTC, 593 Commission must prepare a final included discussions of the definitions U.S. 67 (2021), which held that regulatory analysis, which is contained and substantive provisions of the equitable monetary relief, including in section V. The final regulatory proposed rule, and made various consumer redress, is not available under recommendations. The Commission section 13(b) of the FTC Act.145Under 146See 15 U.S.C. 57b(a)(1) and (2); see also considered comments pointing out the final rule, the Commission will now NPRM, 88 FR 77438 (discussing impact of AMG confusion about specific phrases in the be able to seek court-ordered consumer Cap. Mgmt.). When the Commission has reason to proposed rule, particularly phrases that redress in one Federal district court believe that the rule has been violated, the commenters found vague or overbroad.
J. Zak & Stephen Knack, Trust and growth. 111 section 5(a) of the FTC Act. If the Commission finds Econ. J., 470 (Mar. 2001), https://doi.org/10.1111/ businesses. In addition, the Commission that the respondent did so, the Commission issues 1468-0297.00609; Philip Keefer & Stephen Knack, a cease-and-desist order, which might not become appreciated comments from industry Does Social Capital Have an Economic Payoff? A final until after the resolution of any resulting that identified potential gaps in how the Cross-Country Investigation, 112 Q.J. Econ. 4 (Nov. appeal to a Federal court of appeals. Then, to obtain proposed rule would interact with 1997), https://doi.org/10.1162/003355300555475. redress, the Commission must initiate a second Social trust is particularly necessary for action in Federal district court, in which it must certain types of pricing practices. participation in financial markets. See Jesse Bricker prove that the violator engaged in objectively The Commission makes a number of & Geng Li, Fed. Reserve Bd., Credit Scores, Social fraudulent or dishonest conduct in order to obtain changes to the final rule. Notably, the Trust, and Stock Market Participation, Finance and court-ordered redress. See 15 U.S.C. 57b(a)(2), (b). Commission narrows the application of Economics Discussion Series 2017–008r1, https:// doi.org/10.17016/FEDS.2017.008r1; Luigi Guiso, 147See section 5(m)(1)(A) of the FTC Act, 15 the final rule to offers, displays, or U.S.C. 45(m)(1)(A) (providing that those who Paola Sapienza, & Luigi Zingales, Trust the Stock advertisements of a covered good or violate a trade regulation rule ‘‘with actual Market, 63 J. Fin. (Dec. 2008), https://www.jstor.org/ knowledge or knowledge fairly implied on the basis service—i.e., live-event tickets or short- stable/20487944?seq=1. of objective circumstances that such act is unfair or term lodging. The Commission 143Ginny Seung Choi & Virgil Henry Storr, deceptive and is prohibited by such rule’’ are liable recognizes that many comments to the Market interactions, trust and reciprocity, 15 PLOS for civil penalties for each violation). In addition, One 5 (May 7, 2020), https://doi.org/10.1371/ any entity or person who violates such a rule proposed rule focused on the journal.pone.0232704. (irrespective of the state of knowledge) is liable for application of the rule to specific 144Joshua Kleinfeld & Hadar Dancig-Rosenberg, any injury caused to consumers by the rule industries or pricing scenarios. As a Social Trust in Criminal Justice: A Metric, 98 Notre violation. The Commission may pursue such result of the Commission’s decision to Dame L. Rev. 815 (2022), https:// recovery in a suit under section 19(a)(1) of the FTC scholarship.law.nd.edu/ndlr/vol98/iss2/6. Act, 15 U.S.C. 57b(a)(1). limit this final rule to live-event 145AMG Cap. Mgmt., 593 U.S. at 82. 148NPRM, 88 FR 77447–48. ticketing and short-term lodging, the VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2082 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations Commission need not respond to each fees are part of the same transaction.149 If a representation or practice affects or of these comments at this time. As stated in the NPRM, if a business is directed primarily to a particular In addition, wherever possible, the advertises a price for a good or service group, the Commission examines Commission works to reduce burden on, that requires an ancillary good or reasonableness from the perspective of and maintain pricing flexibility for, service provided by another entity, the an ordinary member of that group.152 businesses. Finally, the Commission charge for the mandatory ancillary good Accordingly, the Commission does not provides guidance and explanation to or service must be included in total believe it is necessary to modify the respond to specific questions and price. Additionally, the NPRM made definition of ‘‘ancillary good or service’’ hypotheticals posed by commenters to clear that the definition includes goods to refer to a reasonable consumer. help give additional clarity to and services (whether from the seller or One commenter argued, in the context businesses. The following discussion third parties) offered as part of the same of online movie ticket purchases, that provides a section-by-section analysis of transaction, because it included online convenience fees are reasonably the NPRM’s proposed provisions and examples of mandatory ancillary goods avoidable because consumers can the provisions adopted in the final rule, or services that may be offered by third- purchase tickets in-person at a theater as well as a discussion of the comments party providers but are part of the same without incurring the fees.153Although received and the Commission’s transaction, such as a payment a movie ticket is not a covered good or responses. processing fee for an online transaction. service, similar convenience fees are A. §464.1 Definitions Accordingly, the Commission does not common in the live-event ticketing believe that it is necessary to modify the industry. The Commission disagrees Proposed §464.1 contained definition of ‘‘ancillary good or service’’ with the commenter that online definitions for the following terms: to clarify that fees charged by a third convenience fees are reasonably ‘‘ancillary good or service’’; ‘‘business’’; party must be included in total price if avoidable: If a consumer must pay a ‘‘clear(ly) and conspicuous(ly)’’; those fees are part of the same service or other fee in order to purchase ‘‘government charges’’; ‘‘pricing transaction. tickets online (i.e., as part of the same information’’; ‘‘shipping charges’’; and Several commenters also suggested transaction), then such a fee must be ‘‘total price.’’ The Commission received that the Commission add language included in total price when it appears various comments with respect to these referring to a reasonable consumer in online. In addition, using vague fee definitions, including particular the definition of ‘‘ancillary good or descriptions, such as an unspecified industries’ requests for exemption from service,’’ to clarify that only goods or ‘‘convenience’’ fee, may violate the definition of ‘‘business’’ and other services that a ‘‘reasonable consumer’’ §§464.2(c) and 464.3 by failing to suggestions. Section 464.1 of the final would expect to be included must be disclose clearly and conspicuously, and rule adopts these definitions, in some included in total price.150The by misrepresenting, the nature or instances with minor modifications for Commission does not believe that purpose of fees or the identity of the clarification, and adds a definition for adding ‘‘reasonable consumer’’ to the good or service for which fees or charges ‘‘covered good or service.’’ In the definition of ‘‘ancillary good or service’’ are imposed.
definition-by-definition analysis, the is necessary, as the reasonable consumer Another commenter argued that the Commission discusses each definition standard is implicit in the rule text. definition of ‘‘ancillary good or service’’ proposed in the NPRM, any changes to Under longstanding precedent, the should ‘‘not turn on whether the good the definition’s text, the added Commission examines conduct from the or service is ‘offered’ to a consumer but definition, and other comments relevant perspective of a consumer acting whether it is ‘required to be purchased’ to the definitions section that are not reasonably under the circumstances.151 by the consumer.’’154The commenter otherwise addressed in the discussion of proposed that the Commission the final rule’s substantive provisions. 149FTC–2023–0064–3191 (Community Catalyst et al.); FTC–2023–0064–3283 (National Consumer Law 1. Ancillary Good or Service Center, Prison Policy Initiative, and advocate standard set forth in the Deception Policy Statement Proposed §464.1(a) in the NPRM Stephen Raher). and upholding administrative law judge 150FTC–2023–0064–3268 (Housing & Eviction determination that ‘‘‘a significant minority’ of defined ‘‘ancillary good or service’’ as Defense Clinic, University of Connecticut School of ‘reasonable’ consumers ‘would interpret [the ad] to ‘‘any additional good(s) or service(s) Law, commented ‘‘the definition of an ‘Ancillary be claiming that drinking eight ounces of POM Juice offered to a consumer as part of the Good or Service’ should be amended to include all daily prevents or reduces the risk of heart same transaction.’’ This definition was fees that are not reasonably avoidable and all fees disease.’’’); FTC v. World Travel Vacation Brokers, or charges for goods or services that a reasonable Inc., 861 F.2d 1020, 1029 (7th Cir. 1988) (upholding relevant to the definition of ‘‘total consumer would expect to be included with the lower court’s determination that ‘‘‘the $29 airfare price,’’ in proposed §464.1(g), which purchase.’’); FTC–2023–0064–3275 (Berkeley promotion constituted the type of misrepresentation specified that any mandatory fees or Center for Consumer Law & Economic Justice et al. upon which a reasonably prudent person would charges for such goods or services recommended the definition of ‘‘Ancillary Good or rely’’’); Fed. Trade Comm’n, FTC Policy Statement Service’’ be revised ‘‘to mean ‘any optional, on Unfairness (appended to In re Int’l Harvester Co., would be included in total price. additional good(s) or service(s), offered to a 104 F.T.C. 949, 1070, 1073 (1984), (hereinafter Commenters proposed modifications to consumer as part of the same transaction, that a ‘‘Unfairness Policy Statement’’), https:// the definition of ‘‘ancillary good or reasonable consumer would not expect to be www.ftc.gov/sites/default/files/documents/ service’’ but, following review of those i o n r c s l e u r d v e ic d e w .’’ i ) t ; h F t T h C e – p 2 u 0 r 2 c 3 h – a 0 s 0 e 6 o 4 f – t 3 h 1 e 6 a 0 d ( v C e o r n ti s s u e m d e g r o od c v o o m lu m m i e s _ s d io e n ci _ s d io ec n i _ s 1 io 0 n 4 _ _ v _ o ju lu ly m _- e _ s d / e v c o e lu m m b e e - r 1 _ 04/ftc_ comments and as discussed in this Federation of America et al. proposed the definition 1984pages949_-_1088.pdf (‘‘To justify a finding of section, the Commission declines to of ‘‘Ancillary Good or Service’’ be modified to ‘‘any unfairness the [consumer] injury must . . . be an adopt the suggested modifications. Final optional, additional good(s) or service(s), offered to injury that consumers themselves could not §464.1 adopts the definition of a consumer as part of the same transaction, that a reasonably have avoided.’’). reasonable consumer would not expect to be 152Deception Policy Statement, 103 F.T.C. at 175, ‘‘ancillary good or service’’ without included with the purchase of the advertised good 179 (‘‘For instance, if a company markets a cure to modification. or service.’’). the terminally ill, the practice will be evaluated Several commenters recommended 151Deception Policy Statement, 103 F.T.C. at 175, from the perspective of how it affects the ordinary that the Commission modify the 177–82; see also FTC v. Cantkier, 767 F. Supp. 2d member of that group.’’). definition of ‘‘ancillary good or service’’ 147, 151–52 (D.D.C. 2011) (applying deception 153FTC–2023–0064–3292 (National Association standard set forth in the Deception Policy of Theatre Owners). to state that fees charged by a third party Statement); POM Wonderful, LLC v. FTC, 777 F.3d 154FTC–2023–0064–3206 (Motor Vehicle must be included in total price if those 478, 490, 500 (D.C. Cir. 2015) (applying deception Protection Products Association et al.). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2083 incorporate the word ‘‘mandatory’’ into costs.157The Commission addresses event the Commission opted to adopt the definition of ‘‘ancillary good or pricing scenarios, including those such a definition. The Commission service.’’ The Commission disagrees pertaining to contingent or variable fees, received broad support for an industry- with this proposed modification. As in section III.B.1.a. Another commenter neutral rule from individual discussed in the NPRM, an ancillary stated that the use of the word ancillary commenters, consumer groups, and good or service may be mandatory or was unclear, because it ‘‘implies a industry organizations. Commenters optional. Whether the cost of the relationship between a primary object cited the prevalence of hidden and ancillary good or service must be and the ancillary object’’ and does not deceptive fees across a variety of incorporated into total price turns on include guidance concerning the industries and argued that broad whether the good or service is primary object.158The Commission exemptions would create an uneven mandatory, which depends on the facts cannot identify in every possible economic playing field and confuse of a transaction.155For example, if a situation which good or service would consumers by creating unpredictability hotel offers a consumer the option to be the ‘‘primary object’’ versus an across industries.160Conversely, the purchase or decline a trip protection ancillary good or service because such Commission received numerous plan with a room reservation, the plan a determination is fact-specific and will would be an optional ancillary good or depend on the goods or services offered comments asking that it narrow the rule service because the consumer has the by individual businesses. to specific industries, including, for option to decline the trip insurance. For the foregoing reasons, and based example, live-event ticketing and short- Conversely, a hotel may require all on its review of the comments received, term lodging. Several commenters also guests to purchase a daily breakfast the Commission adopts the definition of urged the Commission to exempt certain voucher. In this case, the hotel guest ‘‘ancillary good or service’’ set forth in industries, arguing that the rule would cannot avoid being charged for the the NPRM. As discussed in section pose challenges for those industries or voucher, and it is a mandatory ancillary III.A.8, to address comments and clarify that those industries are already subject good or service. If a business charges the rule, the Commission modifies the to existing regulations. definition of total price to further clarify payment processing fees that the Following its review of the comments, that under final §464.2(a), Businesses consumer cannot reasonably avoid, such the Commission narrows application of may exclude from total price fees or fees would be for a mandatory ancillary the final rule to covered goods or charges for any optional ancillary good good or service.
It is also possible that a good or tickets or short-term lodging. While the service may be mandatory in one 2. Business comments demonstrated that bait-and- transaction but optional in another.156 Proposed §464.1(b) defined switch pricing and misleading fees and For example, if a hotel allows a guest to ‘‘business’’ as ‘‘an individual, charges inflict harms on consumers purchase amenities such as bottled corporation, partnership, association, or across the economy, the rulemaking water or pool towels for an additional any other entity that offers goods or record reveals longstanding concerns fee but permits each guest to supply services, including, but not limited to, with these unfair and deceptive their own water or pool towels, such online, in mobile applications, and in practices within the live-event ticketing amenities would be optional ancillary physical locations.’’ As part of the and short-term lodging industries in goods or services. If, however, the hotel NPRM, the Commission also proposed a particular. The final rule addresses requires all patrons to use the hotel- carve-out for certain motor vehicle these industries first. The Commission provided amenities for a fee, then the dealers required to comply with the addresses the definition of ‘‘covered amenities would be mandatory ancillary Combating Auto Retail Scams Trade good or service’’ in section III.A.4.
goods or services. Because ancillary Regulation Rule (‘‘CARS Rule’’),159and goods or services may be either for the carve-out to become effective The Commission received comments mandatory or optional, the Commission upon the CARS Rule’s effective date. requesting modifications to various declines to add the word ‘‘mandatory’’ The CARS Rule provides for certain definitions, including the definition of into the definition of ‘‘ancillary good or pricing disclosure requirements and ‘‘business,’’ or wholesale exemptions service.’’ prohibits misrepresentations. Final from the proposed rule’s coverage Some commenters also asked the §464.1 adopts the first sentence of the related to issues in particular industries, Commission for additional guidance as proposed definition of ‘‘business,’’ but including auto dealers and service to when a good or service might be removes the carve-out for motor providers,161app-based delivery considered ancillary, particularly if a vehicles required to comply with the platforms,162financial services good or service includes variable CARS Rule because of the final rule’s narrowed scope.
DOT’s Full Fare Advertising Rule on the 178Id.
169E.g., FTC–2023–0064–2919 (National Automatic Merchandising Association). treatment of government charges (i.e., in 179See Fed. Power Comm’n v. Tuscarora Indian Nation, 362 U.S. 99, 116–17 (1960) (examining case 170E.g., FTC–2023–0064–3292 (National the context of bundled travel packages, law supporting the conclusion that ‘‘a general Association of Theatre Owners). such as for airfare and hotels, the Full statute in terms applying to all persons includes 171E.g., FTC–2023–0064–3269 (IHRSA—The Fare Advertising Rule requires the Indians and their property interests’’); FTC v. AMG Health & Fitness Association). inclusion of government taxes and fees Servs., Inc., No. 2:12–CV–00536–GMN, 2013 WL 172E.g., FTC–2023–0064–2906 (National 7870795, at *16–21 (D. Nev. July 16, 2013), R. & Association of College & University Business R. adopted, 2014 WL 910302 (D. Nev. Mar. 7, 2014) Officers et al.). available at https://www.ftc.gov/system/files/ftc_ (discussing the FTC Act’s applicability to Federally 173E.g., FTC–2023–0064–3249 (Marine Retailers gov/pdf/R207011TRAAComment.pdf. recognized Tribes and Tribal businesses). Association of the Americas); FTC–2023–0064– 175FTC–2023–0064–3106 (American Society of 180See, e.g., AMG Servs., 2013 WL 7870795, at 3251 (National RV Dealers Association). Travel Advisors). *22–23 (holding there was a genuine dispute of 174Towing & Recovery Association of America, 176See, e.g., FTC–2023–0064–3293 (Travel material fact barring summary judgment on
Inc. submitted a late comment, which the Technology Association); FTC–2023–0064–3262 question of whether Tribal chartered corporations Commission considered in its discretion and makes (Skyscanner). were for-profit corporations under the FTC Act). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2085 advertising campaigns, asserting that estimated initial investment, expected by, or inconsistent with, anything else ‘‘[u]nder the Proposed Rule, national fees, and other expenses.185Because the in the communication.’’ The proposed marketing campaigns are only workable final rule is limited to prices for covered definition further made clear that for if all franchised businesses in a goods or services and ancillary goods or ‘‘representations or sales practice[s]’’ franchise system adhere to the same services offered as part of the same targeting specific audiences, ‘‘such as pricing regime (including pass-through transaction, it would not apply to an children, older adults, or the terminally fees), regardless of the economic offer or sale of a franchise, including a ill, ‘ordinary consumers’ includes demands of the market in which they hotel franchise. However, the reasonable members of that group.’’ The operate.’’181The commenter also raised Commission reiterates that franchised Commission finalizes the definition of concerns particular to restaurant businesses must comply with the final ‘‘clear(ly) and conspicuous(ly)’’ franchises.182 rule in its entirety when selling covered proposed in §464.1(c) with minor The Commission declines to exclude goods or services. clarifications to harmonize the language franchised businesses from the final One industry group recommended and terminology used in this provision rule. As the commenter notes, that the definition of ‘‘business’’ be with the terminology used in recent franchised businesses include hotels, limited to ‘‘an individual, corporation, rulemakings and agency guidance. restaurants, and fitness centers, among partnership, association, or any other Specifically, proposed §464.1(c) other businesses. The Commission’s entity that offers goods or services to provided that a required disclosure addition of the ‘‘covered good or consumers,’’ with the purpose of must be ‘‘difficult to miss (i.e., easily service’’ definition narrows the rule’s exempting business-to-business noticeable).’’ Final §464.1 reverses the application to businesses that make transactions from the scope of the final order of the phrases ‘‘easily noticeable’’ available live-event tickets or short-term rule.186Another industry group and ‘‘difficult to miss,’’ and, thus, lodging and moots the commenter’s similarly requested that the Commission provides that a required disclosure must concerns regarding restaurants or other exempt business-to-business be ‘‘easily noticeable (i.e., difficult to franchises. Further, the final rule transactions from the scope of the final miss).’’ Additionally, in final §464.1, applies equally to franchised and non- rule.187As set forth in section III.B.1.f, the Commission adds language to clarify franchised businesses, including hotels. the Commission believes that that required disclosures must be The commenter has not provided any application of the rule to business-to- ‘‘easily understandable by ordinary evidence to suggest that the rule will business transactions is appropriate and consumers.’’ In final §464.1, the disproportionately impact franchised necessary to provide the Commission Commission deletes reference to businesses. As to the commenter’s with the tools necessary to seek redress ‘‘reasonable’’ members of a specifically contention that application of the rule from businesses that violate the law. targeted group. Each of these will negatively impact franchised The final rule covers both business-to- modifications is to comport with the businesses’ ability to benefit from consumer transactions and business-to- Commission’s recently finalized Trade national advertising campaigns, the business transactions, so no Regulation Rule on the Use of Consumer Commission addresses commenters’ modification to the definition of Reviews and Testimonials and the questions and concerns about national ‘‘business’’ is required. Negative Option Rule, as well as the advertising campaigns in section Commission’s Endorsement Guides.188 III.B.1.d. 3. Clear(ly) and Conspicuous(ly) Moreover, as noted in section II.B., the The commenter also urged the Proposed §464.1(c) in the NPRM Commission examines conduct from the Commission to exclude from the rule defined ‘‘clear(ly) and conspicuous(ly),’’ perspective of a consumer acting sellers of franchises (‘‘franchisors’’) consistent with longstanding FTC reasonably under the circumstances, subject to the FTC’s Disclosure practice, as ‘‘a required disclosure that and if a representation or practice Requirements and Prohibitions is difficult to miss (i.e., easily affects or is directed primarily to a Concerning Franchising Rule noticeable) and easily understandable,’’ particular group, the Commission (‘‘Franchise Rule’’), arguing that the and listed proposed specifications for examines reasonableness from the rule’s total price requirement would ‘‘visual disclosure[s],’’ ‘‘audible perspective of an ordinary member of undermine the Franchise Rule’s disclosure[s],’’ and ‘‘any communication that group.189In final §464.1, the requirement to itemize specific fees.183 using an interactive electronic Commission also includes ‘‘mobile Two commenters representing medium.’’ Among other specifications, franchised businesses (‘‘franchisees’’), the definition explained that the 188See Promulgation of Trade Regulation Rule however, urged the Commission to disclosure ‘‘must be made through the and Statement of Basis and Purpose: Rule address ‘‘the types of fees that are same means through which the Concerning Recurring Subscriptions and Other charged to franchisees by franchisors,’’ Negative Option Programs, 89 FR 90476 (Nov. 15, communication is presented.’’ The which are not subject to the Franchise 2024), https://www.federalregister.gov/documents/ proposed definition also provided that 2024/11/15/2024-25534/negative-option-rule Rule.184 disclosures ‘‘must use diction and (amending 16 CFR 425.4); 16 CFR part 465; The Franchise Rule, 16 CFR part 436, syntax understandable to ordinary Promulgation of Trade Regulation Rule and requires franchisors, in connection with Statement of Basis and Purpose: Rule on the Use of consumers and must appear in each the offer or sale of a franchise, to Consumer Reviews and Testimonials, 89 FR 68034 language in which the representation (Oct. 22, 2024), https://www.federalregister.gov/ provide prospective franchisees with that requires disclosure appears’’ and documents/2024/08/22/2024-18519/trade- specific information about the fees and ‘‘must not be contradicted or mitigated regulation-rule-on-the-use-of-consumer-reviews- charges necessary to begin operation of and-testimonials; Guides Concerning Use of the franchised business, including the Endorsements and Testimonials in Advertising, 16 18516 CFR 436.5; see also Fed. Trade Comm’n, CFR 255.0(f). The Commission notes that it declines Staff Guidance on the Unlawfulness of Undisclosed to adopt every modification adopted in the finalized 181FTC–2023–0064–3294 (International Fees Imposed on Franchisees (July 2024), https:// Rule on the Use of Consumer Reviews and Franchise Association). www.ftc.gov/system/files?file=ftc_gov/pdf/ Testimonials, based on the goals of each rule and 182Id. Franchise-Staff-Guidance.pdf. the comment record. 183Id. 186FTC–2023–0064–3189 (National Automobile 189See Deception Policy Statement, 103 F.T.C. at 184FTC–2023–0064–3141 (Coalition of Dealers Association). 175, 177–82; Unfairness Policy Statement, 104 Franchisee Associations); FTC–2023–0064–3211 187FTC–2023–0064–3294 (International F.T.C. at 1073; and other sources cited supra notes (American Association of Franchisees & Dealers). Franchise Association). 151–52. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2086 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations applications’’ within the definition of concerns by setting forth what ‘‘clear(ly) allow for sufficient flexibility ‘‘to better ‘‘clear(ly) and conspicuous(ly).’’ This and conspicuous(ly)’’ means: using accommodate current and future addition clarifies that ‘‘mobile simple terms that provide sufficient advertising mediums that may not allow applications’’ constitute interactive information about how businesses can for the contemplated disclosures,’’ in media devices under item (4) of the formulate disclosures that are easily particular to make it easier for small definition. The Commission does not understandable and noticeable to businesses to comply with the rule.196 believe that these modifications consumers. The definition provides that The commenter did not provide any substantively alter the definition of disclosures ‘‘must stand out from any examples of advertising media that ‘‘clear(ly) and conspicuous(ly).’’ accompanying text or other visual would make it difficult to comply with The Commission declines to adopt elements’’ to be ‘‘easily noticed, read, the rule and did not suggest alternative several modifications to the definition and understood.’’ language. Similarly, a commenter of ‘‘clear(ly) and conspicuous(ly)’’ An automobile industry group urged representing app-based delivery proposed by a consumer group. First, the Commission to remove ‘‘required platforms noted the limited space for the commenter suggested that the disclosure’’ from the definition of disclosures on delivery platforms and Commission add ‘‘limited English ‘‘clear(ly) and conspicuous(ly),’’ arguing asserted that the rule lacked clarity as to proficient consumers’’ to the list of that ‘‘the NPRM is silent on what those how such platforms should comply.197 specific audience-types that a required disclosures actually are.’’193 The Commission believes that the representation or sales practices may The Commission disagrees and notes definition of ‘‘clear(ly) and target in proposed §464.1(c)(8) to make that the final rule modifies §464.2(a) conspicuous(ly)’’ provides basic, clear that disclosures are through (c) to provide greater clarity common-sense, and flexible principles understandable for both English and concerning what needs to be disclosed, to address current and future limited-English speakers.190The including total price and other advertising media. For example, the Commission does not believe such a information related to fees or charges definition requires that visual modification is necessary. While the that were excluded from total price, and disclosures be in a size and font that definition includes examples of specific the nature, timing, and prominence of consumers will easily notice and not be audiences who may be targeted by those disclosures. Those modifications obscured by other text and that audible particular sales practices or are discussed in detail in section III.B. disclosures be at a volume, speed, and representations, the use of ‘‘such as’’ is One commenter on behalf of members cadence that consumers will easily intended to make clear these are in the financial services industry understand. In keeping with examples, rather than an exhaustive list asserted that the definition of ‘‘clear(ly) longstanding Commission interpretation of categories of consumers who may be and conspicuous(ly)’’ may conflict with and guidance, the definition does not targeted. The Commission further notes requirements of certain financial mandate specific fonts, text-size, or that final §464.1 requires that the services regulations, which do not volume, or otherwise impose a one-size- disclosures ‘‘must appear in each generally require a certain text size or fits-all approach. Instead, it provides language in which the representation placement, but do require that certain substantial flexibility to businesses in that requires the disclosure appears.’’ disclosures be made with ‘‘equal meeting the rule’s disclosure The commenter also suggested that prominence and in close proximity to requirements so long as consumers take the Commission add language to require certain trigger terms.’’194The away an accurate understanding of the that disclosures on interactive electronic Commission does not believe that disclosure. The Commission has media ‘‘be capable of being printed and financial services regulations are published multiple resources to assist saved in an easily readable format.’’191 implicated by the final rule’s more businesses in ensuring that disclosures The Commission does not believe such narrow application to covered goods or are clear and conspicuous, including a a modification is necessary. The services. Nonetheless, the Commission guide specifically geared toward digital definition considers the various types of notes that the definition does not and mobile advertising.198 media through which consumers and require a particular text size or businesses transact and, for all types of placement; the definition states that 4. Covered Good or Service media, the definition requires the ‘‘clear(ly) and conspicuous(ly)’’ requires In the NPRM, the Commission disclosures to be ‘‘easily noticeable (i.e., a visual disclosure to ‘‘stand out from solicited comment on whether it should difficult to miss).’’ Thus, the any accompanying text or other visual narrow the businesses covered by the Commission believes that the definition elements so that it is easily noticed, rule to particular industries or to provides businesses with flexibility to read, and understood.’’ covered businesses, and if so, how to A commenter on behalf of marketing continue transacting effectively and define covered businesses.199The final and advertising businesses criticized the efficiently through different media, rule includes a definition for ‘‘covered proposed definition of ‘‘clear(ly) and while ensuring sufficient consumer good or service’’ to include: (1) Live- conspicuous(ly)’’ as imposing understanding of required disclosures. event tickets; or (2) Short-term lodging, ‘‘prescriptive visual and audio The commenter further proposed that including temporary sleeping disclosure[s] . . . that may not cleanly the rule clarify that disclosures must be accommodations at a hotel, motel, inn, map onto all advertising mediums’’ and concise to discourage businesses from short-term rental, vacation rental or argued that a business’s compliance ‘‘listing hundreds of optional fees, other place of lodging. Under §464.2(a), obligations may not be clear if the identifying fees that would not be business relies on advertising mediums applicable to the consumer, providing a 196Id.
conversely urging it to limit the rule to 205See, e.g., FTC–2023–0064–3248 (DC Jobs With deceptive fees in the rental housing live-event ticketing and short-term Justice on behalf of Fair Price, Fair Wage Coalition industry.210Conversely, advocates from lodging industries. One advocacy group encouraged the Commission to maintain an argued that narrowing application of the industry-neutral rule applicable to the restaurant 207See, e.g., FTC–2023–0064–3275 (Berkeley final rule to a subset of industries would industry); FTC–2023–0064–2885 (AARP Center for Consumer Law & Economic Justice et al.). commented that many consumers ‘‘feel deceived 208See, e.g., FTC–2023–0064–3191 (Community ‘‘create an unlevel playing field’’ and when faced with an unexpected mandatory charge,’’ Catalyst et al.). alter competitive incentives.200Other such as ‘‘service fees,’’ ‘‘living wage fees,’’ or 209FTC–2023–0064–2888 (Housing Policy Clinic, commenters argued that hidden or ‘‘kitchen fees,’’ and ‘‘would prefer these costs be University of Texas School of Law stated, ‘‘it is deceptive fees are present across incorporated into the price of food so that they essential for the rule to cover the rental housing industries and often impact vulnerable better understand restaurants’ costs upfront.’’); industry in order to mitigate the harmful impacts FTC–2023–0064–0103 (Individual Commenter of unfair and deceptive fees on renters.’’); FTC– populations.201Several commenters did stated: ‘‘[R]estaurants are adding surcharges [for] 2023–0064–2858 (U.S. House of Representatives, not specifically address the providing health insurance, or to make sure that Rep. Maxwell Alejandro Frost, Rep. Jimmy Gomez, Commission’s question regarding kitchen crew receives a tip. But these are existing Rep. Barbara Lee, Rep. Rashida Tlaib, Rep. Kevin whether to add a definition of ‘‘covered operating costs that can and should be factored into Mullin, Rep. Dwight Evans, Rep. Judy Chu, Rep. the price. . . . On atl east a couple occasions, the Greg Casar, Rep. Dan Goldman, and Rep. Salud business’’ or how to define ‘‘covered add-on fee wasn’t even disclosed until the check.’’); Carbajal encouraged an industry-neutral rule but business,’’ but instead submitted FTC–2023–0064–0119 (Individual Commenter urged the Commission at minimum to include live- comments highlighting unfair and stated: ‘‘Fees of approximately 5–20% are often event ticketing, short-term lodging, and the rental deceptive pricing practices in certain added to restaurant bills. . . . They are often housing industries in the final rule.); FTC–2023– 0064–3275 (Berkeley Center for Consumer Law & industries, and encouraging the written in small font in inconspicuous places on the Economic Justice et al. commented that: menu or past blank space on websites. It’s often Commission to adopt a final rule ‘‘Exempting landlords from the Rule as other unclear where these additional fees are going and applicable to those industries. Those should be simply incorporated into the menu commenters have proposed would deprive the Commission of a critical tool to challenge purveyors included comments concerning the prices.’’); FTC–2023–0064–0120 (Individual of junk fees charged in connection with a basic motor vehicle industry;202delivery Commenter stated: ‘‘Now restaurants are adding necessity of life, one that is disproportionately applications;203the financial services service fees instead of increasing food price. I want relevant to low-income consumers.’’). to buy goods and services, I want to know the full 210See, e.g., FTC–2023–0064–3218 (National price, with all the extra fees and taxes before, not Consumer Law Center collected consumer 200FTC–2023–0064–2887 (Progressive Policy after selecting a goods or service.’’); FTC–2023– comments highlighting: ‘‘a ‘technology fee’ Institute). 0064–0152) (Individual Commenter stated: addendum that adds 1% fee of total rent on top of 201FTC–2023–0064–1519 (NYC Consumer and ‘‘Tipping since covid is crazy now too—and now rental cost’’; ‘‘an extra $255 in mandatory fees, for Worker Protection argued that ‘‘[c]onsumers these add on fees appear to be creeping into services I don’t even want’’; and ‘‘water, sewer, and deserve every business to be transparent and fair restaurants. A local pizza restaurant added a 20% garbage fees would be charged over and above the about prices.’’); FTC–2023–0064 (Berkeley Law ‘gratuity fee’ on the bill—this was not a tip but an base rent we agreed to . . . [that] could add as stated that ‘‘[r]estricting the Rule to particular additional charge for ‘business costs’ and does not much as $250 extra per month to our rent.’’); FTC– industries would exclude some of the most critical go to employees.’’); FTC–2023–0064–0065 2023–0064–3271 (U.S. Senator Amy Klobuchar sectors that low-income people especially rely on,’’ (Individual Commenter stated: ‘‘A number of commented discussing a hearing conducted including ‘‘the rental housing market, tax restaurants here in Chicago are now adding concerning rental housing competition and noting preparation services, payday lenders, and gift card surcharges that are only disclosed after you get the that: ‘‘[R]enters are often hit with numerous junk merchants’’); FTC–2023–0064–3282 (NCLC check, or they are disclosed in small print on the fees that are only disclosed to them when signing highlighted hidden or deceptive fees in ‘‘businesses menu, which effectively makes the prices displayed a lease—frequently after the renter has already that offer credit, lease, or savings products’’)
states with sales tax prohibit retailers from The Commission notes that the including sales taxes, including taxes collected Ad 2 v 37 is S o e r e s , , e In .g c . . , ) ; F F T T C C – – 2 2 0 0 2 2 3 3 – – 0 0 0 0 6 6 4 4 – – 3 3 1 2 0 1 0 7 ( C (B iv o i w ta l s i ng modifications in the final rule to the from both suppliers and consumers, in the sales Proprietors’ Association of America); FTC–2023– definition of ‘‘government charges’’ price,’’ and cited to states including Alabama, Florida, Georgia, Indiana, Maryland, Massachusetts, 0064–3127 (U.S. Chamber of Commerce); FTC– represent a narrowing of the final rule. 2023–0064–3233 (NCTA—The internet & Television Oklahoma, Pennsylvania, and others.); FTC–2023– businesses must still make the Association).
0064–3126 (Tax Foundation stated, ‘‘many states disclosures required by §464.2(c) in prohibit sales tax-inclusive pricing,’’ highlighting 238FTC–2023–0064–3234 (CTIA—The Wireless Alabama as a State in which the legal incidence of Association). connection with government charges sales tax on the seller may ‘‘obligate a vendor, per 239See, e.g., id.; FTC–2023–0064–3217 (Bowling and are prohibited by §464.3 from the proposed Rule, to list the sales tax-inclusive Proprietors’ Association of America); FTC–2023– misrepresenting the nature, purpose, price if selling to an Alabama resident—which not 0064–3295 (USTelecom—The Broadband only presupposes advance knowledge of the Association). consumer’s location, but forces the vendor to 240FTC–2023–0064–3233 (NCTA—The internet & 241FTC–2023–0064–3204 (Expedia Group). disregard Alabama’s requirement that the list price Television Association); FTC–2023–0064–3127 242FTC–2023–0064–3120 (Arizona Indian not include sales tax.’’). (U.S. Chamber of Commerce). Gaming Association). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2091 amount, or refundability of government the commenter argued that the proposed intended to prevent businesses from charges. definition fails to consider the inappropriately excluding from total unpredictability of shipping fees, noting price costs unrelated to shipping.
6. Pricing Information that precise costs are difficult for One live-event ticket platform Proposed §464.1(e) in the NPRM retailers to determine because shipping supported the proposed rule’s exclusion defined ‘‘pricing information’’ as ‘‘any costs are frequently based on quotes or of certain shipping costs from total information relating to any amount a estimates subject to change based on the price, noting that the cost to ship consumer may pay.’’ The final rule carrier.244The commenter noted that physical tickets may vary based on references pricing information in one businesses may face challenges using factors determined later in the provision: §464.2(b). As discussed in certain shipping methods, including transaction, such as the location of the section III.B.2, final §464.2(b) is limited consolidating shipment of multiple buyer.246The commenter also noted to covered goods or services and orders or using rail service for partial that a variety of delivery and shipping requires that, in any offer, display, or shipment, which it argued can be methods may be available to consumers advertisement that represents any price particularly difficult to predict. Second, purchasing live-event tickets, some of of a covered good or service, a business the commenter asked that the which may be mandatory and therefore disclose the total price more Commission modify the definition of included in total price.247The prominently than any other pricing ‘‘shipping charges’’ to explicitly permit Commission emphasizes that certain information. However, where the final the use of flat rate shipping, explaining fees do not fall within the definition of amount of payment for the transaction that many businesses have existing ‘‘shipping charges,’’ including online is displayed, the final amount of agreements with major freight carriers to ‘‘convenience’’ or other fees charged, for payment must be disclosed more provide flat rate shipping. For example, example, by online ticket agencies to prominently than, or as prominently as, the commenter asked whether the use of electronically ‘‘deliver’’ tickets or other the total price. flat rate shipping charges would be processing fees associated with certain A commenter from the financial considered unlawful if the business online purchases. The Commission services industry asserted that the shipped a small, lightweight item for further notes that an online convenience proposed definition of ‘‘pricing which the actual shipping costs are less or other fee for electronic delivery of a information’’ would be inappropriate for than the flat rate to ship. Finally, the ticket should be included in total price ‘‘standard bank products, such as commenter argued that the use of the if a consumer cannot obtain the ticket as checking, savings, CDs, consumer loans, phrase ‘‘reasonably reflect’’ in the part of the same transaction (i.e., online) etc.’’ and failed to address the treatment definition is ambiguous and asked that without incurring a fee. While the of interest rates for products and the Commission clarify whether the Commission received comments raising services governed by existing financial definition includes a scienter concerns about incorporating the cost of regulations.243The commenter’s requirement. Two commenters also delivery, as opposed to shipping, into concerns about the definition of asserted that the rule would ‘‘force’’ total price,248the Commission is not ‘‘pricing information’’ are inapplicable businesses to disclose proprietary aware of any evidence that such because the final rule, including shipping calculations in a threat to free concerns would apply to sales of live- §464.2(b), is limited to covered goods or market competition.245 event tickets or short-term lodging. services. Accordingly, the final rule The Commission’s use of the phrase Finally, the Commission also received adopts the proposed definition of ‘‘reasonably reflect’’ is intended to allow a range of comments regarding handling ‘‘pricing information’’ at §464.1 without for flexibility in determining shipping costs. Some commenters urged the modification.
7. Shipping Charges precise shipping costs may not be ‘‘shipping charges’’ to clarify that knowable until the end of a transaction, internal handling costs do not constitute Proposed §464.1(f) in the NPRM and, for that reason, the final rule shipping costs and therefore must be defined ‘‘shipping charges’’ as ‘‘the fees or charges that reasonably reflect the permits businesses to exclude shipping included in total price.249The amount a business incurs to send charges from total price. The rule does comments related to handling costs physical goods to a consumer through not require that the cost of shipping involving goods or services covered by the mail, including private mail reflect an exact certainty. Moreover, the the broader proposed rule in the services.’’ The NPRM made clear that rule does not require businesses to NPRM.250While the Commission has businesses are not permitted to disclose proprietary information not received any evidence that the pertaining to relationships with freight artificially inflate the cost of shipping, and, instead, shipping charges must or shipping providers because the rule 246FTC–2023–0064–3266 (StubHub, Inc.). reasonably reflect the cost incurred to does not require that shipping charges 247Id. be excluded from total price; instead, 248See, e.g., FTC–2023–0064–3263 (Flex send goods to consumers. Final §464.1 adopts the proposed definition of the rule permits businesses to exclude A Pr s o s g o r c e i s a s t ) i ; o F n T ); C F – T 2 C 0 – 2 2 3 0 – 2 0 3 0 – 6 0 4 0 – 6 3 4 1 – 8 3 6 1 ( 3 N 7 a ( t C io h n a a m l L be G r B o T f ‘‘shipping charges,’’ with a minor shipping charges from total price if they Chamber of Commerce and National Asian/Pacific modification to clarify that shipping choose. The final rule does not prohibit Islander American Chamber of Commerce & charges incurred through private mail businesses from incorporating the cost Entrepreneurship); FTC–2023–0064–3238 (Gibson, and shipping services such as FedEx of shipping into total price and thereby Dunn & Crutcher LLP); FTC–2023–0064–3267 (National Retail Federation).
and UPS, or by freight, fall within the providing shipping to consumers at no 249See, e.g., FTC–2023–0064–3146 (Institute for definition. additional charge. Nor does the final Policy Integrity, New York University School of One trade association raised rule prohibit the use of flat rate shipping Law); FTC–2023–0064–1294 (James J. Angel, Ph.D., numerous concerns about the proposed or shipping costs based on national CFP, CFA, Professor, Georgetown University, McDonough School of Business).
definition of ‘‘shipping charges.’’ First, averages. Instead, the language is 250FTC–2023–0064–3146 (Institute for Policy Integrity, New York University School of Law);
8. Total Price or charges for goods or services that a the Commission clarify the distinction reasonable consumer would expect to be Proposed §464.1(g) in the NPRM between ‘‘core’’ goods and services and included with the purchase.256 defined ‘‘total price’’ as ‘‘the maximum ancillary goods or services,253provide Commenters disagreed on whether the total of all fees or charges a consumer guidance as to which ancillary goods or rule text is clear that ‘‘total price’’ must pay for a good or service and any services are mandatory,254and modify includes unavoidable fees and fees mandatory ancillary good or service, the ‘‘total price’’ definition to exclude based on consumer expectations, and except that shipping charges and the reference to mandatory ancillary recommended clarifying the definition government charges may be excluded.’’ goods or services.255 of ‘‘total price’’ in this regard or adding Although some commenters stated that The Commission has considered these a definition of mandatory fees.257Other the proposed definition was not flexible comments and declines to accept these commenters argued that the two types of enough to account for all pricing proposed modifications to the definition fees described are themselves vague and models, the Commission believes the of ‘‘total price.’’ The definition of ‘‘total unclear.258 modified definition of ‘‘total price’’ is price’’ specifies that it includes the cost Businesses should consider, in the narrowly tailored to protect consumers of the goods and services being offered context of their specific business by addressing the identified unfair and and any mandatory ancillary goods or practices, the Commission’s guidance deceptive practice of hiding costs by services, subject to certain exceptions. that mandatory fees include charges that omitting mandatory fees from advertised The Commission retains in the consumers cannot reasonably avoid and prices for covered goods or services. definition of ‘‘total price’’ fees and charges for goods or services that a Consumers must be able to purchase charges for ‘‘any mandatory ancillary reasonable consumer would expect to be and use goods or services at the good or service’’ as necessary to protect included with the purchase because advertised total price. consumers from the identified unfair they are necessary to make primary Final §464.1 differs from the and deceptive practice of hidden fees. The Commission also declines to goods or services fit for their intended proposed definition of ‘‘total price’’251 modify the rule to add a definition of purpose. The Commission reiterates the to the extent the definitions of ‘‘mandatory fees.’’ The Commission guidance about total price that it ‘‘government charges’’ and ‘‘shipping cannot identify in advance a definitive provided in the NPRM: It is well charges,’’ as discussed in section III at list of mandatory fees because whether established that it is deceptive to offer A.5 and A.7, are modified. In addition, a particular fee will be mandatory or goods or services that are not fit for the the Commission clarifies in final §464.1 optional will depend on the specific purpose for which they are sold. By that businesses also may exclude from facts of an individual business offering goods or services, businesses total price any fees or charges for transaction, as described in section impliedly represent that the goods or optional ancillary goods or services.
(d) Exclusions From Total Price B. §464.2 Hidden Fees Prohibited the identity of the good or service for The definition of ‘‘total price’’ in final Proposed §464.2(a) and (b) in the which the fees or charge is imposed, as §464.1 is modified from the proposed NPRM provided, respectively, that it well as the final amount of payment for definition to the extent that the would be a violation of the rule for a the transaction. Importantly, to preserve definitions of ‘‘government charges’’ business to ‘‘offer, display, or advertise choice and control for businesses, and ‘‘shipping charges’’ are modified, as an amount a consumer may pay without §464.2(c)’s disclosures with respect to discussed in section III at A.5 and A.7. clearly and conspicuously disclosing government charges and shipping Finally, the definition of ‘‘total price’’ total price’’ and that ‘‘[i]n any such charges are only required if a business clarifies that businesses may exclude offer, display, or advertisement that elects to permissibly exclude such fees or charges for optional ancillary contains an amount a consumer may charges from total price. Similarly, goods or services. pay, a business must display total price §464.2(c)’s disclosures with respect to more prominently than any other fees for optional ancillary goods or (e) Intersection With IRS Requirements pricing information.’’ As discussed services are only required if the One commenter sought clarification herein, final §464.2 makes certain consumer has elected to purchase such as to the intersection of the total price modifications to proposed §464.2(a) goods or services as part of the same requirements with Internal Revenue and (b) and consolidates all provisions transaction and the business has Service (‘‘IRS’’) requirements regarding related to disclosures by relocating excluded their fees from total price. charitable gifts.273The commenter proposed §464.3(b), with certain Nothing in the final rule requires a specifically highlighted a scenario in modifications, to final §464.2(c). business to disclose commercially which charitable contributions are made As discussed in section III.B.1 and sensitive information regarding the concurrent with ticket sales. The III.B.2, to address commenter concerns components of its total price. Commission is not aware of—and that ‘‘an amount a consumer may pay’’ The Commission discusses herein indeed, the commenter did not cite to— is vague and overbroad, the Commission changes to the text of the proposed modifies final §464.2(a) and (b) as provisions and addresses substantive (FreedomWorks); FTC–2023–0064–3263 (Flex compared to the NPRM proposals to comments about these provisions, Association); FTC–2023–0064–3258 (National focus their required disclosures on including how §464.2 would apply to Taxpayers Union Foundation).
(a) Contingent Fees allow fees to scale based on the nature of the items which ultimate price may depend on a or services purchased, is a significant oversight.’’);
(b) Ticket Service Fees businesses nonetheless should clearly fees such as for payment processing, Businesses operating in the live-event disclose a ticket’s true, all-in price (i.e., electronic ticket ‘‘delivery,’’ ticketing industry, including venues, total price).283Another industry ‘‘convenience,’’ or similar add-on ticket sellers, and ticket resellers, member commented that unless an ticketing fees are mandatory and must historically have imposed on consumers added fee is truly optional, it should be be included in total price if a consumer a host of charges in addition to the cannot obtain the covered good or ticket’s face value that are dripped in Emeritus at the American Enterprise Institute, service as part of the same transaction throughout the purchasing process. One ‘‘urge[d] the FTC to ensure that any rule requiring (e.g., online) without incurring the fee. of the rule’s principal purposes is to all-in pricing in live events apply equally to all Final §464.3 also prohibits businesses market participants.’’); FTC–2023–0064–2856 give consumers upfront knowledge of (National Football League stated that if the live- from misrepresenting the nature or the true cost of a good or service, event ticket industry is included in the rule’s purpose, or the identity of the good or including mandatory charges, without coverage, the Commission must ‘‘include all sellers service for which fees are imposed. being forced to navigate through a time- of live-event tickets to prevent inconsistencies in its Some industry members expressed application.’’).
intensive search and transaction. A concern that the rule would prohibit 281See, e.g., FTC–2023–0064–3122 (Vivid Seats broad swath of industry members commented that service fees ‘‘are the TRM’s [ticket itemization of fees in addition to total supported a nationwide total price resale marketplace’s] sole source of revenue and price, while others argued that it should requirement for ticket pricing,280 provide the capital necessary to operate the TRM.’’); prohibit such itemization.285The FTC–2023–0064–3306 (Live Nation Entertainment Commission clarifies that, so long as and its subsidiary Ticketmaster North America 279In some instances, advertising prices as a base commented that a ticket service charge total price is displayed clearly and or starting price can be deceptive, depending on the ‘‘compensates the venue for hosting the event and conspicuously, and more prominently relevant limiting or qualifying criteria. In such the ticketing company for distributing tickets and than any itemized fees, the rule does not instances, the material terms, conditions and related services—important since venues and obligations upon which receipt and retention of the ticketing companies typically do not share in prohibit businesses from itemizing the base or starting price are contingent should be set revenues attributable to a ticket’s face value.’’). forth clearly and conspicuously at the outset of the 282See, e.g., FTC–2023–0064–3122 (Vivid Seats 284FTC–2023–0064–3266 (StubHub, Inc. offer so as to leave no reasonable probability that commented that delivery fees cover costs associated supported the exclusion of ‘‘fees for optional add- the terms of the offer might be misunderstood. with delivering a ticket.); FTC–2023–0064–3306 on features selected at the discretion of the 280See, e.g., FTC–2023–0064–3266 (StubHub, Inc. (Live Nation Entertainment and its subsidiary consumer.’’ As an example, the commenter stated, submitted a comment supporting nationwide all-in Ticketmaster North America); FTC–2023–0064– ‘‘[I]n some instances, consumers may not have a pricing and including Total Price in every 3292 (National Association of Theatre Owners choice on delivery method. In those cases, delivery advertisement to consumers and throughout the commented: ‘‘These fees allow moviegoers to fees are mandatory and should be included in the transaction.); FTC–2023–0064–3105 (Charleston purchase tickets and select their seats from home, [Total Price] because the consumer has no Symphony commented: ‘‘[R]equiring sellers to and this service requires ongoing support and discretion to choose. In other instances, consumers disclose the total price clearly and conspicuously[] management, entailing operational costs that are have multiple delivery options at different price addresses a pressing issue. . . . Predatory practices offset by convenience fees. At the same time points.’’). in the secondary ticket sales market pose a customers can avoid the convenience fee altogether 285See, e.g., FTC–2023–0064–3230 (Future of significant threat to artists, venues, audiences, and by purchasing directly at the box office.’’) FTC– Music Coalition commented that ‘‘adopting all in the future of nonprofit arts organizations, impacting 2023–0064–3264 (Mark J. Perry, Ph.D., Professor pricing without itemization [of the base ticket price the integrity of the ticket-buying process and Emeritus of Economics at University of Michigan- or face value and of fee amounts] would be a gift eroding audience confidence.’’); FTC–2023–0064– Flint and Senior Fellow Emeritus at the American to . . . predatory resellers.’’); FTC–2023–0064–3250 3122 (Vivid Seats stated that it ‘‘supports additional Enterprise Institute, commented that ticket resale (National Independent Talent Organization stressed consumer disclosures, including all-in pricing,’’ but marketplaces offer numerous valuable services to ‘‘the need for an itemized breakdown of ticket fees’’ the rule should ‘‘apply equally across all parts of ticket sellers and buyers that a single seller or buyer and called for ‘‘fees to be clearly itemized the live-events ticketing industry,’’ so consumers could not access otherwise, including access to throughout the purchasing process.’’); FTC–2023– can compare prices and businesses that display buyers or tickets, inventory management, seller and 0064–3304 (Recording Academy commented: ‘‘Price total prices will not be at a competitive customer support, secure financial transactions, and itemization is the only way to effectively regulate disadvantage.); FTC–2023–0064–3241 (National guarantees.’’). transparent pricing in a manner that truly informs Association of Ticket Brokers submitted a comment 283FTC–2023–0064–3306 (Live Nation the consumer about how their dollar is being spent supporting all-in pricing, but noting that it would Entertainment and its subsidiary Ticketmaster . . . . Additionally, price itemization is the only only work if ‘‘(i) it was required of every ticket North America commented: ‘‘Because the practice way to effectively hold third party fees and charges seller and (ii) there was rigorous and expeditious of adding these charges to the ticket’s face value has in check.’’). But see FTC–2023–0064–3212 enforcement.’’); FTC–2023–0064–3306 (Live Nation been so longstanding, consumers have come to (TickPick, LLC commented that the rule ‘‘must Entertainment and its subsidiary Ticketmaster expect service fees when purchasing a ticket to a prohibit the itemization of fees and charges that North America commented that they ‘‘support[] a live entertainment event—but it is impossible for make up the Total Price (other than breaking out definition of all-in pricing that requires the first consumers to anticipate the amount of applicable government taxes and shipping fees) in order to price for a live-event ticket shown to consumers to fees because those rates are set by hundreds of prevent harm from hidden and/or misleading fees.’’ be the price ultimately charged at checkout different venues and can vary accordingly.’’ The The commenter stated concerns that such fees were (exclusive of state and local taxes and optional add- commenter continued, ‘‘Consumers therefore need ‘‘arbitrary’’ and ‘‘any secondary ticketing ons).’’); see also FTC–2023–0064–3264 (Mark J. clear disclosures about the true price of a ticket, marketplace that itemizes mandatory fees and Perry, Ph.D., Professor Emeritus of Economics at including the elements that constitute the all-in charges is arguably misrepresenting the ‘nature and University of Michigan-Flint and Senior Fellow price.’’). purpose of any amount a consumer may pay.’’’). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2097 charges imposed on a transaction. choosing another form of payment.289 consumers multiple viable payment However, any such itemization must not An academic commenter suggested that options for the offered transaction, so misrepresent the nature, purpose, prominent disclosure of a credit card that paying with a credit card is amount, or refundability of the itemized surcharge in advance, so consumers can optional, then credit card fees need not fees, including the identity of the goods avoid it, would benefit consumers and be included in total price. The same is or services for which they are being reduce business costs more than true for debit card surcharges and other charged. requiring such charges to be included in payment processing fees. total price.290A tenant advocacy legal A business that provides at least one (c) Credit Card and Other Payment clinic that generally supported requiring viable method to pay for the offered Processing Surcharges credit card processing charges to be transaction without a fee, chooses to The rule requires businesses to included in total price, suggested that pass through payment processing fees to include credit card surcharges or such charges might be reasonably consumers, and excludes such fees from processing fees in total price only if they avoidable if disclosed in advance to let total price would have to clearly and choose to make payment by credit card consumers use a different payment conspicuously disclose the nature, mandatory. If, on the other hand, credit method.291Another academic purpose, and amount of the processing card use is optional because consumers commenter recommended that the fees before a consumer consents to pay. can use multiple payment options, those Commission clarify that, while credit In addition, nothing in the rule fees do not need to be included in total card surcharges need not be included in prohibits businesses that accept price. If the consumer chooses to use a total price, a business can only pass multiple viable forms of payment from credit card, businesses must clearly and through the actual amount of the charge advertising two prices, one that includes conspicuously disclose the nature, and must clearly and conspicuously credit card or other payment processing purpose, and amount of any credit card disclose any markup it imposes.292 fees and one that does not. It is the surcharge before the consumer consents The Commission notes that the rule Commission’s understanding that some to pay. Some commenters expressed does not prohibit a business from businesses already do this, and such a concern about the rule’s application to charging or passing through credit card strategy is consistent with the rule. credit card fees but, as discussed herein, fees if otherwise allowed by law. The In addition, under final §464.3, a the Commission was not persuaded by rule does not affect State laws that business that offers, displays, or the comments to change the proposed prohibit credit card surcharges. Whether advertises a covered good or service rule as it applies to such fees.
regional market conditions will alter the price of delivery.’’). price might discourage businesses from 296See, e.g., FTC–2023–0064–3233 (NCTA—The offering them.299A competition policy abandon discounts on bundles of goods or bulk Internet & Television Association stated that the orders, because ‘‘the total price of each good could rule would interfere with ‘‘efforts to advertise 297Id. vary depending on the other items in the customer’s p w r o ic u i l n d g r n eq at u i i o r n e w im id p e r a o c r t t i o c a a l b a r n o d a d te a c u h d n i i e c n al c l e y ’ ’ and 298See, e.g., FTC–2023–0064–2919 (National cart.’’). challenging geo-targeted advertising. The Automatic Merchandising Association) (expressing 300FTC–2023–0064–2887 (Progressive Policy commenter further stated that businesses may be concern that the rule would ban offering cash Institute commented, ‘‘the proposed disclosure incentivized to ‘‘‘‘advertis[e] a Total Price for a discounts); see also, FTC–2023–0064–3217 requirements may interfere with the use of different particular service option that overstates the price (Bowling Proprietors’ Association of America) pricing models that provide value to consumers and that most consumers would actually end up paying (stating that requiring businesses to consolidate are the basis upon which some firms compete,’’ at their service location (i.e., the Total Price would ‘‘diverse pricing models into a single displayed such as unbundled pricing models when ‘‘the total be the maximum price that any potential customer price could lead to significant consumer confusion price may not be known until the consumer in the provider’s footprint would have to pay for and dissatisfaction.’’). completes the purchase process,’’ and therefore, a the service),’’ which would ‘‘confuse consumers 299FTC–2023–0064–3263 (Flex Association ‘‘requirement to display prices before the purchase and undermine the type of comparison-shopping commented that some fees cannot be calculated at . . . may mislead consumers and distort the FTC is aiming to facilitate. Bundled pricing the start of a transaction, including for discounts competition.’’). would be even more challenging to calculate and and special offers: ‘‘For example, a ‘two-for-one’ 301FTC–2023–0064–3187 (U.S. Department of represent in advertising, given that each bundled offer cannot be activated until two eligible items are Justice, Antitrust Division). service could have multiple different applicable added to a shopping cart.’’); FTC–2023–0064–3137 302Id. taxes or surcharges.’’). (Chamber of Progress commented that sellers may 303Id. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2099 (f) Online Marketplaces wholesalers.305Travel Tech explained consumers can more easily navigate the that travel service providers determine myriad of choices they have when it The rule covers sellers and online the rates, terms, and mandatory fees, comes to places to stay.312 marketplace platforms or other including resort fees, applicable to their The Commission declines to adopt intermediaries in the same manner as travel services, and that only travel blanket immunity from the rule for other businesses that offer covered service providers know whether the intermediaries that depend on providers goods or services. Various commenters, nature and purpose of any fee they of live-event tickets and short-term however, highlighted the challenges impose is accurate.306Travel Tech lodging for accurate pricing information. some businesses may face in members, which consist of the The Commission, clarifies, however, implementing the rule if it is applied aforementioned intermediaries, use the that the final rule applies to business-to- equally to all online marketplace information provided to them directly business (‘‘B2B’’) transactions as well as stakeholders. The Commission’s review from travel service providers, or business-to-consumer transactions. of the comments, as discussed herein, indirectly through other intermediaries, Businesses such as travel service did not identify any persuasive reason to aggregate, sort, and display offers on providers that sell or advertise through to change the rule as it applies to online their sites and applications, and intermediaries must provide such marketplaces for covered goods or consumers in turn use this information entities with accurate pricing services.
‘‘similarly situated to consumers in that they are 308FTC–2023–0064–3293 (Travel Technology 313FTC–2023–0064–3294 (International also dependent on Travel Service Providers such as Association); FTC–2023–0064–3262 (Skyscanner Franchise Association). hotels to provide accurate, complete, and timely Limited). 314Id. information before booking.’’); FTC–2023–0064– 309Id. 315See, e.g., Complaint ¶¶1–7, 13–87, FTC v. 3262 (Skyscanner Ltd. highlighted ‘‘the numerous 310FTC–2023–0064–3293 (Travel Technology Arise Virtual Solutions, Inc., No. 24–cv–61152 (S.D. and complex ways in which metasearch sites Association). Fla. July 2, 2024), https://www.ftc.gov/system/files/ receive pricing information directly from hotels and 311FTC–2023–0064–3094 (American Hotel & ftc_gov/pdf/arise_complaint.pdf (alleging other short-term lodging providers’’). Lodging Association). Continued VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2100 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations The Commission clarifies that it does must provide the seller with accurate the transaction is displayed, the final not intend to treat intermediaries as the information about the fee’s amount so amount of payment must be disclosed publisher or speaker of information the seller can accurately calculate total more prominently than, or as about pricing or as controlling the price, or otherwise ensure that the total prominently as, the total price. manner of its display where the price is displayed. Travel service Various commenters voiced support intermediary is not responsible, in providers and other sellers, by the same for proposed §464.2(b)’s requirement whole or in part, for such content or token, must provide intermediaries with that total price must be displayed more display.316However, if intermediaries accurate price information. prominently than other pricing are responsible, in whole or in part, for Whether an intermediary, seller, or information.318Certain commenters offering, displaying, or advertising any other business is responsible for stated that the prominence requirement price, including any portion thereof, of offering, displaying, or advertising a will prevent consumer confusion as to a covered good or service, then within price of a covered good or service, may the true price of a good or service.319 the scope of that responsibility, they be a fact- and law-specific Some commenters suggested must give sellers the information determination in which the Commission strengthening the prominence necessary to calculate total price and, can consider issues of participation in, requirement or adding guidance about when uniquely situated to do so, such and control of, unfair or deceptive it.320Other commenters also suggested intermediaries must ensure that they practices, as well as contractual clarifying that the phrase ‘‘an amount a display total price. For example, if an obligations between sellers and consumer may pay’’ refers only to truly intermediary charges a fee for access to platforms and other intermediaries, and mandatory ancillary goods or its platform and the seller passes the fee the applicability of other Federal laws. services.321On the other hand, some through to consumers, the intermediary The Commission will consider issuing and updating business guidance to 318See, e.g., FTC–2023–0064–3266 (StubHub, Inc. defendants made misleading and unsubstantiated address particular or nuanced scenarios, agreed with the FTC’s proposal to require Total earnings claims in selling its Arise business Price in every offer, display, or advertisement opportunity to gig worker consumers seeking to as it has done as a complement to other presented to consumers and that Total Price must work from home in customer service and failed to rulemakings.317 be consistently displayed throughout the provide the disclosures required by the Business transaction); FTC–2023–0064–3306 (Live Nation Opportunity Rule); Complaint ¶¶7–51, In re 2. §464.2(b) Entertainment and its subsidiary Ticketmaster A ht m tp a s z :/ o / n w . w co w m .f , t c In .g c o ., v 1 /s 7 y 1 s t F e . m T. / C fi . l e 8 s 6 / 0 ft , c 8 _ 6 g 1 o – v 7 /p 1 d ( f 2 / 0 21), Proposed §464.2(b) in the NPRM N fo o r r a t h li A ve m -e e v r e ic n a t s ti u c p k p et o r s t h e o d w ‘‘ n re t q o u c i o r[ n in su g] m t e h r e s f t i o rs b t e p t r h ic e e DV171.pdf (alleging defendants deceptively required businesses to display total price ultimately charged at checkout (exclusive of claimed they would give their Amazon Flex drivers price more prominently than any other state and local taxes and optional add-ons). This 100% of consumer tips when in fact they withheld pricing information in any offer, price should be clearly displayed on the initial nearly a third of the tips from their drivers); landing page and easily discernible.’’ The Complaint ¶¶13–65, FTC v. First American display, or advertisement that contains commenter proposed adding the phrase, ‘‘from the Payment Systems, LLC, No. 4:22–cv–00654 (E.D. TX an amount a consumer may pay. first instance a consumer sees a price for a good or July 29, 2022), https://www.ftc.gov/system/files/ftc_ Following review of the comments, the service’’ to the end of proposed §464.2(a) and gov/pdf/Complaint%20%28file%20stamped%29_ Commission finalizes §464.2(b) with moving the phrase, ‘‘as soon as pricing information 0.pdf (alleging defendants made false claims about is provided to the consumer’’ before ‘‘more their payment processing services, including about three modifications. First, as already prominently than any other Pricing Information’’ in total monthly fees, savings opportunities, and the discussed in this section, the proposed §464.2(b).); FTC–2023–0064–3290 (U.S. ease of cancelling automatically-renewing accounts, Commission limits the requirements of Public Interest Research Group Education Fund to small business consumers such as restaurants, §464.2, including §464.2(b), to covered commented: ‘‘[T]he Total Price should be provided nail salons, or small retail businesses); Complaint first and with the most prominence. Businesses ¶¶12–50, FTC v. Yellowstone Capital LLC, No. goods or services. Second, as discussed must not be allowed to confuse consumers with a 1:20–cv–06023 (S.D.N.Y. Aug. 3, 2020), https:// in section III.B.1, the Commission barrage of numbers.’’); FTC–2023–0064–1939 www.ftc.gov/system/files/documents/cases/ narrows the disclosure trigger in (Tzedek DC). 1823202yellowstonecomplaint.pdf (alleging §464.2(a) and (b) to ‘‘an offer, display, 319See, e.g., FTC–2023–0064–3290 (U.S. Public defendants engaged in a pattern of deceptive and Interest Research Group Education Fund); FTC– unfair conduct involving their ‘‘merchant cash or advertisement that represents any 2023–0064–1939 (Tzedek DC commented that advances’’ to small business consumers and made price of a covered good or service.’’ proposed §464.2(b) ‘‘will prevent companies from excess, unauthorized withdrawals from consumers’ Third, as discussed herein, final hiding the real cost of goods and services in fine accounts after consumers already repaid the full §464.2(b) clarifies the prominence print or making the total cost difficult to find.’’). amount they owed); Complaint ¶¶9–104, FTC v. 320See, e.g., FTC–2023–0064–3196 (South requirement with respect to the final Fleetcor Technologies, Inc., No. 1:19–cv–05727– Carolina Department of Consumer Affairs ELR (N.D. Ga. December 20, 2019), https:// amount of payment for a transaction. commented: ‘‘Guidance on how the business can www.ftc.gov/system/files/documents/cases/fleetcor_ Final §464.2(b) thus provides that, in simultaneously comply with the ‘Clearly and complaint_with_exhibits_002.pdf (alleging any offer, display, or advertisement that Conspicuously’ requirement and the prominence defendants marketed fuel cards to business requirement may help with business represents any price of a covered good consumers that operate vehicle fleets, including comprehension and compliance.’’ The commenter many small businesses and made false claims about or service, a business must disclose the suggested adding ‘‘a definition addressing the the fuel card’s savings, fraud controls, and lack of total price more prominently than any different mediums by which the offer, display or set-up, transaction, and membership fees, instead other pricing information. However, advertisement may be relayed to a consumer charging these businesses hundreds of millions of (visual, audio, print, online)’’ and providing where the final amount of payment for dollars in unexpected fees); see also Fed. Trade ‘‘examples of compliance with the requirement of Comm’n, Policy Statement on Enforcement Related prominent display’’ such as ‘‘in a visual disclosure to Gig Work (2022), https://www.ftc.gov/system/ 317See, e.g., Fed. Trade Comm’n, Bureau of presentation of the Total Price in bolded typeface files/ftc_gov/pdf/Matter%20No.%20P227600 Consumer Protection Business Guidance, FTC at least two points larger than any other Pricing %20Gig%20Policy%20Statement.pdf (noting that Safeguards Rule: What Your Business Needs to Information or 14-point font, whichever is larger, protecting gig workers ‘‘from unfair, deceptive, and Know (May 2022), https://www.ftc.gov/business- satisfies the prominence requirement.’’). anticompetitive practices is a priority,’’ and the FTC guidance/resources/ftc-safeguards-rule-what-your- 321See, e.g., FTC–2023–0064–3275 (Berkeley ‘‘will use its full authority to do so’’). business-needs-know; Fed. Trade Comm’n, Bureau Center for Consumer Law & Economic Justice et al. 316See, e.g., FTC–2023–0064–3202 (TechNet of Consumer Protection Business Guidance, FAQs: suggested modifying proposed §464.2(b) to include: stated: ‘‘The FTC’s proposed rule also poses Complying with the Contact Lens Rule (June 2020), ‘‘[A] Business must not automatically include significant harm to online marketplaces by https://www.ftc.gov/business-guidance/resources/ Ancillary Goods or Services in the Total Price or potentially creating liability for platforms that faqs-complying-contact-lens-rule; Fed. Trade automatically select Ancillary Goods or Services for merely display pricing advertised by others. As Comm’n, Bureau of Consumer Protection Business purchase on behalf of the consumer.’’); FTC–2023– publishers, such platforms are likely protected from Guidance, Complying with the Funeral Rule (Aug. 0064–3160 (Consumer Federation of America et al. such responsibility by Section 230 of the 2012), https://www.ftc.gov/business-guidance/ made a similar suggestion and stated it would Communications Decency Act of 1996.’’). resources/complying-funeral-rule. ‘‘ensure that ‘must pay’ is interpreted to include VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2101 industry commenters stated that the displayed as prominently as, or more recommended that the rule allow the prominence requirement may have prominently than, total price. The required disclosures to be made at the unintended consequences that could modification avoids a potential time goods or services are selected.326 harm consumers, such as consumers not unintended consequence of the rule, Commenters argued that requiring noticing an offered discount or a which may have been read to require businesses to explain how fees will be business deciding not to provide any total price to obscure the final amount used is not reasonable and may require pricing information.322As noted in of payment. the disclosure of confidential, section III.B.1.e, nothing in the rule The Commission determines that, proprietary, or commercially sensitive prohibits a business from adjusting total with these modifications, §464.2(b)’s information, such as the business price to account for any applied prominence requirement is clear, rationale for imposing fees and the discounts or other promotional pricing understandable, and unambiguous. specific uses to which businesses put and, given strong market incentives, the fees.327Other commenters
Commission disagrees with comments recommended that the rule require the that the rule’s prohibitions against In final §464.2, the Commission disclosure of the optional nature of hidden and misleading fees will deter consolidates all proposed disclosure optional fees328and regulate opt-in and businesses from advertising prices.323 requirements; therefore, proposed opt-out procedures for fees.329 Final §464.2(b) also clarifies how the §464.3(b) is codified at final §464.2(c). prominence requirement applies to the Proposed §464.3(b) would have The Commission modifies the NPRM final amount of payment for a required businesses to disclose clearly proposal so that final §464.2(c) requires transaction. The Commission recognizes and conspicuously, before the consumer businesses to disclose separately the that the final amount of payment, now consents to pay, the nature and purpose amount, as well as the nature and an explicitly required disclosure under of any amount a consumer may pay that purpose, of each fee or charge imposed final §464.2(c), may differ from total is excluded from total price, including on the transaction for the covered good price due to various factors, such as the the fee’s refundability and the identity or service that is excluded from total exclusion from total price of certain fees of the good or service for which the fee price, and the final amount of payment, or charges, including for any optional is charged. Final §464.2(c) largely before the consumer consents to pay. ancillary good or service, or the adopts the disclosure requirements of The Commission determines that these application of promotional pricing proposed §464.3(b), with certain modifications are necessary for price models. The Commission determines modifications. Specifically, final transparency and to protect consumers that both total price and the final §464.2(c) requires businesses to who would reasonably expect to know amount of payment are material to disclose clearly and conspicuously, the nature, purpose, and amount of fees consumers. The Commission therefore before the consumer consents to pay for they will have to pay, as well as the clarifies that, when the final amount of any covered good or service: The nature, payment is displayed, it must be purpose, and amount of any fee or 0064–3133 (National Multifamily Housing Council charge imposed on the transaction that and National Apartment Association commented any fee or charge that is included by default and has been excluded from total price and t ‘‘ h im at p d r i a s c c t l i o c s a i b n l g e ’ t ’ h a e n n d a r t e u q r u e i a r n in d g p r u en rp ta o l s h e o o u f s f i e n e g s is that the consumer must pay unless they take the identity of the good or service for providers to furnish prospective tenants ‘‘with any affirmative action to opt-out or avoid it.’’ The which the fee or charge is imposed, but fee or charge excluded from the total price that the commenter proposed adding guidance that: ‘‘A not the fee’s refundability; and the final customer may (or may not) have to pay at some c c o h n ar s g u e m is e r n m ot u r s e t a p so ay n a a b f l e y e a o v r o c id h a a b rg le e o if r t i h f e t h fe e e or amount of payment for the transaction. p p o ro in v t i d d e u r r s i n w g i l t l h n e e l e e d a s t e o p d r i a sc c l t o ic s a e l l a y l l m p e o a s n si s b h le o u fe s e i s n . g ’’ ); consumer must pay the fee or charge unless they The Commission makes these FTC–2023–0064–3263 (Flex Association asserted take affirmative action to avoid it. An ancillary good modifications, as discussed herein, in that the ‘‘requirement to disclose the ‘nature and or service is mandatory if a reasonable consumer response to the comments and to purpose’ of a fee is vague’’ and ‘‘provide[s] no would expect the good or service to be included address related concerns. One material benefit to consumers.’’); see also, FTC– with the purchase.’’).
money or led to a more enjoyable vacation.’’ The commenters argued that the provision FTC–2023–0064–3233 (NCTA—The internet & commenter suggested that the rule be more flexible was vague and overbroad, and that its Television Association); FTC–2023–0064–3296 (Bay ‘‘so that Intermediaries can use their expertise to relay the most appropriate information to application to ‘‘any amount a consumer Area Apartment Association); FTC–2023–0064– 3311 (Greater Cincinnati Northern Kentucky consumers.’’); FTC–2023–0064–3296 (Bay Area may pay’’ would make complying with Apartment Association).
Apartment Association commented that the the provision impracticable and result 326FTC–2023–0064–3094 (American Hotel & prominence requirement could have a ‘‘chilling in excessive disclosures that would Lodging Association). effect on the content of commercial speech,’’ with some rental housing providers choosing ‘‘not to confuse consumers into believing that 327See, e.g., FTC–2023–0064–1425 (Iowa Bankers include pricing information in their advertisements, all disclosed fees apply to them when Association); FTC–2023–0064–3263 (Flex and instead invite prospective residents to learn they might not.325One commenter Association asserted that ‘‘[i]t appears that the about pricing on their website or to call their Commission seeks to require disclosure of the leasing office,’’ thereby ‘‘undermining a key business rationale for imposing a fee and the objective (better consumer awareness of the price of 324FTC–2023–0064–3283 (National Consumer specific uses to which proceeds of a given fee will goods and service[s]) the rule is intended to Law Center, Prison Policy Initiative, and advocate go,’’ which would require businesses to ‘‘divulge accomplish.’’). Stephen Raher). commercially sensitive information that could 323See also Bates v. State Bar of Ariz., 433 U.S. 325See, e.g., FTC–2023–0064–3094 (American seriously alter competition in a given 350, 383–84 (1977) (‘‘Since the advertiser knows his Hotel & Lodging Association asserted: ‘‘The marketplace.’’). product and has a commercial interest in its language of the proposed rule is vague, overbroad, 328See, e.g., FTC–2023–0064–2888 (Housing dissemination, we have little worry that regulation and not sufficiently specific to provide notice of Policy Clinic, University of Texas School of Law). to assure truthfulness will discourage protected what types of fees businesses are required to 329See, e.g., Id.; FTC–2023–0064–2883 (District of speech.’’) (citing Va. State Bd. of Pharm. v. Va. display . . . . Businesses could reasonably differ in Columbia, Office of the People’s Counsel); FTC– Citizens Consumer Council, Inc., 425 U.S. 748, 771– their approaches to disclosing the ‘nature and 2023–0064–3146 (Institute for Policy Integrity, New 772, 771 n. 24 (1976)). purpose’ or ‘identity’ of such fees.’’); FTC–2023– York University School of Law). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2102 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations final amount of payment, before they that it means before businesses obtain The Commission finalizes proposed consent to pay. consumers’ billing information.331 §464.3(a) in §464.3 with some The Commission clarifies that, modifications. Specifically, final §464.3 To provide clarification and address although when a consumer consents to prohibits any business, in any offer, commenter concerns about potential pay may depend on the facts and display, or advertisement for a covered overbreadth and vagueness, the circumstances surrounding the good or service, from misrepresenting Commission narrows the NPRM transaction, §464.2(c) requires any fee or charge, including its nature, proposal so that final §464.2(c) requires businesses to clearly and conspicuously purpose, amount or refundability, and the disclosures in connection with ‘‘any disclose the nature, purpose, and the identity of the good or service for fee or charge imposed on the transaction amount of any fees or charges imposed which it is imposed. The Commission that has been excluded from total price’’ on the transaction that have been adds the phrase ‘‘covered goods or instead of ‘‘any amount a consumer may excluded from total price and the services’’ to reflect the narrower scope pay.’’ The provision therefore requires identity of the good or service for which of the final rule. The Commission also the disclosure, before the consumer the fee or charge is imposed, as well as adds ‘‘amount’’ to ‘‘nature’’ and consents to pay, of the nature, purpose, the final amount of payment for the ‘‘purpose,’’ and clarifies that the and amount of government charges, transaction, before consumers are prohibited misrepresentations concern shipping charges, and any other fee or required to pay cash or provide their ‘‘any fee or charge’’ instead of ‘‘any charge, such as for optional ancillary payment information. The Commission amount a consumer may pay.’’ This goods or services, that permissibly were notes that a default setting that modified provision makes plain that, in excluded from total price but are being automatically opts-in consumers to pay connection with covered goods or imposed on the transaction. for goods or services does not constitute services, businesses cannot Final §464.2(c) also explicitly consent to pay nor does it satisfy misrepresent the nature, purpose, requires disclosure of ‘‘the final amount §464.2(c)’s disclosure requirements. amount, or refundability of any fee or of payment for the transaction,’’ as that As part of final §464.2(c), the charge, including government charges, amount may differ from total price due Commission does not adopt the NPRM’s shipping charges, any fees or charges for proposed requirement to affirmatively optional ancillary goods or services, or to, for example, the application of disclose each fee’s refundability. The any mandatory fees or charges. In promotional pricing or the addition of Commission determines that requiring making these modifications, the any fees or charges permissibly clear and conspicuous disclosure of Commission has considered excluded from total price, including for each fee’s refundability may be recommendations and alternatives any optional ancillary goods or services.
the nature and purpose of an imposed commented that fee misrepresentations
charge excluded from total price, business has misrepresented the nature Whether fee descriptions are adequate including government charges, shipping or purpose of the fee. to avoid misrepresenting their nature, charges, any fees or charges for optional Misrepresentations can result from purpose, or the identity of goods or ancillary goods or services, or any other failing to disclose material conditions or services for which they are charged will itemized or totaled fee or charge, limitations relating to fees and charges, be case specific and may depend on the including total price and the final for example, material conditions or context.
amount of payment. limitations that would affect consumers’ Final §464.3 prohibits ability to purchase covered goods or Another commenter argued that the misrepresentations about material services at advertised prices.350 rule would unfairly hold online travel pricing terms of a transaction. The agencies and other intermediaries liable nature, purpose, amount, and representations about transaction fees and for fee misrepresentations when only refundability of fees or charges and the discounts were material). travel service providers can know identity of the good or service for which 348As the Commission noted in the NPRM, if a whether representations about the they are imposed are material delivery application includes an invitation to tip a nature and purpose of fees are characteristics that affect the value to delivery driver without disclosing that a portion of accurate.352As discussed in section the tip is allocated to offset the delivery driver’s consumers of the covered goods or base wages or benefits, it would violate §464.3 in III.B.1.f, complying with the rule would services being offered and businesses’ addition to other laws or regulations relating to the require businesses that sell or advertise ability to compete on price. As the distribution of tips. See Complaint ¶¶50–51, In re covered goods or services through Commission noted in the NPRM, Amazon.com, Inc. (‘‘Amazon Flex’’), No. C–4746 platforms to provide the platforms with (FTC June 9, 2021) (alleging respondents falsely whether a consumer is required to pay represented that 100% of tips would go to the accurate pricing information. a charge, the amount of the charge, and driver in addition to the pay respondents offered Contractual relationships and the rule’s what goods or services they will receive drivers). application to B2B transactions should in exchange for the charge, is 349See discussion of optional and mandatory fees ensure that businesses that rely on other necessarily material information that s T u r p ad ra e P C a o r m ts m II ’ I n .A , B .1 r i a n n g d in I g II D .A a . r 8 k .a P ; a s t e t e e r a n l s s o t , o e L .g ig ., h F t: e d. parties for pricing information receive affects a consumer’s choice about Staff Report 9, 15, 15 n.122, 22 (stating ‘‘companies accurate pricing information. whether to consent to a charge.347Other must not mislead consumers to believe that fees are One commenter argued that charging mandatory when they are not’’ and describing the consumers for ‘‘speculative tickets’’ in use of pre-selected checkboxes as a dark pattern of total costs and the nature and purpose of fees, that tricks consumers into buying unwanted goods the live-event sector is deceptive the Commission finds that it is necessary to require and services) (Sept. 2022), https://www.ftc.gov/ because it is tantamount to ‘‘charging both affirmative disclosures and a prohibition of system/files/ftc_gov/pdf/P214800%20Dark% consumers for something that doesn’t misrepresentations, instead of limiting the rule to 20Patterns%20Report%209.14.2022%20- exist,’’ and suggested the rule should prohibiting misrepresentations. See supra Parts II.A %20FINAL.pdf; Stipulated Order for Permanent and II.B. Injunction, Monetary Judgment, and Other Relief as ‘‘prohibit sellers or resellers from 345See, e.g., FTC–2023–0064–3094 (American to Defendants Rhinelander Auto Grp. LLC, et al., charging the consumer for buying Hotel & Lodging Association); FTC–2023–0064– FTC v. Rhinelander Auto Ctr., Inc., No. 3:23–cv– something the seller doesn’t own, or 3206 (Motor Vehicle Protection Products 00737–wmc (W.D. Wis. Nov. 6, 2023) (settling that does not even exist.’’353The Association et al.). allegations that defendants misrepresented that 346NPRM, 88 FR 77434. consumers were required to purchase add-on 347NPRM, 88 FR 77432; Deception Policy products to purchase, lease, or finance a vehicle 351FTC–2023–0064–3094 (American Hotel & Statement, 103 F.T.C. 110, 175, 182–183, 183 n.55 and, among other provisions, enjoining defendants Lodging Association). (listing, respectively, ‘‘misleading price claims’’ from misrepresenting whether charges, products, or 352FTC–2023–0064–3293 (Travel Technology among those that the FTC has found to be services are optional or required), https:// Association). deceptive, and claims or omissions involving cost www.ftc.gov/system/files/ftc_gov/pdf/18- 353FTC–2023–0064–3108 (Christian L. Castle, among those that are presumptively material); see ConsentJudgmentEnteredastoRAGRMGand Esq.; Mala Sharma, President, Georgia Music also FTC v. FleetCor Techs, Inc., 620 F. Supp. 3d Towne.pdf. Partners; and Dr. David C. Lowery, founder of 1268, 1303–04 (N.D. Ga. 2022) (finding that 350See, e.g., cases cited supra note 111. musical groups Cracker and Camper Van VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2105 Commission notes that the final rule the Negative Option Rule,359and the Federal law.363‘‘Federal regulations does not directly address the sale of Telemarketing Sales Rule.360The have no less pre-emptive effect than speculative tickets. However, a business Commission did not receive substantive [F]ederal statutes.’’364Accordingly, the that represents that tickets are in fact comments about overlap or conflict with rule preempts a State law only to the available when they are not may violate these rules.361The Commission is not extent it is inconsistent with the rule §§464.2(c) and 464.3 by failing to aware of any evidence that there is a and compliance with both is impossible, disclose clearly and conspicuously, and conflict between these rules and the or it is an obstacle to achieving the full by misrepresenting, the identity of the final rule. The Commission believes it is purposes and objectives of the rule. To good or service for which fees or charges possible for businesses to comply with provide a clear explanation of the are imposed. each of them, as applicable. Commission’s intent and the rule’s Commenters opposed the scope of preemption, the rule includes misrepresentation provision in the D. §464.4 Relation to State laws an express preemption provision at context of negotiated contracts because §464.4.365 Proposed §464.4 addressed negotiations arguably allow consumers Numerous commenters supported preemption and the proposed rule’s to seek clarification about fees.354The proposed §464.4(b)’s targeted approach relation to State statutes, regulations, Commission, however, has not of preempting only inconsistent parts of orders, or interpretations, including identified any justification for excluding State laws.366Some commenters, State common law (hereinafter ‘‘State contracts from the misleading fees law’’). Proposed §464.4(a) provided that provision. Truthful fee disclosures in 363See, e.g., Cong. Rsch. Serv., R45825, Federal contract negotiations are material to the rule would not supersede or Preemption: A Legal Primer 23 (2023), https:// consumers. One commenter otherwise affect any State law unless the crsreports.congress.gov/product/pdf/R/R45825/3. recommended providing a safe harbor State law is inconsistent with the rule, 364Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153 (1982).
from the misleading fees provision if and then only to the extent of the 365Many FTC regulations, including regulations businesses clearly and conspicuously inconsistency. Proposed §464.4(b) promulgated under section 18 of the FTC Act, disclose fees and make either no specified that a State law providing include provisions addressing State laws and statement or an accurate statement consumers with greater protections than preemption. See, e.g., Funeral Rule, 16 CFR 453.9 (exempting from preemption State laws that about the nature and purpose of fees.355 the rule does not, solely for that reason, ‘‘afford[] an overall level of protection [that] is as The Commission declines to grant a safe make the State law inconsistent with the great as, or greater than, the protection afforded by’’ harbor from the misleading fees rule. When a State law offers greater (or, the FTC’s Rule); Rule Concerning Cooling Off provision when businesses make in some circumstances, even lesser) Period for Sales Made at Homes or at Certain Other Locations, 16 CFR 429.2(b) (exempting laws and affirmative disclosures. Whether protection than the rule, if businesses ordinances that provide ‘‘a right to cancel a door- disclosures are adequate, clear and can comply with both, they are not to-door sale that is substantially the same or greater conspicuous, and not misleading are inconsistent. Thus, as commenters than that provided in this part’’); Business Opportunity Rule, 16 CFR 437.9(b) (‘‘The FTC does issues that may depend on the specific noted, the rule would establish a not intend to preempt the business opportunity facts and circumstances of the regulatory floor rather than a ceiling.362 sales practices laws of any state or local transaction. After reviewing the comments, the government, except to the extent of any conflict The NPRM identified and sought Commission adopts the provision as with this part. A law is not in conflict with this comment on the proposed rule’s proposed in the NPRM. Rule if it affords prospective purchasers equal or greater protection . . . .’’); Mail, Internet, or intersection with existing Federal rules The Commission finds it has the Telephone Order Merchandise Rule, 16 CFR and regulations containing prohibitions 435.3(b) (‘‘This part does supersede those authority to promulgate regulations that on misrepresentations: the Business provisions of any State law, municipal ordinance, Opportunity Rule,356the Mortgage Acts preempt inconsistent State laws under or other local regulation which are inconsistent section 5 of the FTC Act. Even without with this part to the extent that those provisions do and Practices Advertising Rule an express preemption provision, not provide a buyer with rights which are equal to (Regulation N),357the Mortgage or greater than those rights granted a buyer by this Federal statutes and regulations Assistance Relief Services Rule part.’’); Franchise Rule, 16 CFR 436.10(b) (‘‘The (Regulation O),358the amendments to preempt conflicting State laws. Under FTC does not intend to preempt the franchise the Supreme Court’s conflict practices laws of any state or local government, preemption doctrine, a Federal statute except to the extent of any inconsistency with part Beethoven, and a lecturer at the University of 436. A law is not inconsistent with part 436 if it Georgia Terry College of Business). or regulation impliedly preempts State affords prospective franchisees equal or greater 354See, e.g., FTC–2023–0064–2918 (Elite Catering law when it is impossible for the protection . . . .’’); Labeling and Advertising of + Event Professionals opposed the regulated parties to comply with both Home Insulation, 16 CFR 460.24(b) (preemption of misrepresentations provision for private food the Federal and the State law, or when ‘‘State and local laws and regulations that are services contracts because ‘‘[t]hroughout the inconsistent with, or frustrate the purposes of, this contracting process, there are ample opportunities a State law is an obstacle to achieving regulation’’). for the customer to seek clarification or negotiate the full purposes and objectives of the 366See, e.g., FTC–2023–0064–3150 (Attorney the applicability of the price and fees.’’). General of the State of California commented that 355FTC–2023–0064–3016 (National Federation of consumer protection is also a state concern, so, ‘‘it Independent Business proposed modifying the rule 359Promulgation of Trade Regulation Rule and is appropriate, then, that the rule does not preempt as follows: ‘‘(a) . . . [I]t is an unfair and deceptive Statement of Basis and Purpose: Rule Concerning a state law unless the rule and the state law conflict practice . . . for a Business to: (i) misrepresent the Recurring Subscriptions and Other Negative Option and then only to the extent of the inconsistency.’’); total cost of a good or service by omitting a Programs, 89 FR 90476 (Nov. 15, 2024), https:// FTC–2023–0064–3215 (Attorneys General of the mandatory fee from the advertised price of the good www.federalregister.gov/documents/2024/11/15/ States of North Carolina and Pennsylvania, along or service; or (ii) misrepresent the nature and 2024-25534/negative-option-rule. with Attorneys General of the States or Territories purpose of such a mandatory fee.’’ The commenter 36016 CFR part 310. of Arizona, Colorado, Connecticut, Delaware, also proposed exempting any business from that 361In addition, the added definition of ‘‘Covered District of Columbia, Hawaii, Illinois, Maine, requirement if it discloses the fee clearly and Goods or Services’’ removes any potential overlap Michigan, Minnesota, New Jersey, New York, conspicuously ‘‘before a consumer becomes between the final rule and Regulations N and O. Oklahoma, Oregon, Vermont, Washington, and obligated to pay the fee’’ and ‘‘either makes no 362See, e.g., FTC–2023–0064–3150 (Attorney Wisconsin, supported the rule’s preemption statement about the nature and purpose of the fee General of the State of California ‘‘appreciate[d] that provision because it ‘‘recognizes and preserves the or makes an accurate statement of the nature and the FTC’s rule respects the states’ role in protecting interest that individual states have in combatting purpose of the fee.’’). consumers from deceptive price advertising, and unfair or deceptive acts or practices committed in 35616 CFR part 437. the rule’s clear intent to create a federal floor, rather our respective jurisdictions.’’); FTC–2023–0064– 35712 CFR part 1014. than a ceiling, for consumer protection.’’); FTC– 3275 (Berkeley Center for Consumer Law and 35812 CFR part 1015. 2023–0064–3212 (TickPick, LLC). Continued VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2106 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations however, stated that the rule should reiterates that a State law is preempted partners in battling unfair and deceptive completely preempt all State laws to only to the extent it conflicts with the pricing disclosure practices.373For the provide greater consistency and clarity rule’s requirements and complying with reasons stated herein, the Commission and to lower compliance costs,367 both is impossible, or it is an obstacle adopts §464.4 as proposed. particularly when State laws provide to achieving the full purposes and
Dunn & Crutcher LLP). finds that each of the provisions, Promulgation of Trade Regulation Rule and 369FTC–2023–0064–3137 (Chamber of Progress). Statement of Its Basis and Purpose: Cooling-Off 370See, e.g., FTC–2023–0064–3244 (Vacation Period for Door-to-Door Sales, 37 FR 22934, 22958 373See, e.g., Final Trade Regulation Rule: Trade Rental Management Association); FTC–2023–0064– (Oct. 26, 1972) (finding that, when State laws ‘‘give Regulation Rule; Funeral Industry Practices, 47 FR 3206 (Motor Vehicle Protection Products the consumer greater benefit and protection . . ., 42260, 42287 (Sept. 24, 1982) (codified at 16 CFR Association et al.); FTC–2023–0064–3143 (ACA there seems to be no reason to deprive the affected part 453) (noting the purpose of the rule’s provision Connects—America’s Communications consumers of these additional benefits,’’ but when addressing relation of the rule to State law is ‘‘to Association). State laws do not, ‘‘the rule would supply the encourage federal-state cooperation by permitting 371See, e.g., FTC–2023–0064–3152 (Building needed protection or be construed to supersede the appropriate state agencies to enforce their own state Owners & Managers Association et al.); FTC–2023– weak statute to the extent necessary to give the laws that are equal to or more stringent than the 0064–3133 (National Multifamily Housing Council consumer the desired protection.’’). trade regulation rule’’). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2107 components of the provisions, and industries—mitigates the harms caused issues this rule to prevent prevalent applications of the final rule operate by the unfair or deceptive pricing tactics unfair or deceptive acts or practices and independently, and that the evidence in those transactions or industries to to promote compliance in a manner that and findings supporting each stand which the rule does apply. At the same accounts for and balances the needs of independent of one another. The time, as discussed in parts I and II.A, consumers and regulated entities. The Commission finds that realizing the the Commission finds bait-and-switch rule falls squarely within the benefits of the rule does not require the pricing tactics and misleading fee Commission’s legal authority, is based joint adoption or operation of each practices are widespread and potentially on substantial evidence in the provision. In addition, while the growing. As a result, the Commission rulemaking record, and clearly defines Commission believes applying the same may later find that a rule of expanded specific unfair and deceptive practices restrictions to all pricing representations or even general applicability, to the regarding fees or charges. would provide even greater overall extent of its jurisdiction, would be The Commission received comments benefits, as explained in Parts II.B and appropriate and would result in benefits supporting, discussing, or questioning V.B, the Commission finds the benefits to consumers and competition that are its authority to promulgate the final of the final rule exceed the costs as to greater in magnitude than a rule with rule. Commenters supporting the covered goods or services, both overall more limited applicability. However, Commission’s authority noted the rule and with respect to each substantive such findings do not invalidate this falls squarely within the Commission’s provision of the rule. For covered goods final rule’s quantifiable positive mandate to prevent unfair and deceptive or services, as discussed in section V.E, benefits, in whole or in part. acts and practices through rulemaking ample data show the rule would have Accordingly, the Commission under sections 5 and 18 of the FTC positive quantified net benefits, considers and intends each of the Act.375Commenters questioning the including by reducing search costs, as provisions adopted in the final rule to Commission’s rulemaking authority well as unquantified reductions in be severable, within each provision, typically advanced one of three deadweight loss and consumer from other provisions in Part 464, and arguments. First, some commenters frustration. Similarly, consumers would as applied to different persons, argued that requiring disclosures related benefit from the misleading fees industries, or circumstances. In the to pricing is a major question that prohibition even if the requirement to event of a stay or invalidation of any Congress has not given the Commission disclose total price were stayed or provision, any component of any authority to address.376Second, some invalidated. The benefits would also provision, or of any provision as it commenters argued that if the rule was justify the costs if the total price applies to certain persons, conduct, or in fact consistent with the Commission’s provision were further limited to either industry, the Commission’s intent is to authority under sections 5 and 18 of the just the live-event ticketing or just the otherwise preserve and enforce the final FTC Act, Congress had impermissibly short-term lodging industry. rule to the fullest possible extent. delegated this authority to the Based on the available data, the Therefore, if a reviewing court were to Commission.377Third, some Commission concludes that, even if the stay or invalidate a particular commenters argued that the disclosures rule were more limited in scope or if it application of the final rule, or a required by the rule violate the First applied to a more limited set of provision thereof, as to certain persons, Amendment.378In addition to these transactions, such as to a single industry industries, or circumstances, other arguments, one commenter asserted that or to particular circumstances, it would businesses that remain covered by the the rule is invalid because the still achieve some of the Commission’s rule should be required to comply with objectives and the benefits of the rule the applicable provisions of the final actions alleging, respectively, that bait-and-switch would still exceed the costs. Although rule that remain in effect. pricing tactics concerning hidden fees and a more limited scope or application misrepresentations regarding the nature and
intends the remainder of the rule to 374See, e.g., In re Filderman Corp., 64 F.T.C. 427, 376FTC–2023–0064–3127 (U.S. Chamber of remain in force. 442–43, 461 (1964), https://www.ftc.gov/sites/ Commerce); FTC–2023–0064–3133 (National default/files/documents/commission_decision_ Multifamily Housing Council and National As described in section V.B, the volumes/volume-64/ftcd-vol64january- Apartment Association); FTC–2023–0064–3152 Commission considered alternatives to march1964pages409-511.pdf; In re Resort Car (Building Owners & Managers Association et al.); the final rule that would have applied Rental Sys., Inc., 83 F.T.C. 234, 281–82, 300 (1973), FTC–2023–0064–3202 (TechNet); FTC–2023–0064– the rule to other transactions or https://www.ftc.gov/system/files/ftc_gov/pdf/Resort 3238 (Gibson, Dunn & Crutcher LLP); FTC–2023– %20Car%20Rental%20System%2C%20Inc. 0064–3251 (National RV Dealers Association); FTC– industries or expanded it to all goods %2083%20FTC%20234%20%281973%29.pdf, 2023–0064–3263 (Flex Association); FTC–2023– and services within the Commission’s aff’d sub. nom. Resort Car Rental Sys., Inc. v. FTC, 0064–3294 (International Franchise Association). jurisdiction. The Commission finds that 518 F.2d 962, 964 (9th Cir. 1975); Opinion of the 377FTC–2023–0064–3233 (NCTA—The internet & each such alternative would be an Commission at 28–30, 47–50, In re Intuit Inc., No. Television Association); FTC–2023–0064–3238 appropriate exercise of the 9408 (FTC Jan. 22, 2024), https://www.ftc.gov/ (Gibson, Dunn & Crutcher LLP); FTC–2023–0064– system/files/ftc_gov/pdf/d09408_commission_ 3294 (International Franchise Association). Commission’s authority under sections opinion_redacted_public.pdf; In re George’s Radio 378FTC–2023–0064–3016 (National Federation of 5 and 18 of the FTC Act as stand-alone & Television Co., 60 F.T.C. 179, 193–94 (1962), Independent Business, Inc.); FTC–2023–0064–3028 regulations because disclosure of total https://www.ftc.gov/sites/default/files/documents/ (Competitive Enterprise Institute); FTC–2023–0064– price in any type of transaction or commission_decision_volumes/volume-60/ftcd- 3233 (NCTA—The internet & Television vol60january-june1962pages107-211.pdf (collecting Association); FTC–2023–0064–3238 (Gibson, Dunn industry—whether or not the same is cases involving false savings claims); cases cited & Crutcher LLP); FTC–2023–0064–3267 (National required in other transactions or supra notes 61–62 (collecting FTC enforcement Retail Federation). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2108 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations Commission is unconstitutionally commenters also argued that the rule is mandate under section 5.387The structured.379Finally, some commenters broader than the agency’s prior rules, Commission has the authority to asserted the Commission has not based on the assertion that the rule address these unfair or deceptive acts or complied with the Administrative regulates pricing.383Commenters practices both through case-by-case Procedure Act (‘‘APA’’).380 concluded that Congress has not enforcement, either administratively or Most of the commenters challenging authorized the Commission to in Federal court, or through rulemaking the Commission’s authority represent promulgate the rule.384 if the unfair or deceptive practices are businesses that offer goods or services The major questions doctrine, as the prevalent as established by the other than covered goods or services. Supreme Court recently explained in rulemaking record. The Commission Thus, the concerns raised by these West Virginia v. EPA, 597 U.S. 697 may choose case-by-case adjudication or commenters may not be relevant to the (2022), applies to ‘‘‘extraordinary cases’ rulemaking at its discretion.388 narrowed scope of the final rule. . . . in which the ‘history and the The Commission’s authority to Further, the NPRM’s industry-neutral breadth of the authority that [the promulgate rules to define with approach was central to nearly all of the agency] has asserted,’ and the ‘economic specificity unfair or deceptive acts or critiques of the rule that raised and political significance’ of that practices under section 18 of the FTC questions regarding the Commission’s assertion, provide a ‘reason to hesitate Act, 15 U.S.C. 57a, is not extraordinary authority to promulgate the rule; while before concluding that Congress’ meant and is undisputed, resting on firm the Commission disagrees with such to confer such authority.’’385When an historical footing.389Indeed, when critiques, they are not applicable to this agency claims a ‘‘‘transformative consumers have faced bait-and-switch final rule, which focuses on two expansion in [its] regulatory tactics in the past, including being industries, live-event tickets and short- authority,’’’ it ‘‘must point to ‘clear unable to get accurate material term lodging. Notably, the vast majority congressional authorization’ for the information about what they must pay of comments from businesses offering power it claims.’’386 and what they will receive in return, the Having considered the factors that the Commission has repeatedly issued rules live-event tickets and short-term lodging Supreme Court has used to identify that define unfair or deceptive acts or and their direct representatives did not major questions, the Commission, as practices related to the disclosure of that raise challenges to the Commission’s discussed herein, concludes that the material information.390For example, authority to promulgate the rule.381 final rule does not implicate the major Nevertheless, the Commission has questions doctrine. The FTC does not 387See generally supra section II.B; NPRM, 88 FR considered the comments challenging claim a transformative change in its 77432, 77434.
its authority and explains in this section rulemaking authority. The final rule 388Cf. NLRB v. Bell Aerospace Co., 416 U.S. 267, why it disagrees with those. 294 (1974) (holding that ‘‘the Board is not comports with the history and breadth precluded from announcing new principles in an A. Major Questions Doctrine of prior rules that the FTC has adjudicative proceeding,’’ that ‘‘the choice between promulgated pursuant to its existing rulemaking and adjudication lies in the first Some commenters invoked the major rulemaking authority, which Congress instance within the Board’s discretion,’’ and that questions doctrine to argue that the the agency’s choice between adjudication and conferred to allow the Commission to Commission lacks authority to adopt the rulemaking was ‘‘entitled to great weight’’); SEC v. rule. Commenters argued the rule raises address prevalent unfair or deceptive Chenery Corp., 332 U.S. 194, 203 (1947) (‘‘[T]he practices. Even if the major questions choice made between proceeding by general rule or a major question because addressing doctrine did apply, the Commission by individual, ad hoc litigation is one that lies consumer fees and pricing across primarily in the informed discretion of the concludes that Congress provided clear industries is of vast political and administrative agency.’’). economic significance.382Some authorization for the Commission to 389Congress added section 18, 15 U.S.C. 57a, to promulgate this rule. the FTC Act in 1975, and that section provides the process the Commission must follow to promulgate 379FTC–2023–0064–3238 (Gibson, Dunn & 1. The Rule Does Not Address a Major rules defining unfair or deceptive acts or practices. Crutcher LLP). Question See Magnuson-Moss Warranty—Federal Trade 380See, e.g., id.; FTC–2023–0064–3133 (National Commission Improvement Act, Public Law 93–637, Multifamily Housing Council and National (a) The Commission Has a Long History sec. 202, §18, 88 Stat. 2183, 2193 (1975) Apartment Association); FTC–2023–0064–3152 of Addressing Unfair or Deceptive Acts (hereinafter ‘‘Magnuson-Moss Warranty Act’’); see (Building Owners & Managers Association et al.); or Practices Related to Pricing also Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957, FTC–2023–0064–3263 (Flex Association); FTC– 967 (D.C. Cir. 1985) (summarizing the historical 2023–0064–3294 (International Franchise Information backdrop to the Commission’s authority to prevent Association). Identifying unfair or deceptive acts or unfair or deceptive acts or practices including the 381The International Franchise Association, adoption of the Magnuson-Moss Warranty Act, practices related to the disclosure of the which represents franchised businesses offering which codified section 18 of the FTC Act and short-term lodging, raised challenges to the price and purpose of goods and services confirmed the Commission’s authority to Commission’s authority to promulgate the rule. is at the core of the Commission’s promulgate rules defining acts or practices that are IFA’s comment, however, primarily focused on the unfair or deceptive). NPRM’s industry-neutral scope and its implications 390See, e.g., Franchise Rule, 16 CFR 436.2(a), commenters pointed to any specific political for franchised businesses that do not offer Covered 436.5(e) and (f) (defining as an unfair or deceptive significance.
Goods or Services. Regarding the short-term lodging act or practice to fail to provide prospective industry specifically, IFA’s comment challenged 383FTC–2023–0064–3238 (Gibson, Dunn & franchisees with the franchisor’s disclosure certain aspects of the Commission’s estimate of Crutcher LLP); FTC–2023–0064–3127 (U.S. document, which includes, among other things, compliance costs, which are addressed in section V. Chamber of Commerce). disclosure of ‘‘initial fees’’—i.e., ‘‘all fees and See FTC–2023–0064–3294 (International Franchise 384FTC–2023–0064–3127 (U.S. Chamber of payments, or commitments to pay . . . whether Association). Commerce); FTC–2023–0064–3238 (Gibson, Dunn & payable in lump sum or installments’’ and of ‘‘all 382See, e.g., FTC–2023–0064–3263 (Flex Crutcher LLP); FTC–2023–0064–3152 (Building other fees that the franchisee must pay to the Association); FTC–2023–0064–3127 (U.S. Chamber Owners & Managers Association et al.); FTC–2023– franchisor or its affiliates’’); Business Opportunity of Commerce); FTC–2023–0064–3152 (Building 0064–3202 (TechNet); FTC–2023–0064–3133 Rule, 16 CFR 437.4(d) (defining as an unfair or Owners & Managers Association et al.); FTC–2023– (National Multifamily Housing Council and deceptive act or practice to ‘‘[f]ail to notify any 0064–3202 (TechNet); FTC–2023–0064–3133 National Apartment Association). prospective purchaser in writing of any material (National Multifamily Housing Council and 385West Virginia v. EPA, 597 U.S. at 721 (quoting changes affecting the relevance or reliability of the National Apartment Association); FTC–2023–0064– FDA v. Brown & Williamson Tobacco Corp., 529 information contained in an earnings claim 3238 (Gibson, Dunn & Crutcher LLP). While U.S. 120, 159–60 (2000)). statement before the prospective purchaser . . . commenters suggested that the rule would have 386Id. at 723–24 (quoting Util. Air Regulatory makes a payment’’); Business Opportunity Rule, 16 ‘‘political and economic significance,’’ no Group v. EPA, 573 U.S. 302, 324 (2014). CFR 437.6(h) (defining as an unfair or deceptive act VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2109 the Commission initiated the (b) Commenters’ Claims About the mandatory fees, the rule does not rulemaking resulting in the Rule on Scope of the Acts or Practices Covered prevent businesses from continuing to Retail Food Store Advertising and by the Rule Are Inapplicable or charge such fees as a pricing strategy, Marketing Practices (the ‘‘Unavailability Overstated itemizing them in addition to stating the Rule’’), 16 CFR part 424, based in part Commenters suggested that the major total price, or from providing non- on findings in a Commission report that questions doctrine is implicated simply misleading information about those fees. items priced at or below the advertised because the rule proposed by the NPRM Indeed, a number of commenters have price were frequently unavailable and was industry-neutral.393The misunderstood the rule to act as a that in ‘‘a very substantial majority of Commission disagrees. Congress prohibition or limitation on itemization; the instances of the deviations, the authorized the Commission to prevent as explained in section III, truthful prices marked on the items were higher unfair or deceptive practices in or itemization is not prohibited. than the advertised price.’’391 affecting commerce across the economy In sum, the rule does not address a As discussed in parts I and II, there while specifying a limited number of major question because it focuses on is nothing new about businesses using industries, activities, or entities that are traditional types of unfair or deceptive acts or practices that have long been the bait-and-switch tactics to reel in and exempt.394These comments are subject of Commission rulemaking and deceive consumers, just as there is inapposite, however, because the final enforcement activity and targets only nothing new about the Commission rule is limited to covered goods or those acts or practices.
exercising its authority to limit such services: live-event ticketing and short- tactics and the harms they cause.392 term lodging. 2. Congress Provided the Commission This rule is tailored to address practices Commenters also contended that the With a Clear Grant of Authority To squarely within the scope of the rule implicates a major question because Promulgate This Rule Commission’s core work to protect it regulates pricing practices broadly or Even if the final rule did present a consumers: bait-and-switch pricing supposedly will have effects on a wide major question, the FTC Act provides tactics, including drip pricing, and array of pricing strategies.395The clear authorization for the rule. In cases misrepresentations regarding a material Commission disagrees. The rule focuses involving major questions, courts expect term. As described in section II.A and on hidden mandatory fees or charges Congress to ‘‘speak clearly’’ if it wishes II.B, the Commission adopts this rule that obscure the total price of a covered to assign the disputed power.398In the now because bait-and-switch tactics, good or service and misrepresentations FTC Act, Congress vested the including drip pricing, and about the nature, purpose, amount, and Commission with enforcement powers misrepresentations as to the nature and refundability of fees or charges. The rule and the authority to promulgate rules to purpose of fees and charges are has no effect on many pricing practices carry out the Commission’s mandate to prevalent and continue to harm and strategies, including a business’s prevent unfair or deceptive acts or consumers. This is precisely what fundamental decision about what price practices.399Rather than trying to define section 18 of the FTC Act envisions and to charge consumers for its goods or all unfair or deceptive acts and is consistent with the Commission’s services.396Nor does the rule affect a practices, Congress empowered the exercise of the same authority in the business’s ability to use dynamic Commission to respond to changing past. pricing, to offer or use sales, discounts, market conditions and to identify rebates, or special offers, or to truthfully conduct that is unfair or deceptive.400 or practice to ‘‘[m]ispresent the cost . . . of the itemize fees and costs so long as the When the Commission was created by business opportunity or the goods or services business accurately describes the total the FTC Act in 1914, the Act prohibited offered to a prospective purchaser’’); Funeral Rule, price upfront.397With respect to ‘‘unfair methods of competition’’ in 16 CFR 453.2(a) and (b) (defining as an unfair or deceptive act or practice to ‘‘fail to furnish accurate price information disclosing the cost to the 393See, e.g., FTC–2023–0064–3263 (Flex 398West Virginia v. EPA, 597 U.S. at 716, 723 purchaser for each of the specific funeral goods and Association); FTC–2023–0064–3127 (U.S. Chamber (quoting Util. Air, 573 U.S. at 324). funeral services used in connection with the of Commerce); FTC–2023–0064–3152 (Building 39915 U.S.C. 45, 57a. disposition of deceased human bodies’’ and Owners & Managers Association et al.); FTC–2023– 400See S. Rep. No. 75–221, at 2 (1937) (report on requiring funeral providers to provide specific price 0064–3202 (TechNet); FTC–2023–0064–3133 Amendments to the Federal Trade Commission Act lists in writing). (National Multifamily Housing Council and (S.1077), explaining Congress’s reasoning in 391Statement of Basis and Purpose: Retail Food National Apartment Association). granting the Commission authority in 1914 to Store Advertising and Marketing Practices, 36 FR 39415 U.S.C. 45. define specific unfair methods of competition, and 8777, 8777–78 (May 13, 1971) (citing a Bureau of 395Commenters did not argue or provide then applying the same reasoning to the proposed Economics staff report titled ‘‘Economic Report on substantive support for any argument that a major grant of authority to prohibit unfair or deceptive Food Chain Selling Practices in the District of question was raised by proposed §464.3(a), which acts or practices: ‘‘The committee gave careful Columbia and San Francisco’’). Similarly, when the would have prohibited any Business from consideration to the question as to whether it would Commission later amended the Unavailability Rule, misrepresenting the nature and purpose of any attempt to define the many and variable unfair it again stressed that food retailers must not engage amount a consumer may pay, including its practices . . . or whether it would by a general in bait and switch advertising—where the seller refundability and the identity of any good or service declaration . . . condemn[] unfair practices, advertises an unavailable good at a low price to get for which it is charged. The Commission is leav[ing] it to the Commission to determine what the consumer in the door—or deception regarding finalizing §464.3 more narrowly to prohibit any practices were unfair.’’ The Committee ‘‘concluded availability of advertised goods. Final amendments Business, in any offer, display, or advertisement for that the latter course would be the better, for the to trade regulation rule: Amendment to Trade a Covered Good or Service, from misrepresenting reason . . . that there were too many unfair Regulation Rule Concerning Retail Food Store any fee or charge, including its nature, purpose, practices to define, and after writing 20 of them into Advertising and Marketing Practices, 54 FR 35456, amount, or refundability, and the identity of the the law it would be quite possible to invent 35462–63 (Aug. 28, 1989). good or service for which it is imposed. others.’’); see also H.R. Rep. No. 93–1606, at H 392E.g., In re Filderman Corp., 64 F.T.C. 427, 396See supra section I (‘‘The discretion to set 12060 (1974) (Conf. Rep.) (report on Consumer 442–43, 461 (1964); Resort Car Rental Sys., 83 prices remains squarely with businesses; the rule Product Warranty and Federal Trade Commission F.T.C. at 281–82, 300 (1973); Complaint ¶¶12, 46– simply requires that they tell consumers the truth Improvement Act, stating: ‘‘[section 18] is an 49, In re LCA-Vision, No. C–4789 (FTC Mar. 13, about those prices.’’). important power by which the Commission can 2023); Opinion of the Commission at 37–40, 47–50, 397See supra section III.A.8.c (‘‘The rule neither fairly and efficiently pursue its important statutory In re Intuit Inc., No. 9408 (FTC Jan. 22, 2024). See requires, nor prohibits, the itemization of mission.’’ Further, ‘‘[b]ecause the prohibitions of generally supra section I.A.–I.C (discussing the mandatory fees that must be included in Total section 5 of the Act are quite broad, trade regulation comment and hearing record in response to the Price.’’); section III.B.1.d–e (responding to rules are needed to define with specificity conduct ANPR and NPRM); section II.A (discussing the comments about dynamic pricing, rebates, bundled that violates the statute and to establish prevalence of the practices that the rule addresses). pricing, and other discounts). requirements to prevent unlawful conduct.’’). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2110 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations section 5 and granted the Commission could finalize them without following EPA, courts have upheld Commission authority to promulgate rules to section 18’s procedural requirements.407 rules similar to the one here—that effectuate the Act’s provisions in section Congress again confirmed the prohibit misrepresentations, define 6(g), including the prohibition on unfair Commission’s authority to promulgate unfair or deceptive conduct, and require methods of competition.401The Act did rules defining unfair and deceptive acts specific disclosures to avoid not expressly prohibit deception. While or practices in 1980 when it enacted deception—against a myriad of legal deception could qualify as an unfair section 22 of the FTC Act, 15 U.S.C. challenges.413 method of competition, courts required 57b–3(b), as part of the Federal Trade In sum, this is a far cry from a the Commission to show harm to Commission Improvements Act of situation where Congress competition or rivals in each instance; 1980.408Section 22 imposes certain ‘‘conspicuously and repeatedly’’ harm to consumers alone was additional procedural requirements the declined to grant the agency the claimed insufficient to meet the standard.402In Commission must follow when it power.414Quite the opposite—Congress response, Congress amended the FTC promulgates any ‘‘rule,’’ including rules has conspicuously and repeatedly Act in 1938 to include a prohibition, not promulgated under section 18. Section confirmed that promulgating a rule like just against unfair methods of 22(b) contemplates the FTC’s authority this final rule is precisely how Congress competition, but against unfair or to promulgate rules that are substantive expects the Commission to use its and economically significant by rulemaking authority. For these reasons, deceptive acts or practices as well.403 requiring, for example, that the even if the final rule involves a major Congress affirmed the Commission’s Commission conduct a cost-benefit question, Congress has clearly delegated authority to issue rules like the one here analysis.409In addition, section 22(a) to the Commission the authority to through amendments to the FTC Act in imposes the same requirements on address that question. 1975 and 1980. First, in the Magnuson- amendments to existing rules if they B. Non-Delegation Doctrine Moss Warranty Act of 1975, Congress may ‘‘have an annual effect on the added section 18 of the FTC Act, 15 national economy of $100,000,000 or One commenter contended that the U.S.C. 57a, confirming the more,’’ ‘‘cause a substantial change in Commission’s issuance of the rule Commission’s authority to issue rules the cost or price of goods or services,’’ violates the non-delegation doctrine.415 that ‘‘define with specificity acts or or ‘‘have a significant impact upon’’ The commenter argued that, given the rule’s breadth, section 5 lacks an practices which are unfair or deceptive persons and consumers.410Thus, intelligible principle if it authorizes the acts or practices,’’ and requiring the Congress explicitly authorized the Commission to promulgate the rule. The Commission to follow specific Commission to issue rules and commenter asserted that the rule procedures for promulgating rules.404 amendments that address major regulates pricing economy-wide and Among the substantially completed economic questions, so long as the that Congress has not made ‘‘the rules at the time were the Rule on the rulemaking complies with section 22. necessary fundamental policy-decision’’ Preservation of Consumers’ Claims and The Commission has exercised its underlying the rule. The commenter Defenses405and the Mail Order Rule,406 authority to promulgate numerous rules which proposed to define as an unfair and rule amendments defining unfair or characteristics of the business opportunity or the or deceptive act—and upon deceptive acts or practices pursuant to goods or services offered’’; or ‘‘any material aspect promulgation did so define—certain sections 18 and 22.411Central to many of any assistance offered to a prospective conduct that the rulemaking record of these rules is a rulemaking record purchaser’’); 16 CFR 436.9(a) and (c) (The Franchise showed was causing harm across establishing that businesses Rule provides that it is an ‘‘unfair or deceptive act or practice’’ to ‘‘[m]ake any claim or representation various industries. As Congress added misrepresent or fail to disclose certain . . . that contradicts’’ the required disclosures, procedural requirements to the material terms in a transaction, which include certain pricing information and fees, Commission’s rulemaking authority including information related to price, or to ‘‘[d]isseminate any financial performance representations to prospective franchisees unless through section 18, Congress did not and that these practices are unfair or the franchisor has a reasonable basis and written limit these existing cross-industry rules deceptive.412Unlike in West Virginia v. substantiation for the representation[.]’’). targeting unfair or deceptive acts or 413See, e.g., Harry & Bryant Co. v. FTC, 726 F.2d practices, but instead created an 407Magnuson-Moss Warranty—Federal Trade 993, 999–1001 (4th Cir. 1984) (holding that exception under which the Commission Commission Improvement Act, Public Law 93–637, petitioners challenging Funeral Rule were not
(1931) (‘‘The paramount aim of the [FTC] act is the promulgated in the same manner and with the same authority when promulgating the Trade Regulation Rule on Credit Practices under sections 5 and 18 of protection of the public from the evils likely to validity as such rule could have been promulgated the FTC Act, and that the rule was supported by result from the destruction of competition or the had this section not been enacted.’’). substantial evidence and not arbitrary, capricious, restriction of it in a substantial degree. . . . Unfair 408Federal Trade Commission Improvements Act or an abuse of discretion); Consumers Union of trade methods are not per se unfair methods of of 1980, Public Law 96–252, sec. 15, sec. 22, 94 U.S., Inc. v. FTC, 801 F.2d 417, 422, 426 (D.C. Cir.
competition.’’). Stat. 374, 388 (1980) (codified at 15 U.S.C. 57b–3). 1986) (denying petition for review of FTC Used Car 403Federal Trade Commission Act Amendments 40915 U.S.C. 57b–3(b). Rule and holding that Commission’s decision to of 1938 (Wheeler-Lea Act), Public Law 75–447, sec. 58115 U.S.C. 57b–3(a). omit a proposed disclosure requirement from the 3, sec. 5, 52 Stat. 111, 111 (1938). 411See, e.g., Franchise Rule, 16 CFR part 436; rule had evidentiary support under both the FTC’s 404Magnuson-Moss Warranty—Federal Trade Business Opportunity Rule, 16 CFR part 437; substantial evidence test and the APA’s arbitrary Commission Improvement Act, Public Law 93–637, Funeral Rule, 16 CFR part 453; Negative Option and capricious test, which are one and the same as sec. 202, sec. 18, 88 Stat. 2183, 2193 (1975) Rule, 16 CFR part 425; Cooling Off Rule, 16 CFR to the requisite degree of evidence); Pa. Funeral (codified at 15 U.S.C. 57a). part 429; see also discussion supra section IV.1.a. Dirs. Ass’n v. FTC, 41 F.3d 81, 92 (3d Cir. 1994) 405Promulgation of Trade Regulation Rule and 412See, e.g., 16 CFR 437.6(d), (h), (i) (The (denying petition for review of Funeral Rule and Statement of Basis and Purpose: Preservation of Business Opportunity Rule provides that it is an finding that Commission decision to regulate casket Consumers’ Claims and Defenses (Holder Rule), 40 ‘‘unfair or deceptive act or practice’’ to handling fees was not arbitrary or capricious and FR 53506 (Nov. 18, 1975). misrepresent, among other information, ‘‘the was supported by substantial evidence). 406Promulgation of Trade Regulation Rule and amount of sales, or gross or net income or profits 414West Virginia v. EPA, 597 U.S. at 724. Statement of Basis and Purpose: Mail Order a prospective purchaser may earn’’; ‘‘the cost, or the 415FTC–2023–0064–3238 (Gibson, Dunn & Merchandise, 40 FR 51582 (Nov. 5, 1975). performance, efficacy, nature, or central Crutcher LLP). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2111 also asserted that the Commission’s (1935), the Court observed that conduct the Commission, including through authority to promulgate the rule is an that fell within the ambit of section 5 of ninety-day public comment periods on unconstitutional delegation under a the FTC Act was ‘‘to be determined in both an advance notice of proposed ‘‘history and tradition test,’’ citing to a particular instances, upon evidence, in rulemaking and a notice of proposed dissenting opinion in Gundy v. United the light of particular competitive rulemaking, as well as an informal States, 588 U.S. 128 (2019).416The conditions and of what is found to be a hearing. These procedures helped to Commission disagrees. The Commission specific and substantial public ensure that the Commission properly notes that this commenter’s argument interest.’’423The Court ultimately applied its statutory mandate when that the proposed rule violated the non- concluded that Congress properly adopting the rule to prevent prevalent delegation doctrine was predicated on delegated authority to the FTC under unfair and deceptive practices its assertion that the proposed rule the FTC Act based, among other things, concerning hidden and misleading fees. regulated ‘‘the disclosing and collecting on the subject matter and procedural Like the FTC’s Act’s procedural [of] consumer fees for all requirements Congress placed on the requirements, the subject matter businesses.’’417Since the focus of the Commission—which involves ‘‘notice requirements that apply to the FTC’s final rule is narrowed to covered goods and hearing,’’ ‘‘appropriate findings of or services, the comment may not be fact supported by adequate evidence,’’ statutory authority are well established. relevant to the final rule. Nevertheless, and ‘‘judicial review.’’424 With respect to unfairness, Congress the Commission addresses the FTC rulemaking under section 18 articulated in section 5(n) of the FTC arguments herein. features similar procedural safeguards to Act the factors the Commission must ‘‘Only twice in this country’s history FTC adjudication and thus comports apply.427For deception, virtually all has the Court found a delegation with the nondelegation doctrine for the courts have adopted the three-part test excessive, in each case because same reasons. For example, section 18’s put forward by the Commission in its ‘Congress had failed to articulate any rulemaking process requires the Deception Policy Statement: (1) there is policy or standard’ to confine Commission to: (1) notify Congress; (2) a representation, omission, or practice discretion.’’418Article I of the publish multiple public notices of the that (2) is likely to mislead consumers Constitution vests the Federal proposed rulemaking; (3) provide all acting reasonably under the government’s legislative powers in interested persons the opportunity to circumstances, and (3) the Congress, and Congress may not ‘‘submi[t] . . . written data, views, or representation, omission, or practice is delegate those powers to an executive arguments’’; (4) consider all material.428For decades, courts have agency absent an intelligible principle submissions; (5) provide the reviewed and upheld the Commission’s to guide the exercise of discretion.419 opportunity for an informal hearing; (6) application of unfairness and deception The ‘‘intelligible principle’’ standard is determine, based on all available authority in enforcement actions and ‘‘not demanding.’’420This is because of information, that the unfair or deceptive rules. Moreover, the Supreme Court has the practical understanding that ‘‘‘in acts or practices are prevalent; and (7) recognized the ability of regulators, our increasingly complex society, determine, based on the rulemaking courts, and regulated entities to replete with ever changing and more record, that the final rule is appropriate. distinguish deceptive from technical problems,’ . . . ‘Congress In addition, once the rule is finalized, it nondeceptive claims or advertisements simply cannot do its job absent an is subject to judicial review in a court under section 5 of the FTC Act.429In ability to delegate power under broad of appeals.425The rulemaking process sum, the subject matter requirements of general directives.’’’421For that reason, thus ‘‘may actually be fairer to regulated the FTC Act’s statutory authority as to the Supreme Court has repeatedly held parties than total reliance on case-by- unfair and deceptive practices are well that ‘‘a statutory delegation is case adjudication’’ because the process settled.
constitutional as long as Congress ‘lay[s] allows all interested parties the down by legislative act an intelligible opportunity to weigh in by submitting Finally, the Supreme Court has not principle to which the person or body data, views, and arguments and by adopted the commenter’s suggested authorized to [exercise the delegated participating in a hearing.426In this ‘‘history and tradition test’’ as the authority] is directed to conform.’’’422 rulemaking, interested parties had applicable standard for determining As described throughout section IV.A, numerous opportunities to be heard by whether congressional delegation of Congress, the Commission, and the authority is constitutional. The courts have long understood the 423A.L.A. Schechter, 295 U.S. at 532–33. In so intelligible principle test is binding Commission’s mandate to prevent both holding, the Supreme Court in A.L.A. Schechter precedent on that question, and the final unfair and deceptive acts or practices as referred to cases in which both unfair and deceptive rule complies with the intelligible providing intelligible principles to p co ra m c p ti e c t e i s ti w on e . r e 2 9 d 5 e t U er .S m . i a n t e 5 d 3 t 2 o – b 3 e 3 u (c n i f t a in ir g m FT et C h o v d . s R . o F f . principle test. guide the exercise of the Commission’s Keppel, 291 U.S. 304 (1934) and FTC v. Algoma discretion. In A.L.A. Schechter Poultry Lumber Co., 291 U.S. 67 (1934)). Congress later C. First Amendment Corp. v. United States, 295 U.S. 495 clarified in the Wheeler-Lea Act of 1938 that unfair and deceptive practices are unlawful under the FTC Some commenters argued that §464.2 Act independent of any effect they may have on impermissibly prohibits and compels dis 4 s 1 e 6 n Id ti . n ( g c , i t j i o n i g n e G d u b n y d y R , o 5 b 8 e 8 r t U s, . S C . . J a . t a 1 n 5 d 9 T ( h G o o m rs a u s c , h J , . ) J ) . . , c S o c m he p c e h t t i e ti r o C n o . u 52 rt ’ S s t c a o t. n 1 c 1 lu 1. s i A o c n c t o h r a d t i n C g o l n y g , r t e h s e s ’ A s . g L r . a A n . t speech in violation of the First 417FTC–2023–0064–3238 (Gibson, Dunn & of authority to the Commission is guided by Crutcher LLP). intelligible principles applies equally to the 42715 U.S.C. 45(n). 418Gundy, 588 U.S. at 130 (plurality op.) (quoting Commission’s authority to identify unfair or 428Fed. Trade Comm’n, FTC Policy Statement on Mistretta v. United States, 488 U.S. 361, 373 n.3 deceptive acts or practices and to the Commission’s Deception, 103 F.T.C. 174, 175 (1984) (sent by letter (1989)). authority to identify unfair methods of competition. to Congress on October 14, 1983 and appended to 419U.S. Const. art. I, sec. 1; see also, e.g., 424A.L.A. Schechter, 295 U.S. at 533–36. In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174 Mistretta, 488 U.S. at 372. 42515 U.S.C. 57a(b)(1)–(2). Section 18 requires (1984) (hereinafter ‘‘Deception Policy Statement’’), 420Gundy, 588 U.S. at 146. both an advance notice of proposed rulemaking and https://www.ftc.gov/system/files/ftc_gov/pdf/ 421Id. at 135 (quoting Mistretta, 488 U.S. at 372). a notice of proposed rulemaking to engage with and Cliffdale-Assocs-103-FTC-110.pdf. 422Id. (quoting J.W. Hampton, Jr., & Co. v. United solicit comment from interested parties. 429FTC v. Colgate-Palmolive Co., 380 U.S. 374, States, 276 U.S. 394, 409 (1928)) (brackets in 426Nat’l Petroleum Refiners Ass’n v. FTC, 482 387 (1965); Zauderer v. Office of Disciplinary original). F.2d 672, 681–83 (D.C. Cir. 1973). Counsel, 471 U.S. 626, 645–46 (1985). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2112 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations Amendment.430The Commission heightened scrutiny standard435or that the rule is underinclusive because disagrees. The rule addresses unfair and intermediate scrutiny.436One total price does not include government deceptive conduct and does not commenter argued that the rule is a charges, arguing that consumers suffer otherwise affect businesses’ ability to content-based regulation subject to strict the same harm of being surprised by express truthful and accurate price scrutiny because, where a business government fees as with non- information. presents any type of price information, government charges required to be it is required to display total price and included in total price. Finally, other 1. Comments in a particular way—i.e., clearly, commenters recommended that the conspicuously, and prominently.437The Commission adopt a rule that only Some commenters argued the rule’s commenter argued that the Commission prohibits deceptive conduct without disclosure requirements compel speech failed to demonstrate the rule directly requiring specific affirmative in violation of the First Amendment.
3. The Rule’s Disclosure Requirements compelled speech in violation of the harmed if the required disclosures are Are Constitutional Under Zauderer First Amendment. The Supreme Court not made.
up) (citing Bolger v. Young’s Prods. Corp., 463 U.S.
60, 66 (1983)); see generally Cent. Hudson Gas & 448Zauderer, 471 U.S. at 651–53; see also NIFLA, Amendment as applied to the plaintiff, Elec. Corp., 447 U.S. at 561 (referring to commercial 585 U.S. at 768–69 (restating the Zauderer standard, the rule here is distinguishable from the speech as ‘‘expression related solely to the noting that ‘‘purely factual and uncontroversial facts of 303 Creative. First, both price economic interests of the speaker and its information about the terms under which . . . audience’’); Va. State Bd. of Pharmacy v. Va. services will be available . . . should be upheld Citizens Consumer Council, Inc., 425 U.S. 748, 762 unless they are unjustified or unduly burdensome’’ 45215 U.S.C. 45, 57a.
(1976) (commercial speech includes speech that (internal citations omitted)). 453Zauderer, 471 U.S. at 650. does ‘‘no more than propose a commercial 449Zauderer, 471 U.S. at 651. 454FTC–2023–0064–3238 (Gibson, Dunn & transaction’’ (internal citations omitted)); see also 450Id. at 653. Crutcher LLP). Bates v. State Bar of Ariz., 433 U.S. 350, 383 (1977) 451Id. at 650–51 (internal quotation omitted). 455303 Creative, 600 U.S. at 587–88. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2114 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations and how price is displayed (here, how differently, the rule permits any truthful advertising, including by requiring a total price is displayed) relate solely to pricing claims an advertiser wants to disclosure.463 proposing a commercial transaction and make; what it forbids is half-truths that The Commission also disagrees with to the economic interests of the speaker omit total price. commenters arguing the rule violates is and its audience.456Second, the Court Section 464.2 does require a business overinclusive and would prohibit some based its decision in 303 Creative on the that displays certain pricing information displays of partial price that are not unique nature of the plaintiff’s work, about covered goods or services to also deceptive or unfair without the display noting the plaintiff ‘‘does not seek to provide factual and non-controversial of total price. Again, because truthful sell an ordinary commercial good.’’457 information in the form of total price. itemization of price components is not In comparison, the rule merely requires Although total price may be ‘‘somewhat prohibited by the rule, commenters’ the display of the total price of a more information than they might be contention that the rule is a prohibition covered good or service—live-event tickets and short-term lodging—which otherwise inclined to present,’’ such a on speech misses the mark. The is core commercial speech. requirement is allowed by Zauderer.460 Commission finds, however, that the Therefore, the Commission finds that With the rule’s requirement that total display of the price of a good or service the disclosure requirements are price be clear, conspicuous, and without disclosing total price clearly, consistent with the compelled speech prominent, the Commission balances conspicuously, and prominently is analysis under Zauderer. Clear, industry commenters’ stated desire to unfair and deceptive and harms display other price information with its conspicuous, and prominent disclosure consumers and honest competitors. of total price in advertisements, finding that total price is a necessary Because the third prong of Central displays, or offers, and the disclosure of piece of price information for Hudson does not require the complete pricing information of covered consumers if any other price government to use the least restrictive goods or services before the consumer information is displayed.461 means necessary to advance its interest, consents to pay, directly advance the Because the rule does not restrict the rule would be constitutional even if Commission’s interest in preventing truthful speech, and because the it prohibited displaying partial price in deception and harm. The rule’s conduct the rule addresses (advertising instances that, in isolation, may not be requirements enable consumers to prices without mandatory fees) is unfair or deceptive. The same is true receive the information they need to deceptive, the Commission need not under Zauderer, where the Court held make informed purchasing decisions apply the Central Hudson factors. that the State’s ‘‘assumption that about live-event tickets and short-term Nevertheless, the rule would meet them. substantial numbers of potential clients lodging based on complete and truthful Under Central Hudson, the regulation would be . . . misled’’ about the information. must serve a substantial governmental possibility that they would be 4. The Rule Does Not Prohibit Truthful interest, must directly advance that responsible for litigation costs—in Speech interest, and must not be more extensive contrast to proving that all potential than necessary to serve the Commenters asserted that the rule clients would be misled—was sufficient government’s interest.462As outlined in amounts to a prohibition on the display to meet the standard.464 parts II and III, the rule serves the of truthful price information in violation The Commission addresses in section substantial governmental interest of of the First Amendment because the III commenters who argued that it providing material price information to rule prohibits certain information (like should adopt alternative policies, such consumers purchasing live-event tickets partial prices without mandatory fees) and short-term lodging to allow them to as prohibiting misrepresentations and from being displayed without make accurate price comparisons and allowing businesses to disclose amounts displaying total price. Commenters also informed purchasing decisions, and to or fees as they wish. As relevant here, asserted that, because the rule prohibits allow businesses to compete on price in commenters argued that the certain displays of price, like parts of a level playing field. And consistent Commission should adopt those prices without fees, it should be with the third prong of Central Hudson, alternatives because they would not evaluated under Central Hudson. The the rule is no more extensive than violate the First Amendment. The Commission disagrees. First, the commenters ‘‘overlook[] material necessary to serve the government’s Commission finds that the rule, differences between disclosure interests in preventing unfairness, including §464.2, does not violate the requirements and outright prohibitions deception, and harm, as the rule simply First Amendment. Given the on speech.’’458The rule does not requires clear, conspicuous, and Commission’s finding that failure to prevent businesses from conveying prominent display of total price. Central disclose total price is unfair and information to the public and, in Hudson acknowledges that the deceptive, the rule’s affirmative particular, it does not prohibit the government can regulate the format of disclosure requirements are needed to disclosure of the components of total achieve the Commission’s goal of price. Businesses remain free to Prof’l. Regul., 512 U.S. 136, 142 (1994) (‘‘false, preventing this unfair and deceptive describe, disclose, or convey price, fee, deceptive, or misleading commercial speech may be conduct. banned’’ (citations omitted)). Commenters did not and charge information.459Put argue §464.3 violates the First Amendment.
456See cases cited supra note 447 (defining 461Indeed, the Zauderer Court noted that 463See id. at 570–71 (‘‘To further its policy of commercial speech). ‘‘because disclosure requirements trench much conservation, the Commission could attempt to 457303 Creative, 600 U.S. at 593–94. more narrowly on an advertiser’s interests than do restrict the format and content of Central Hudson’s 458Zauderer, 471 U.S. at 650. flat prohibitions on speech, ‘warning[s] or advertising. It might, for example, require that the 459Of course, Businesses offering, displaying, or disclaimer[s] might be appropriately required . . . advertisements include information about the advertising a Covered Good or Service cannot in order to dissipate the possibility of consumer misrepresent the nature, purpose, amount, or confusion or deception.’’’ Id. at 651 (citation relative efficiency and expense of the offered refundability of any fee or charge under §464.3; this omitted). service, both under current conditions and for the requirement is consistent with the First 462Cent. Hudson Gas & Elec. Corp., 447 U.S. at foreseeable future.’’). Amendment. See Ibanez v. Fla. Dep’t of Bus. & 566. 464Zauderer, 471 U.S. at 652–53. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2115
5. The Rule’s Treatment of Credit Card have no bearing on the Commission’s tenure.469The key policy rationale Fees and Government Charges Does Not decision to adopt this rule. As noted in underlying Humphrey’s Executor Violate the First Amendment section III.A.5, consumers have come to remains valid today. The understand and expect sales tax to be Commissioners collectively act as an The rule does not violate the First Amendment in its treatment of credit added at the end of a purchase, and adjudicatory body, and the for-cause card fees and government charges. First, there are other Federal, State, and local removal standard ensures that they are as noted in section III.B.1.c, the rule laws that have specific requirements free from ‘‘suspicion of partisan does not prohibit a business from about disclosing taxes and other direction’’ or ‘‘political domination or charging or passing through credit card government charges. In addition, in control.’’470Congress has similarly fees if otherwise allowed by law. The many online transactions, businesses provided for-cause removal standards rule also does not affect State laws that are unable to fully calculate certain for the members of many other non- prohibit credit card surcharges. Whether components of government charges Article III tribunals composed of credit card charges must be included in until a consumer provides their location multiple members who perform total price depends on whether a information. Thus, the Commission has adjudicatory functions as an expert business makes such fees mandatory. If good reason to allow businesses to body within a specific area of the a business offers consumers multiple exclude government charges from total law.471 viable payment methods for the offered price if they choose.465 Next, the commenter incorrectly asserted that administrative law judges transaction, so that paying with a credit
be included in total price. In addition, structured because the Commissioners Accounting Oversight Bd., 561 U.S. 477 where credit card fees are mandatory, are shielded from removal and asserts (2010), administrative law judges must the rule does not prohibit businesses that Humphrey’s Executor v. United be appointed by the full Commission from itemizing them as long as they are States, 295 U.S. 602 (1935), either no and that the appointment process for also included in total price. longer applies or was wrongly decided administrative law judges at the FTC is Accordingly, there is no merit to by the Supreme Court.466The same unconstitutional because administrative commenters’ concerns that consumers commenter asserted that the law judges are appointed by the will not understand the impact of costs Commission’s administrative law judges Commission Chair alone.472The affecting businesses, since businesses are unconstitutionally appointed by the commenter is mistaken. The can itemize those costs under the rule. Commission Chair and are The Commission also disagrees with unconstitutionally shielded from Commission voted in December 2023 to commenters’ argument that §464.2 removal.467The Commission disagrees. approve the appointment of violates the First Amendment as a Administrative Law Judge Jay L. content-based regulation because it does In Humphrey’s Executor, the Supreme Himes.473The Chief Presiding Officer— not require businesses to include Court addressed the crux of the here, the Chair pursuant to 16 CFR 0.8— government charges in total price. One commenter’s first argument and then selected Judge Himes to be the commenter, who argued the point in concluded that the Commission’s presiding officer for this rulemaking, detail, relied on Barr v. American Ass’n structure is constitutional. In that case, and Judge Himes was properly of Political Consultants, Inc., 591 U.S. President Roosevelt sought to remove a designated as the presiding officer in the 610 (2020), in which the Supreme Court Commissioner without cause. The Court Commission’s notice of informal held that an exclusion for collectors of held that the FTC Act authorized hearing.474 government debt from the Telephone removal of Commissioners only on the In response to the commenter’s Consumer Protection Act (‘‘TCPA’’), grounds specified in the statute contention that the removal protections which generally prohibits robocalls, (‘‘inefficiency, neglect of duty, or for the Commission’s administrative law violated the First Amendment. A malfeasance in office’’) and that this judges are unconstitutional, the majority agreed that the exclusion for limitation on the President’s removal Commission notes that the Supreme collectors of government debt was power was constitutional given the Court has recognized in recent decisions severable—the prohibition on robocalls ‘‘character of the [C]ommission and the that Congress may constitutionally legislative history which accompanied was upheld.
exclude government charges from total course of its more than 100-year 472FTC–2023–0064–3238 (Gibson, Dunn & price, it does not require businesses to Crutcher LLP).
do so. Businesses have a choice—they 473Press Release, Fed. Trade Comm’n, FTC may include government charges in 465The Commission modifies the definition of Announces Appointment of Jay L. Himes as New total price. Second, the commenter ‘‘Government Charges’’ from those fees or charges Administrative Law Judge (Mar. 12, 2024), https:// ‘‘imposed on consumers’’ to those ‘‘imposed on the www.ftc.gov/news-events/news/press-releases/2024/ makes specific and erroneous transaction’’ to limit the potential distinction 03/ftc-announces-appointment-jay-l-himes-new- assumptions about the Commission’s between fees and charges imposed directly on administrative-law-judge. reasoning for excluding government consumers and those imposed on Businesses. See 474Initial notice of informal hearing; final notice charges from total price, such as that the supra section III.A.5. of informal hearing; list of Hearing Participants; Commission’s interest in adopting the 466FTC–2023–0064–3238 (Gibson, Dunn & requests for submissions from Hearing Participants: Crutcher LLP). Trade Regulation Rule on Unfair or Deceptive Fees, rule includes favoring taxes and 467Id. 89 FR 21216 (Mar. 27, 2024); see also 16 CFR 0.8, increasing tax revenue. Tax revenues 468Humphrey’s Executor, 295 U.S. at 624–32. 1.13. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2116 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations restrict the President’s at-will removal neither is true. As relevant here, the role E. Administrative Procedure Act power with regard to inferior officers.475 of the presiding officer in section 18 Several commenters asserted the In Collins v. Yellen, 594 U.S. 220 (2021), rulemakings—assisting in the collection Commission has not complied with the for example, the Court declined to of necessary information for the APA.487The Commission disagrees. The ‘‘revisit . . . prior decisions allowing rulemaking to proceed, ensuring Commission complies with the APA’s certain limitations on the President’s hearings proceed methodically, and requirements, including by explaining removal power,’’476which include the maintaining the rulemaking record481— the rule’s relationship to the unfair and ‘‘good cause’’ protections for inferior is not policymaking; that role is deceptive conduct the Commission officers ‘‘with limited duties and no reserved for the Commission.482 seeks to prevent and by responding to policymaking or administrative Moreover, an administrative law judge, all significant comments.488As authority’’ described by the Court in whether or not he or she is serving as explained herein, the Commission also Seila Law LLC v. CFPB, 591 U.S. 197 a presiding officer, cannot initiate a complies with the additional (2020).477In Free Enter. Fund, the Court rulemaking, decide its subject, decide requirements of sections 18 and 22 of held removal protections for Public whether a rule should issue, or establish the FTC Act. Company Accounting Oversight Board its content. The Commission performs Commenters claimed that the rule is members unconstitutional and all of these functions.483 arbitrary and capricious because it is not contrasted the duties of those members As an initial matter, the Commission based on sufficient facts or data, and with the lesser duties of administrative determines whether an informal hearing lacks a rational connection between the law judges: ‘‘[U]nlike members of the will be conducted; presiding officers do facts and the regulatory choices.489 [Public Company Accounting Oversight] not have discretion over whether the These commenters argued that the Board,’’ administrative law judges (1)
‘‘perform adjudicative rather than hearing will occur. The presiding officer factual record does not support the Commission’s decision to promulgate an enforcement or policy making simply ‘‘presides over the rulemaking industry-neutral rule or to apply the functions,’’ or (2) ‘‘possess purely proceedings’’ and, when appropriate, rule to particular industries.490One recommendatory powers.’’478The makes a ‘‘recommended decision based commenter criticized various FTC’s administrative law judges fit upon the findings and conclusions of substantive aspects of the rule including squarely within both of those such officer.’’484The presiding officer’s its breadth, consideration of descriptions. powers in the conduct of the hearing are alternatives, and costs.491The Even if the appointment procedures also limited. For example, the officer commenter also argued that the rule is and removal protections of may not extend the time allotted for the duplicative and could lead to regulatory administrative law judges were informal hearing beyond a certain confusion.492 unconstitutional because of their role as period ‘‘unless the Commission, upon a The Commission has carefully inferior officers under Article II, the showing of good cause, extends the reviewed and considered the comments constitutionality of the rule would not number of days for the hearing.’’485The and information it received in this be in question because presiding officers commenter is correct that the presiding rulemaking. As a preliminary matter, under section 18 are not ‘‘officers’’ officer is initially chosen by the ‘‘chief the NPRM engaged in extensive under Article II. Notably, while the presiding officer,’’ who is the Chair of discussion concerning the comments presiding officer in the Informal Hearing the FTC under 16 CFR 0.8. However, the received in response to the ANPR and for this rulemaking happened to be an formal assignment of that presiding followed up with additional questions administrative law judge, neither officer to a particular hearing is in the and requests for empirical data and section 18(c)(1)(B) nor the Commission’s initial notice of informal hearing, which proposed rule text. Likewise, the rules implementing that provision is issued by vote of the Commission. analysis contained throughout this SBP, require an administrative law judge to Although the presiding officer reports to particularly Parts III–VII, similarly preside over section 18 informal the chief presiding officer, again, the hearings.479 powers of the two together amount to no 487FTC–2023–0064–3133 (National Multifamily Instead, the presiding officer is a more than conducting the informal Housing Council and National Apartment specific, temporary designation made hearing and making a recommended Association); FTC–2023–0064–3152 (Building under section 18(c) and its decision based on the presiding officer’s Owners & Managers Association et al.); FTC–2023– 0064–3238 (Gibson, Dunn & Crutcher LLP); FTC– implementing rules, 16 CFR 1.11 findings to the Commission.486All 2023–0064–3263 (Flex Association); FTC–2023– through 1.13. The Supreme Court’s substantive decisions are made by the 0064–3294 (International Franchise Association). framework for distinguishing between Commission. These are temporary 488Motor Vehicle Mfrs. Ass’n v. State Farm Mut. officers and employees asks whether an assignments that begin and end with the Auto Ins., 463 U.S. 29, 43 (1983) (holding that an individual ‘‘exercise[s] significant informal hearing process. agency must articulate a satisfactory explanation for its action including a ‘‘rational connection between authority pursuant to the laws of the Accordingly, neither the the facts found and the choices made.’’ (citing United States’’ and occupies a position Burlington Truck Lines, Inc. v. United States, 371 Commission’s structure nor the role of that is ‘‘continu[ous] and U.S. 156, 168 (1962))).
V. Final Regulatory Analysis Under short-term lodging industries, where the challenged the Commission’s estimation Section 22 of the FTC Act Commission first began evaluating drip of the rule’s potential costs and benefits.
when comparison shopping and level 496Certain statutes, such as the Restore Online the playing field for honest businesses Shoppers’ Confidence Act, 15 U.S.C. 8401 through statute as a violation of a rule for purposes of in the live-event ticketing and short- 8405, include provisions that treat violations of the section 19(a)(1). See, e.g., 15 U.S.C. 8404(a). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2119 stress, and improved economic decisions based on transparent and action. As explained in section V.E, the efficiency through a reduction of honest information.’’498A small Commission believes the rule’s benefits deadweight loss, as outlined in section business exemption could also reduce exceed the costs of the rule. Notably, the V. Implementation of the rule also consumer benefits arising from Commission believes, as detailed in strengthens the Commission’s increased price transparency across Parts II, III, and V, that the rule also will enforcement program against unfair or markets and lower consumer confidence result in additional tangible benefits deceptive pricing practices in the live- regarding whether the rule applies to from consumers’ ability to accurately event ticketing and short-term lodging specific purchases. comparison shop for live-event tickets industries. Excluding small businesses could also and short-term lodging. Therefore, the As noted in the NPRM, given the harm honest competition because such Commission finds in this final strong indicators that bait-and-switch an exemption might impose more regulatory analysis that adoption of the pricing, including drip pricing, and uncertainty and compliance costs for rule will result in benefits to the public misleading fees and charges are businesses to determine whether the that exceed the costs. prevalent and worsening across rule applies to them. In addition, as
D. Significant Issues Raised by estimates capture the fact that some States Small Business Administration Comments, the Commission’s businesses will require more time than (‘‘SBA Office of Advocacy’’) argued that Assessment and Response, and Any the average and some will require less. costs estimated in the Preliminary Changes Made as a Result The Commission received additional Regulatory Analysis are too low because In this section, the Commission comments with similar concerns about data scientist and web developer hours summarizes its assessment of, and the Commission’s compliance hours should be ongoing costs, rather than response to, the major concerns, estimates as they apply to other specific one-time costs.505It argued that ‘‘the comments, and suggestions raised by industries such as movie theater FTC should assume a percentage of commenters about the Preliminary ticketing, delivery apps, restaurants, firms that in the previous year were in Regulatory Analysis. The Commission bowling, and cable and broadband, compliance will not be the following received comments about the which are no longer subject to the final year.’’ The Commission does not believe Preliminary Regulatory Analysis from rule.500However, the Commission’s that these ongoing costs are attributable industry groups, law firms, consumer argument that the compliance hours to the rule. Once firms have adjusted to advocacy groups, think tanks, represent averages holds more broadly. the rule, making sure new pricing consumers, and business owners. Two commenters in the live-event strategies comply with the rule is Section V.D.1 addresses comments ticketing industry provided alternative considered a part of the normal course about the Commission’s cost estimates, estimates of average employee hours of business, as is ensuring compliance section V.D.2 addresses comments about necessary to comply with the rule. Vivid with other existing laws and the Commission’s the benefits estimates, Seats stated that, from its experience regulations. and section V.D.3 addresses comments implementing upfront pricing as a ticket Some commenters identified specific to the economy-wide break- seller in three states, the Commission purported costs that were either already even analysis. underestimated the employee hours captured in the economic analysis or needed for live-event ticket sellers by at would not be affected by the rule. The 1. Comments on Costs least a factor of five.501Conversely, U.S. Chamber of Commerce and SBA In section V.D.1.a through d, the another live-event ticket seller, Office of Advocacy argued that the Commission addresses four major TickPick, commented that, for the most Preliminary Regulatory Analysis did not comments regarding the NPRM’s cost part, live-event ticketing companies account for the time needed to train staff estimates: (a) the estimated costs are too would incur an immaterial cost to to provide new upfront prices to low; (b) there are unquantified costs to implement all-in pricing because ‘‘the customers for in-person, online, and firms; (c) there are unquantified costs to technology already exists within phone sales.506The Commission consumers; and (d) there are ticketing platforms to eliminate drip believes training time, to the extent that unquantified costs to third parties. pricing and would simply need to be it exists, is already captured in the Section V.D.1.e addresses commenter applied to events in the U.S.’’502Again, assumed range of data scientist and web concerns about costs that may stem from the Commission notes that the estimated developer hours, which the Commission applying the rule to variable, dynamic, employee hours reflect an average and, has noted serves as a proxy for any rule- or contingent fees. as these commenters stated, it is associated costs from adjusting pricing (a) Public Comments: Estimated Costs possible that firms like Vivid Seats may strategies and displaying prices to Are Too Low require more hours, while others, like consumers. Another commenter argued TickPick, may require fewer. that businesses would need to ‘‘hire Commenters from members and The National Restaurant Association graphic designers to make representatives of the live-event stated that it would take restaurants at advertisements look appealing and web ticketing and short-term lodging least twenty hours a year to reoptimize designers or software engineers to industries, among others, argued that menu prices because the Commission’s rebuild entire websites.’’507In addition, estimated costs in the NPRM were too estimates did not account for supply it argued that the Preliminary low because the analysis chain issues that may change prices or Regulatory Analysis did not account for underestimated the number of attorney, consider that some restaurants may offer data scientist, and web developer hours seasonal menus.503The Preliminary . . . offer varying seasonal menus with completely needed to comply with the proposed Regulatory Analysis omitted these costs different offerings’’); FTC–2023–0064–2992 rule.499These commenters contended (Individual Commenter who owns a restaurant because they are not a result of the rule;
that some businesses will require more commented that complying with the rule would not restaurants will face supply chain be complex for restaurants because ‘‘[t]hey reprice time than the assumed average estimates fluctuations and seasonal changes to and change dishes frequently’’); FTC–2023–0064– of labor hours used in the Preliminary their menus regardless of the rule.504 3219 (Georgia Restaurant Association also referred Regulatory Analysis. The Commission to ‘‘rising food costs [and] supply chain acknowledges the possibility that some disruptions’’); FTC–2023–0064–3180 (Independent 500FTC–2023–0064–3263 (Flex Association); Restaurant Coalition commented about ‘‘increasing businesses will incur a greater number FTC–2023–0064–3300 (National Restaurant food costs’’); FTC–2023–0064–3078 (Washington of hours to comply with the final rule, Association); FTC–2023–0064–3217 (Bowling Hospitality Association referred to supply chain Proprietors’ Association of America); FTC–2023– issues, inflation, and other rising costs). 499FTC–2023–0064–2856 (National Football 0064–3233 (NCTA—The internet & Television 505U.S. Small Bus. Admin., Office of Advocacy, League); FTC–2023–0064–3127 (U.S. Chamber of Association). Re: Trade Regulation Rule on Unfair or Deceptive Commerce); FTC–2023–0064–3238 (Gibson, Dunn, 501FTC–2023–0064–3122 (Vivid Seats). Fees FTC–2023–0064–0001, https:// & Crutcher LLP); FTC–2023–0064–3122 (Vivid 502FTC–2023–0064–3212 (TickPick, LLC). advocacy.sba.gov/wp-content/uploads/2024/03/ Seats); FTC–2023–0064–3094 (American Hotel & 503FTC–2023–0064–3300 (National Restaurant Comment-Letter-Trade-Regulation-Rule-on-Unfair- Lodging Association); FTC–2023–0064–3292 Association). or-Deceptive-Fees.pdf. (National Association of Theatre Owners); FTC– 504See, e.g., id. (National Restaurant Association 506See, e.g., id.; FTC–2023–0064–3127 (U.S. 2023–0064–3293 (Travel Technology Association); commented that there are ‘‘common supply chain Chamber of Commerce). FTC–2023–0064–3294 (International Franchise issues that may cause certain food items to increase 507FTC–2023–0064–3238 (Gibson, Dunn & Association). or decrease in price’’ and ‘‘thousands of restaurants Crutcher LLP). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2121 costs needed to replace physical ads, commenter stated that no firm would added layer of regulation is an subway ads, and billboards and want to be the first in its market to additional cost for businesses as they speculated that would take ‘‘thousands comply, and the resulting ‘‘partial or determine whether they are compliant of hours.’’ The final rule has no bearing uneven compliance would cause with the various rules to which they are on a firm’s decision to engage graphic compliant firms to lose business to firms subject. The Commission updates the designers to ensure its advertisements that ignored the rule. Implementing final regulatory analysis to reflect this are ‘‘appealing,’’ and the Commission coordinated compliance for the entire concern as it applies to covered goods does not believe—and commenters have economy would be difficult with the or services, but notes that the cost was failed to cite evidence demonstrating— [Commission’s] limited resources.’’ The already captured by the assumption that that the need to update prices will Commission believes that the partial all firms within the live-event ticketing require rebuilding entire websites. compliance described by this and short-term lodging industries will Moreover, as discussed in more detail in commenter is the current status quo in spend on average one hour to determine section V.E.3.a, the estimated range of the absence of a rule. Currently, some whether the rule applies to them. web developer time is a proxy for any firms impose drip pricing, and these One commenter asserted that ‘‘[t]he costs associated with changing price firms may have a competitive advantage Commission erroneously disclaims the displays to comply with the rule. over those that do not impose drip possibility of losses to producer Two commenters argued that the pricing. Under the rule, the Commission surplus.’’513The commenter argued that Preliminary Regulatory Analysis expects all firms in the short-term the Commission’s statement that underestimated costs because the wage lodging and live-event ticket industries consumer surplus is reduced due to rates for attorneys and data scientists to provide total price, which is an consumer search costs under drip were too low and were not the same as, improvement relative to the status quo. pricing ignores the countervailing for example, attorneys fees.508One If, as the commenter argues, some increase of producer surplus. The commenter stated that the estimated degree of partial compliance remains, commenter further contended that the wages did not account for overhead the potential competitive advantage Preliminary Regulatory Analysis omits costs or reflect the higher costs of hiring from non-compliance would be similar that, under drip pricing, consumers outside counsel and data scientists and to the status quo, with the additional purchase more expensive products, suggested using $306 in attorney wages risk to non-compliant firms of law which amounts, in part, to a transfer of and $59 in data scientist wages to reflect enforcement actions with potential surplus from consumers to sellers. The these higher costs.509In response to exposure to consumer redress and Commission acknowledges the transfer these suggestions, the Commission penalties. In other words, even with of surplus due to higher prices. conducted a sensitivity analysis that some degree of partial compliance after However, the commenter incorrectly multiplied wage rates by two to reflect the final rule, such an equilibrium assumes that the movement of surplus overhead and hiring costs for the short- would still result in more benefits for from consumers to producers will be a term lodging and live-event ticket consumers than a world without the one-to-one transfer and presupposes industries. The results of the sensitivity final rule. The commenter’s concern that there will be no increase in analysis are provided in section that implementing coordinated consumer search time or deadweight V.E.3.b.i and do not impact the compliance for the whole economy may loss. As is discussed in section V.E.2.a.i, Commission’s assessment that the be difficult is mitigated in the final rule, the increased, unnecessary consumer benefits exceed the costs. The which only applies to two industries. In search time due to drip pricing results Commission received two additional addition, while the Commission may in a net cost to society—no one benefits comments with similar concerns about have limited enforcement resources, it from the additional hours consumers the Commission’s wage estimates as expects consumer behavior regarding collectively spend searching for price they apply to the restaurant industry fees to adjust over time due to the final information and then being surprised and the innovation economy, which are rule. Once upfront pricing becomes the with a higher final amount at the time no longer subject to the final rule.510 new norm, consumers will expect to see of purchase. In addition, as is discussed (b) Public Comments: Unquantified total prices displayed upfront and will in section V.E.2.a.ii, inefficient Costs to Firms be more likely to punish firms that overconsumption under drip pricing ignore the rule by taking their business generates a deadweight loss. The NPRM noted that there are elsewhere. Therefore, any partial Inefficiently high spending under drip unquantified costs of the rule, primarily compliance is likely to be temporary. pricing thus results in a cost to society in the form of unintended consequences Nine commenters stated the NPRM’s in the form of higher search costs and to consumers as they adjust to upfront assertion that the rule will provide a a deadweight loss in addition to a pricing. In addition, commenters harmonized legal framework for all transfer of surplus from consumers to identified additional types of States is incorrect because, as discussed sellers in the form of higher seller unquantified costs to firms. in section III, the rule only preempts revenue. Overall, this results in a net An academic commenter argued that State laws if they are inconsistent with loss to society. there may be unintended consequences the rule.512Commenters noted that an Lastly, some commenters representing to firms from partial compliance.511The the communications services industry noted that there are unquantified costs 512FTC–2023–0064–2856 (National Football 508Id.; U.S. Small Bus. Admin., Office of League); FTC–2023–0064–2887 (Progressive Policy to cable, broadband, and wireless Advocacy, Re: Trade Regulation Rule on Unfair or Institute); FTC–2023–0064–3122 (Vivid Seats); providers due to similar upfront pricing Deceptive Fees FTC–2023–0064–0001, https:// advocacy.sba.gov/wp-content/uploads/2024/03/ FTC–2023–0064–3127 (U.S. Chamber of requirements from the FCC.514The Commerce); FTC–2023–0064–3133 (National Comment-Letter-Trade-Regulation-Rule-on-Unfair- Multifamily Housing Council and National or-Deceptive-Fees.pdf. Apartment Association); FTC–2023–0064–3143 513FTC–2023–0064–3238 (Gibson, Dunn & 509FTC–2023–0064–3238 (Gibson, Dunn & (ACA Connects—America’s Communications Crutcher LLP). Crutcher LLP). Association); FTC–2023–0064–3233 (NCTA—The 514FTC–2023–0064–2884 (NTCA—The Rural 510FTC–2023–0064–3300 (National Restaurant internet & Television Association); FTC–2023– Broadband Association); FTC–2023–0064–3143 Association); FTC–2023–0064–3202 (TechNet). 0064–3238 (Gibson, Dunn & Crutcher LLP); FTC– (ACA Connects—America’s Communications 511FTC–2023–0064–2891 (Mary Sullivan, George 2023–0064–3258 (National Taxpayers Union Association); FTC–2023–0064–3233 (NCTA—The Washington University, Regulatory Studies Center). Foundation). Continued VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2122 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations Commission’s decision to narrow the consumers are likely to punish firms intermediaries allow the hotels to reach final rule to covered goods or services that unbundle features that they expect more consumers. In addition, under the renders these comments inapplicable. to be included in total price by taking status quo, intermediaries already their business elsewhere. A commenter contend with different fee practices (c) Public Comments: Unquantified also speculated that there may be an across short-term lodging firms and are Costs to Consumers increase in deadweight loss if required to ensure they consistently The NPRM noted that there may be businesses set inefficiently high prices disclose pricing information to unquantified costs of the rule in the as they reoptimize prices or seek to cut consumers; the final rule should obviate form of consumer confusion as costs by reducing the quality of goods the need for intermediaries to deal with consumers adjust to upfront pricing. and services.518The Commission inconsistent fee practices moving Commenters argued there were several believes this is unlikely. Under the rule, forward. Therefore, the final rule should additional unquantified costs to there will be competitive pressure to not change any incentives relative to the consumers. One commenter suggested adjust both price and product quality to status quo, and it is unlikely that hotels that consumers would experience more efficient levels when firms must will change their behavior in this higher search time if companies limit or present total price. As discussed in respect as a result of the rule. eliminate price advertising to avoid the section V.E.1.b, drip pricing sometimes A commenter disagreed with the regulatory risk of providing an leads consumers to underestimate the Commission’s statement that consumer inaccurate total price.515The total price of a good or service. The confusion will be a temporary cost as Commission reiterates that the rule does result is that consumers start prices adjust.520The commenter also not require firms to eliminate price transactions not understanding that the argued that consumers may inefficiently advertising; rather the rule requires final amount of payment will be higher under-consume when confronted with covered firms to present total price to than what they are willing or able to higher upfront prices. The Commission consumers whenever businesses offer, pay. For example, consumers may book believes that consumers who may display, or advertise any price of a premium seats to a concert believing inefficiently under-consume due to the covered good or service. The they could afford the purchase, only to rule because they are anticipating Commission believes that unnecessarily realize afterward that the total price was hidden fees are the same consumers high consumer search time and understated. Had they understood the who are accurately accounting for anticompetitive effects resulting from final amount of payment, they would hidden fees and efficiently consuming different pricing strategies are already a have selected seats at a lower price under the status quo. The percentage of problem absent the rule, where firms point or skipped the concert altogether. consumers who expect and anticipate advertise a mix of dripped prices, The final rule will help ensure that hidden fees is likely to be very small upfront prices, and no prices. The consumers’ preferences, both in terms of because, as discussed in the NPRM, commenter did not provide evidence for cost and quality, can be realized. empirical and theoretical models why, under the rule, some firms are, or One industry group argued that consistently show that consumers would be, unable to advertise total price because intermediary travel websites strongly and systematically or why it would result in higher search rely on short-term lodging firms for underestimate the full price they will time and a less competitive equilibrium accurate price information, the pay when faced with drip pricing, and than the status quo. The Commission proposed rule may incentivize these they pay more than they otherwise received two additional comments with firms to charge intermediaries a would in a transparent marketplace.521 similar concerns as they apply to the premium for accurate pricing Therefore, if these consumers are savvy telecommunications and rental housing information, ‘‘knowing that the enough to adjust their expectations and industries, which are no longer subject intermediaries face significant accurately account for hidden fees to the final rule.516 regulatory risk without access to such under the status quo, then it is likely Two commenters also suggested there information.’’519The commenter that they will quickly adjust their might be potentially higher consumer suggested that these additional costs expectations after the final rule becomes search time if businesses unbundle could be passed onto consumers effective and any under-consumption previously bundled options in an effort without adding any value. As explained will be temporary. to reduce the advertised price in in section III, the Commission reiterates The commenter also misinterpreted response to the rule, stating that hotels, that the rule requires businesses that the results of a study conducted in the for example, may make amenities such sell or advertise through intermediaries live-event ticketing market, Blake et al. as wi-fi, gym access, and parking pay- to provide the intermediaries with (2021) (the ‘‘Blake Study’’), in an effort per-use.517The Commission accurate pricing information (including to support the claim that seeing total acknowledges that some businesses may about mandatory and optional fees). The price will deter consumers from making unbundle previously bundled options rule’s coverage of business-to-business efficient and economically desirable but reiterates that the rule prohibits transactions protects consumers when purchases.522The Blake Study found businesses from treating features as they purchase goods or services, the optional if they are necessary to render sellers that do business with 520FTC–2023–0064–3238 (Gibson, Dunn & the good or service fit for its intended intermediaries, and the intermediaries Crutcher LLP).
use. The Commission also notes that themselves. The Commission further 521Tom Blake et al., Price Salience and Product Choice, 40 Mktg. Sci. 619 (2021), https://doi.org/ notes that hotels are already free to 10.1287/mksc.2020.1261; Michael R. Baye et al., internet & Television Association); FTC–2023– charge travel websites and Search Costs, Hassle Costs, and Drip Pricing: 0064–3234 (CTIA—The Wireless Association). intermediaries money in exchange for Equilibria with Rational Consumers and Firms 515FTC–2023–0064–3127 (U.S. Chamber of pricing information, yet they do not (Nash-Equilibrium.com Working Paper, 2019), Commerce). http://nash-equilibrium.com/PDFs/Drip.pdf;
underconsumption when, in fact, it question at issue; it explicitly asked for represents a return to an efficient level (a) Public Comments: Benefits Are Too the total cost inclusive of all fees.
and quality of consumption compared High to drip pricing. The authors explicitly (d) Public Comments: Unquantified One commenter argued that benefits concluded: ‘‘Our empirical results Costs to Third Parties are too high because the Preliminary support our hypotheses: price One commenter argued that, as Regulatory Analysis overestimated obfuscation distorts both quality and consumer expectations adjust to upfront consumer search costs that result from quantity decisions.’’523 prices, inefficiently low spending may drip pricing.531It argued that consumers Five industry groups identified what affect other businesses in the supply benefit from seeing an advertisement they incorrectly labeled as three chain such as manufacturers, packagers, with dripped fees compared to their shippers, and warehouses.529The position before seeing any additional types of unquantified costs commenter also argued that lower advertisement. The Commission for consumers. The ‘‘costs’’ identified spending may affect live-event venues believes this is not the correct actually are either transfers from and ticket resellers due to decreased comparison to make when determining consumers to producers (resulting in no sales in food, drinks, and merchandise. whether consumer search time will net loss for society) or reflect In addition, the commenter claimed that change as a result of the rule; a more apt misunderstandings of the rule. These lower spending will lead to lower sales comparison considers consumer benefit commenters claimed that prices would tax revenue for State and local when faced with total price versus drip increase as businesses pass compliance governments, causing them to borrow pricing. The Commission expects that costs onto consumers,524that more money at high interest rates, raise the rule will decrease consumer search prohibiting businesses from displaying taxes, or eliminate services. As time, because consumers will spend less partitioned pricing would decrease discussed in detail in section V.E.2.c, time searching for total price under the transparency for consumers,525and that the Commission believes that any rule’s framework versus a dripped forcing businesses to display all inefficient underconsumption due to pricing framework. optional fees upfront would overload consumer confusion is likely to be A commenter argued that the rule’s and confuse consumers with often temporary, as are any resulting costs to estimated benefits are too high because irrelevant information.526None of these third parties. the value-of-time estimate of $24.40 is are true costs resulting from the final too high.532The $24.40 figure is
must disclose clearly and Mktg. Rsch. 453 (1998), https://doi.org/10.1177/ be higher than 82%. The final regulatory conspicuously, before the consumer 002224379803500404. analysis in section V.E updates the consents to pay, the nature, purpose, 528FTC–2023–0064–3028 (Competitive Enterprise value of time using the same method but Institute).
and amount of any fee or charge 529FTC–2023–0064–3238 (Gibson, Dunn & imposed on the transaction that been Crutcher LLP). Association); FTC–2023–0064–3133 (National excluded from total price. 530See, e.g., id.; FTC–2023–0064–3140 (Merchant Multifamily Housing Council and National Apartment Association); FTC–2023–0064–3296 Advisory Group); FTC–2023–0064–3180 (Bay Area Apartment Association). (Independent Restaurant Coalition); FTC–2023– 523Blake, supra note 521.
(2016) paper, and then expressed as a term lodging calculation because the 3. Comments on the Economy-Wide percentage of the mean hourly wage at Preliminary Regulatory Analysis Break-Even Analysis that time. That percentage can be estimated the reduction in listings In this section, the Commission applied to the current mean hourly viewed as a result of the proposed rule addresses comments specific to the wage to calculate an updated value of using data from a study done in the live- economy-wide break-even analysis of time. If the Commission expressed the event ticketing market.537However, the the Preliminary Regulatory Analysis.
value of time as a percentage of the Commission’s base number of listings Section V.D.3.a addresses comments median wage, this would not be a ‘‘more viewed under the status quo was taken that argued the Commission’s break- accurate’’ calculation of the value of from studies conducted in the short- even analysis contained incorrect term lodging industry. The live-event time as the commenter suggests, but assumptions or errors; section V.D.3.b ticketing study provided a scaling factor simply a different way of expressing the addresses comments that claimed a that the Commission used to estimate a same value of time estimated by break-even analysis is not enough to percentage reduction in listings viewed Hamermesh (2016).
lower wages, and consumers who (a) Public Comments: Break-Even ‘‘enjoy shopping’’ and may not believe (b) Public Comments: Unquantified Analysis Has Incorrect Assumptions or they incur costs from searching.536 Benefits Contains Errors These concerns are consistent with the The NPRM identified the rule’s Three commenters argued that the Commission’s estimated value of time, unquantified benefits, primarily a Commission’s assumption that 90% of which captures an average of a reduction in deadweight loss as firms are already in compliance with the representative group of American consumers make more efficient proposed rule was inaccurate.542This consumers across eleven studies; some purchasing decisions. Several comments comment does not apply to the final individuals will have lower valuations from consumer and worker protection rule, which no longer contains an of time, and some will have higher.
of search such that the marginal benefit like those discussed in the comments To address the uncertainty, the of discovering an additional different and may have had second-order effects Preliminary Regulatory Analysis price or comparable good equals the on housing security and the labor provided both the break-even benefits marginal cost of the time and effort to market.
face drip pricing, they must spend Commerce).
additional time and effort to acquire full 538FTC–2023–0064–2883 (District of Columbia, Office of the People’s Counsel). 541FTC–2023–0064–3146 (Institute for Policy pricing information allowing them to 539FTC–2023–0064–3283 (National Consumer Integrity, New York University School of Law). Law Center, Prison Policy Initiative, and advocate 542FTC–2023–0064–3233 (NCTA—The Internet & 535FTC–2023–0064–3238 (Gibson, Dunn & Stephen Raher).
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2125 One commenter also argued that the only covered goods or services, which well as quantified benefits and costs for $6.65 average annual per-consumer are offered by the live-event ticketing these industries. After incorporating benefit number in the Preliminary and short-term lodging industries. these revisions and updating numbers Regulatory Analysis is too low because The Commission emphasizes that a based on recent data releases, the the Commission calculated the break-even analysis is encouraged by Commission confirms in the final necessary break-even benefit level by OMB Circular A–4 when there are regulatory analysis that the benefits of dividing estimated costs by all U.S. unquantifiable costs or benefits, and the rule exceed the costs. Specifically, adults, rather than only consumers who affirms that its break-even analysis in the Commission estimates that the make live-event ticket and short-term the Preliminary Regulatory Analysis is quantified benefits of the rule will lodging purchases.543The Commission consistent with OMB guidance.547In the exceed its quantified costs, and the emphasizes that the $6.65 figure from final regulatory analysis, the Commission believes that the total the Preliminary Regulatory Analysis is Commission identifies some of the benefits of the rule (quantified and an average per-person benefit. In the unquantified benefits to the rule and unquantified) will outweigh its total same way that the estimated attorney provides a similar break-even analysis costs (quantified and unquantified). hours assumes that some small for the live-event ticketing and short- The Commission discusses in the businesses will not hire an attorney to term lodging industries. The final regulatory analysis the projected ensure compliance, the benefit per Commission also provides benefit-cost consumer figure reflects the fact that analyses demonstrating that the impact of the rule’s prohibition on some adults will not encounter dripped quantified benefits exceed the offering, displaying, or advertising any fees. The Commission does not dispute quantified costs. price of a covered good or service without clearly and conspicuously that some consumers will see much higher benefits than others. The same (c) Public Comments: Break-Even disclosing total price, as well as the Analysis Is Satisfactory argument applies to the final rule, rule’s prohibition on misrepresentations where the Commission recalculates the Conversely, another commenter noted regarding any fee or charge, including average annual per-consumer break- that the Commission’s break-even the nature, purpose, amount, or even benefit level using only the costs analysis is satisfactory and suggested refundability of any fee or charge, and from covered goods or services. the Commission provide further the identity of the good or service for Finally, the same commenter analysis to support the conclusion that which the fee or charge is imposed. The contended that both the one-time and time savings resulting from the rule are Commission’s analysis also assesses the annual costs for the high-end estimates likely to exceed the break-even impact of the rule’s required disclosures in table 2 of the Preliminary Regulatory threshold.548Although this comment no of the nature, purpose, and amount of Analysis were calculated incorrectly.544 longer applies to the final rule, which any fee or charge imposed on the This comment no longer applies to the focuses on addressing hidden and transaction that has been lawfully final rule, which does not contain an misleading fees in the live-event excluded from total price, the identity of economy-wide break-even analysis. ticketing and short-term lodging the good or service for which the fee or industries, the Commission charge is imposed, and the final amount (b) Public Comments: Break-Even acknowledges that there is economic of payment. When possible, the Analysis Is Not Enough To Justify an support for a broader rule. Commission quantifies the benefits and Economy-Wide Rule
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2127 VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4725 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<840.52AJ01RE 2128 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations BILLING CODE 6750–01–C average consumer that the final rule over ten years for the rule’s benefits to As discussed in more detail in section would need to generate in order for its exceed its quantified compliance costs. V.E.3, the Commission only quantifies benefits to outweigh its quantified costs. Under the low-end cost assumptions benefits from reductions in consumer Table 2 presents low-end and high-end with a 3% discount rate, that per- search costs. However, the Commission estimates of the total quantified costs consumer amount is $0.08 per year over notes there are likely additional and the necessary ‘‘break-even benefit’’ ten years. As noted, the Commission consumer benefits in the form of per consumer. Under the high-end cost believes that the necessary break-even reduced deadweight loss. Since the assumptions with a 7% discount rate, benefit per consumer is likely between Commission is unable to quantify all of the final rule’s potential benefits, the the Commission’s analysis finds that $0.08 and $0.33 per year over ten years, final regulatory analysis instead each consumer would need to depending on which set of assumptions calculates the minimum value for the experience a benefit of $0.33 per year is used.
1. Economic Rationale for the Final Rule advertise only part of a product’s price opportunity to purchase the product and reveal other charges later as the from another firm. Drip pricing and the The final rule addresses the economic customer goes through the buying resulting imposition of additional problem of incomplete and insufficient process.’’550Discovering the lowest full search costs make it more difficult for price information by businesses that price prior to a final purchase by going consumers to compare prices across shroud the full price from the consumer through the checkout process with platforms, which may soften price during parts of the purchasing process, multiple firms is inefficient and competition in the market.551 which harms both consumers and involves additional consumer search honest competitors. Not including mandatory fees in the full price when costs. In some cases, taking the time to 551White House, How Junk Fees Distort search for the full price from one firm Competition (Mar. 21, 2023), https:// consumers start the purchasing process www.whitehouse.gov/cea/written-materials/2023/ may result in the consumer losing the for a good or service may result in a 03/21/how-junk-fees-distort-competition/; Brian market failure. Firms may shroud the Deese et al., White House, The President’s Initiative full price to the consumer through the 550Howard A. Shelanski et al., Economics at the on Junk Fees and Related Pricing Practice (Oct. 26, FTC: Drug and PBM Mergers and Drip Pricing, 41 2022), https://www.whitehouse.gov/briefing-room/ practice of ‘‘drip pricing,’’ which is ‘‘a
(a) Shrouded Pricing as a Cause of information, in this section. The third Market Failure effect, firms increasing their market As long as there are no externalities A well-functioning market depends, power in response to increases in search (i.e., impacts on third parties beyond the in part, on consumers having accurate costs, would exacerbate any welfare consumers and firms under information regarding the price, and losses caused by the distortion of consideration) from the consumption of consumers’ decisions due to the lack of the product, this outcome is efficient; other attributes, of the goods or services full price information. However, the that is, point A represents the being offered. Firms that engage in drip Commission lacks the data to quantify consumption level of the product that pricing or employ partitioned pricing or distinguish their effects on provides the greatest benefit to society. create a friction in the operation of the deadweight loss. The benefit to society is measured by market by imposing costs on consumers The distortion of consumers’ the sum of the benefit to consumers, to acquire price information. Several decisions due to the lack of full price called consumer surplus, and the economic harms may arise from this information, the second effect discussed benefit to firms, called producer surplus friction. First, holding consumer choices in the previous paragraph, can be or profit. Consumer surplus is the net and prices fixed, the added search cost illustrated through a simple model of benefit consumers experience from to acquire price information harms supply and demand. For simplicity of consuming the product after accounting consumers with no countervailing exposition, the analysis assumes that for their expenditure on the product. benefit to firms. Second, because there are many firms, each selling a Consumer surplus is given by the shrouded prices make comparison homogeneous product (i.e., good or difference between the area of trapezoid shopping more difficult, consumers service). The analysis further assumes ACFG, the value to consumers from might make suboptimal consumption that firms can adjust their prices and consuming Q units of the product, decisions. In fact, consumers may find upfront pricing strategies, but that the quality of and the area of rectangle ABFG, the total it too costly to search for full and the product is fixed.554 expenditure on the product (P * accurate price information for some or upfront A useful starting point is to consider Q ); thus, consumer surplus is given all goods or services under upfront the baseline market outcome where by the area of triangle ABC. Producer consideration. The lack of full price consumers are fully informed; that is, surplus is the net benefit to firms from information may lead consumer demand consumers know the full price upfront selling the product after accounting for to become less sensitive, i.e., less (either because firms state the full price their costs to provide the product. elastic, to changes in price, and upfront or because consumers can fully Producer surplus is given by the consumers will accept higher (quality- and correctly predict any add-on difference between rectangle ABFG, the adjusted) prices than they would if they total revenue from the product, and the were fully informed with clear and 553Baye, supra note 521. area of trapezoid AEFG, the cost to firms upfront pricing. This, in turn, leads to 554These assumptions are made for exposition from producing Q units of the a third effect: since shrouded prices purposes to abstract from the issues of market upfront power in pricing and strategic interactions between product; thus, producer surplus is given firms. The general ideas from this simple by the area of triangle ABE. The net Model of Add-On Pricing, 120 Q.J. Econ. 585 (2005), framework extend to differentiated products and benefit to society is then given by the https://www.jstor.org/stable/25098747. strategic interactions between a smaller number of area of triangle ACE.
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2130 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations As previously discussed, shrouded One possible rationale for this offer upfront, and P denotes total,unaware pricing makes it more difficult for phenomenon is that consumers are fully the full price firms charge, which is consumers to ascertain the full price of aware of base prices but are not, or only equal to the base price plus t, the sum the product. In the case of drip pricing, partially, aware of fees. of mandatory per unit fees not included consumers will see the base price before The Commission analyzes the impact in the base price: P = total,unaware seeing additional mandatory price drip pricing has on market outcomes in P + t.556Consumers determine base,unaware the previous framework in two stages.
components such as convenience fees. their consumption according to The analysis starts by examining the Consumers may or may not be unaware P , unaware that they are case where consumers are completely base,unaware of the additional fees at the time they actually going to pay P . This unaware of the additional fees, namely, total,unaware make a purchase decision. If consumers difference between the price consumers they assume that the base price offered are fully aware of the additional fees, or believe they are paying and the price upfront is the full price. The analysis anticipate them correctly, the outcome firms are actually charging leads to an then examines the case where remains point A, which is efficient. expansion in consumer demand relative consumers are aware that a fee might be However, there is evidence that added later but do not correctly estimate to demand when consumers are fully consumers respond differently to a the size of this fee. Note that this case informed. Specifically, as illustrated by change in the base price offered upfront may arise under a variety of Figure 2, the firms’ deception causes an than to changes in the fees disclosed circumstances. For example, all upward shift in demand equal to the separately from the base price. consumers could be partially aware of price difference, t, from D upfront to Specifically, economic studies provide the fees, some consumers could be fully D unaware . The intersection of D unaware evidence that consumers react less to aware of the fees while others are totally with S, illustrated by point J, at quantity price changes through fees than they do unaware, or there could be a mixture of Q and price P ,represents unaware total,unaware to price changes through the base consumers exhibiting different degrees the outcome when consumers are price.555That is, consumer demand is of awareness. unaware of the fee and only observe the less elastic to the fee component of the In the first stage of the analysis, base price.557 full price than it is to the base price. P denotes the base prices firms base,unaware 555Blake, supra note 521; Raj Chetty et al., 556For simplicity of exposition, the analysis 557This shift is entirely analogous to the shift that Salience and Taxation: Theory and Evidence, 99 assumes that all firms follow the same shrouding would occur from a government subsidy. When a Am. Econ. Rev. 1145 (2009), https://doi.org/ strategy and set the same t. subsidy is provided, the price consumers pay is 10.1257/aer.99.4.1145. lower than the price charged by firms. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<000.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2131 Consumer surplus is now equal to the quantity demanded and the deadweight market. Although consumers would area of triangle CHI minus the area of loss would be smaller than in the case prefer upfront full prices, it is unlikely triangle IJK. Relative to the fully where consumers were fully unaware of that an individual firm in a market with informed outcome, consumer surplus the fees (illustrated in Figure 2). shrouded prices could increase its decreases by the area of trapezoid ABHI, Essentially, the aggregate demand curve market share by providing its full price the decrease in consumer surplus due to will lie somewhere between the upfront upfront. Under the expectation of the price increase, and the area of demand curve in Figure 1 and the fully shrouded prices, consumers may triangle IJK, the decrease in consumer shrouded demand in Figure 2. This inadvertently interpret such a firm’s surplus due to the deceptive pricing aggregate demand can come from (the upfront full price as a higher base price, strategy. Producer surplus is now equal same) partial awareness by all with fees added separately, leading the to the area of triangle EHJ. It increases, consumers or a mixture of different firm to lose, rather than gain, business. relative to the fully informed outcome, degrees of awareness by different The distortion of consumer expectations by the area of trapezoid ABHJ. This consumers. A technical appendix in caused by shrouded pricing thus trapezoid illustrates the transfer of section V.E.6 provides a more detailed prevents a shift to upfront pricing surplus from consumers to firms due to model of the impact of consumers’ through competition. the deceptive practice of shrouded partial awareness. In many markets, goods and services pricing. The net effect on society is now In summary, the shrouding of prices are differentiated, with higher quality the area of triangle ACE minus the area distorts the market outcome by leading items selling at higher prices. In such of triangle AJK. Relative to the fully consumers to consume more than they markets, drip pricing may lead to informed outcome, the benefit to society would if they were fully aware of the outcomes characterized by inefficiently decreases by the area of triangle AJK (the full price. The overconsumption by high qualities in addition to the combined change in consumer and consumers leads to a social cost in the inefficiently high quantities previously producer surplus). This decrease in form of deadweight loss because the discussed.559Consumers may respond social surplus is the harm, also referred resources used to produce the product to fully disclosed prices in these to as deadweight loss, caused by the full would have been put to better use if markets by purchasing goods or services shrouding of the fee. consumer demand had not been of lower, more efficient quality in The analysis now turns to the case distorted in this manner. The addition to purchasing lower, more where consumers are aware of the deadweight loss from the inefficient efficient quantities of goods or services. possibility of additional fees but do not consumption level is one component of fully anticipate their magnitude. As the welfare loss generated by drip (b) Shrouded Pricing as a Source of previously discussed, academic research pricing, in addition to the increase in Biased Expectations suggests that this might be the case.558 consumer search costs and the possible As explained in section V.E.1.a, firms This reduced salience would increase shift in pricing and product offerings have incentives to distort consumer quantity demanded and incur a due to increased market power. demand toward an inefficient deadweight loss compared to the fully Collectively, these effects represent a equilibrium. This inefficiency may also informed outcome (illustrated in Figure market failure. 1), although both the increase in Shrouded pricing likely cannot be 559This phenomenon has been observed, for mitigated by competitive forces alone example, in the live-event ticketing industry. See 558Blake, supra note 521; Chetty, supra note 555. once it has become pervasive in a Blake, supra note 521. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<100.52AJ01RE 2132 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations arise in a behavioral context.560By presenting consumers with dripped final rule. Where there may be impacts shrouding full prices through drip or prices.565 that the Commission is unable to partitioned pricing, a firm may bias its quantify, it provides a qualitative
example, consumers may respond to The model of incomplete price
(b) Welfare Transfers exclude shipping charges from total the number of hours required to comply The Commission expects that prices price until the point at which a with the rule.568For example, the in the live-event ticketing and short- consumer may consent to pay, the rule Commission’s analysis assumes that term lodging industries will adjust in requires any internal handling costs that firms not presently compliant will response to the transparency facilitated were previously disclosed at the end of employ a low end of five hours and a by the rule. These price adjustments the purchase process to be incorporated high end of ten hours of lawyer time to transfer welfare from one side of the in total price. Since shipping and determine necessary steps to comply market to the other; consumer welfare handling charges are sometimes with the rule. While some firms may will increase, and producer profits will combined, businesses may have to forgo legal advice, this range of lawyer decrease by the same amount. Typically, change how they account for handling time serves as a proxy for any costs transfers of welfare from one set of costs and how they advertise shipping associated with understanding and people in the economy to another are and handling costs to comply with this preparing to comply with the rule. documented in a regulatory analysis, provision. The final rule’s requirement to but do not change net social welfare.566 3. Quantified Welfare Effects display total price may lead to shifts in Consequently, while it is likely that the consumer demand and, consequently, This section quantifies the potential rule will result in transfers of welfare, market equilibria. In response, firms benefits and costs of the final rule for the Commission does not attempt to transitioning away from drip pricing the live-event ticketing industry and the estimate these transfers. may need to determine new optimal short-term lodging industry. The prices. The Commission’s analysis (c) General Costs of the Final Rule Commission provides quantitative assumes that these price re- estimates where possible for these Firms in the live-event ticketing and optimizations will require firms to incur industries, and it describes benefits and short-term lodging industries will likely a one-time, upfront cost of data scientist costs that can only be assessed do a basic regulatory review to time to perform this work. The analysis qualitatively. The Commission estimates determine how the rule applies to assumes firms not presently compliant that the quantified benefits will exceed them.567Firms that are not already in will employ a low-end of forty hours the quantified costs, and the compliance with the rule may incur and a high-end of eighty hours of data Commission believes that the total additional costs to re-optimize the price scientist time. Similar to the use of benefits (quantified and unquantified)
of goods and services. These firms may lawyer hours in estimating compliance will outweigh the total costs (quantified also incur costs to adjust how they costs, this range of data scientist time and unquantified) of the rule.
display pricing information to disclose serves as a proxy for any costs total price whenever the price of a good (a) Quantified Compliance Costs associated with adjusting pricing or service is displayed. For example, The Commission quantifies the strategies in response to the rule.569 firms may need to update websites or compliance costs for both industries The Commission expects that the drip reprint advertisements to comply with utilizing assumptions about the number pricing employed by firms not presently the rule. of hours required to determine and, if compliant with the rule is, in many In addition, the Commission notes necessary, come into compliance with cases, manifested in online sales. In that there may be other indirect short- the final rule. The Commission expects such cases, firms also will need to term costs that the Commission cannot that, in response to the final rule, firms adjust advertised prices as well as quantify. For instance, consumers who will initially determine whether and purchase processes for online sales, and are used to an existing pricing structure how the rule applies to their current the analysis assumes these adjustments that separately discloses mandatory fees pricing and fee disclosure practices. The require firms to incur a one-time, at the end of the purchase process may Commission assumes firms with current upfront cost of web developer time. The mistakenly make inefficient purchases practices that align with the final rule analysis assumes firms not presently while adjusting to the new regime of will incur, at most, one hour of lawyer compliant will employ a low end of upfront total price. Specifically, time to confirm compliance. This hour forty hours and a high end of eighty consumers accustomed to dripped live- of lawyer time is a proxy for the average hours of web developer time to become event ticketing fees may initially under- amount of time firms will need to consume when shopping for tickets determine whether the final rule applies 568The Commission requested additional with upfront total price. The societal to them. For example, some firms may information on potential compliance hours in the cost of such inefficiencies would be not employ an attorney at all but may NPRM, but it did not receive consistent data. temporary and decrease as consumers instead have a staff member review the Therefore, the Commission uses the same set of assumptions on hours as used in the NPRM but rule. notes that the live-event ticketing and short-term 566See OMB Circular A–4, supra note 547 The Commission does not have data lodging industries are likely to have already (‘‘Transfer payments are monetary payments from on the exact costs noncompliant firms established systems necessary to comply with the one group to another that do not affect total final rule due to operating in jurisdictions with will incur to comply with the final rule.
resources available to society. A regulation that similar regulations. restricts the supply of a good, causing its price to Some firms already may have developed 569It is possible that presently compliant firms rise, produces a transfer from buyers to sellers.’’ tools to comply with the rule because would also need to reoptimize prices in response Even though a ‘‘net reduction in the total surplus they operate in jurisdictions, such as to shifts in market equilibria. That is, the shift in (consumer plus producer) is a real cost to society, California, with existing similar all-in an industry’s equilibrium resulting from the rule [] the transfer from buyers to sellers resulting from could be significant enough that all firms in the a higher price is not a real cost since the net pricing requirements. Coming into industry, compliant or not, would need to adjust reduction automatically accounts for the transfer compliance with the rule should be prices. Firms regularly reoptimize prices in from buyers to sellers.’’). relatively easy for these firms. For other response to market shifts, but it is possible that this 567This basic regulatory review also captures the firms, complying with the final rule may price adjustment would require already compliant time it takes for firms to determine how a firms to incur additional costs. The Commission require additional time and costs. To nationwide rule interacts with any state-level solicited, but did not receive, the data necessary to regulations to which they are already subject. capture both the variation and quantify this potential cost to firms. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2134 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations compliant with the final rule.570Once there are no additional costs. For a low- of Labor Statistics’ May 2023 National firms are compliant with the rule, any end estimate of costs, the Commission’s Occupational Employment and Wage future changes to pricing displays or analysis assumes annual costs are $0 Estimates for the live-event ticketing purchasing systems are not a direct because there are zero additional hours industry.571For the short-term lodging consequence of the rule. Since the rule of labor. However, it may be the case industry, the analysis uses industry- will not take effect for four months, that, as firms transition into compliance specific wages associated with the North some of these pricing display and with the final rule, firms need to American Industry Classification advertising updates may come at no reevaluate their pricing policies to System (‘‘NAICS’’) codes.
additional cost to certain firms. Many ensure continued compliance by firms regularly update their pricing employing additional lawyer time on an displays and advertisements. Any firms annual basis. Available data do not that would, in their normal course of allow the Commission to estimate the 571U.S. Bureau Lab. Stat., Occupational business, update their displays and exact annual compliance costs firms Employment and Wage Statistics, May 2023 National Occupational Employment and Wage advertising during the four month may incur as various industries adapt to Estimates United States (May 2023), https:// window prior to the rule taking effect the final rule. For the high-end cost www.bls.gov/oes/current/oes_nat.htm (‘‘OEWS would not incur the additional one-time estimate, the Commission’s analysis National’’); U.S. Bureau Lab. Stat., Occupational cost of updating their displays and assumes firms require an average of ten Employment and Wage Statistics, Occupational Employment and Wages, May 2023: 15–2051 Data advertisements in response to the rule. hours of lawyer time for annual Scientists (May 2023), https://www.bls.gov/oes/ Because the Commission lacks data on compliance checks. The Commission current/oes152051.htm (‘‘OEWS Data Scientists’’) these business practices, the recognizes some firms may not utilize (providing the hourly wages for data scientists); Commission conservatively assumes lawyer time but may delegate U.S. Bureau Lab. Stat., Occupational Employment that all firms not presently compliant compliance to non-attorney employees and Wage Statistics, Occupational Employment and Wages, May 20231: 15–1254 Web Developers (May with the rule will incur these costs. As and still incur annual compliance costs. 2023), https://www.bls.gov/oes/current/ such, the Commission’s analysis likely Data on non-lawyer compliance costs oes151254.htm (‘‘OEWS Web Developers’’) represents an overestimate of are not available, and these potential (providing the hourly wages for web developers); compliance costs. annual compliance costs are proxied U.S. Bureau Lab. Stat., Occupational Employment and Wage Statistics, Occupational Employment and It may be the case that once the firm with lawyer time with the implicit Wages, May 2023: 23–1011 Lawyers (May 2023), incurs the one-time transition costs, assumption that non-attorney employee https://www.bls.gov/oes/current/oes231011.htm hourly wages are lower than lawyer (‘‘OEWS Lawyers’’) (providing the hourly wages for 570The U.S. Department of Transportation also wages. lawyers). This assumption is valid if hours spent in uses an assumption of 80 hours of time to compliance activities would otherwise be spent in Table 3 presents the total compliance reprogram flight quotation websites for the other productive work-related activities, the social Enhancing Airline Passenger Protections II rule. costs as the sum of the industry-specific value of which is summarized by the employee’s U.S. Dep’t Transp., Preliminary Regulatory compliance costs described in more wage. To the extent that these activities can be Analysis: Enhancing Airline Passenger Protections detail in section V.E.3.c and V.E.3.d. accomplished using time during which employees II (May 24, 2010), https://www.regulations.gov/ would otherwise be idle in the absence of a rule, The cost of employee time is monetized document/DOT-OST-2010-0140-0003 (‘‘Consumer our estimates will overstate the welfare costs of the Rule II’’). using wages obtained from the Bureau final rule. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2135 Table 4 presents the ten-year per-firm one-time compliance check, and firms disaggregated into costs for U.S. hotels annualized compliance costs for the not presently in compliance, which and U.S. home share hosts. Costs to live-event ticketing and short-term incur both one-time and recurring costs. foreign hotels and home share hosts are lodging industries, separated by firms Compliance costs for the short-term discussed in section V.E.3.d.ii. already in compliance, which incur a lodging industry are further VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<150.52AJ01RE 2136 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations (b) Break-Even Analysis average benefit per consumer per year Table 5 presents the results of this over ten years.574 break-even analysis. According to the To have a positive net benefit, the From Table 3, under the assumption 2020 Census, there are 258,343,281 final rule’s benefits must outweigh its that firms and consumers discount adults living in the United States. Thus, costs. The Commission calculates the future years at 3%, the Commission’s the analysis divides the estimates of break-even benefit per consumer based analysis estimates that the final rule annualized costs by the number of U.S. on the quantified costs presented in may result in costs as high as $644 adults to find the average consumer section V.E.3.b.572That is, the million over 10 years. Assuming instead benefit per year for 10 years required to Commission determines the minimum a discount rate of 7% for future years, exceed quantified compliance costs. For value the final rule would need to the analysis estimates that the final rule example, if the final rule results in an generate for the average consumer for its may result in costs as high as $603 average benefit to consumers that total benefits to outweigh its quantified million over ten years. To determine the exceeds $0.33 per year over ten years, break-even benefit, the Commission’s costs. The rule’s benefits may include then the final rule’s benefits exceed its analysis begins with the total present reduced search costs, reduced quantified compliance costs under the value of total costs and calculates the deadweight loss, and reduced high-end assumption and an assumed annualized total costs across both psychological distress or frustration 7% discount rate. industries.575Next, the Commission from surprise fees. For this analysis, the calculates what the break-even benefit Table 5 also provides the break-even Commission considers costs in would be per consumer, according to benefit per consumer in terms of annualized terms—the average the following formula: minutes saved as a result of the final discounted cost of compliance per year Per Consumer Annualized Benefits ≥ rule. According to the Bureau of Labor over 10 years.573As such, the analysis (Annualized Quantified Statistics’ Occupational Employment expresses the break-even benefit as an Compliance Costs/Population) Statistics, the average hourly wage of U.S. workers in 2023 was $31.48, and 574Benefits to consumers, such as reductions in recent research suggests that individuals 572In section V.E.3.c and V.E.3.d, the search costs, will accrue continually over time. For living in the U.S. value their non-work Commission quantifies the final rule’s net social simplicity, the break-even analysis assumes that benefits for the live-event ticketing and short-term annualized benefits accrue all at once at the end of time at 82% of average hourly earnings. each year. As such, the break-even analysis may Thus, the value of non-work time for the lodging industries.
costs, the analysis assumes that firms incur one- 575While total costs are higher with a smaller per hour.576If the analysis divides the time costs immediately, at the beginning of year 1, discount rate, annualized costs are higher with a and potential costs of annual compliance checks at larger discount rate due to higher upfront costs and 576See OEWS National, supra note 571 the end of each year. lower recurring costs. (providing the mean hourly wage); Hamermesh, VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<250.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2137 break-even dollar benefit per consumer, in savings from reduced search time that rule may vary across consumers, as using the high-end assumptions and a exceed 0.77 minutes per consumer per some consumers may be more likely discount rate of 7% ($0.33), by the value year over ten years, then the benefits than others to consume live-event of saved search time ($25.81/hour) and solely from reduced search time will tickets and/or short-term lodging, the converts to minutes, the break-even exceed quantified compliance costs.577 Commission finds it highly likely that saved search time per consumer is 0.77 Although the Commission consumers would experience average minutes. That is, if the final rule results acknowledges that benefits of the final search time savings of this amount. There are a few important caveats to any unquantified benefits or costs due estimation. To address these comments, this break-even analysis. This analysis to unintended consequences. However, this section provides the break-even may overestimate the number of if the benefits from reduced deadweight analysis described in section V.E.3.b noncompliant firms in the live-event loss caused by consumers’ incomplete using rates that are double the average ticketing and short-term lodging price information, reduced search time, wage rate obtained from the Bureau of industries. In that case, this assumption and beneficial unintended Labor Statistics May 2023 National leads to an overestimate of both costs consequences outweigh the costs from Occupational Employment and Wage and necessary break-even benefits. On compliance and harmful unintended Estimates.578Specifically, the wage consequences, then the rule results in the other hand, there may be more firms rates used for this analysis are $169.68 positive net social benefits. The not already in compliance with the final for lawyer time to review compliance, Commission believes benefits will rule, in which case this assumption $114.46 for data scientist time to re- exceed the costs.
results in an underestimate of both costs optimize pricing, and $91.90 for web and break-even benefits. i. Sensitivity Analysis: Assume Higher developer time. Using these higher wage The Commission cannot forecast all Wage Rates rates, the break-even benefit required to potential consequences and costs. This The Commission received comments exceed quantified compliance costs is break-even analysis does not account for regarding the wage rates used in the cost provided in Table 6.579 supra note 533 (providing the value of consumer OEWS Data Scientists (providing the hourly wages wages. One component of the cost calculation in the time). for data scientists); OEWS Web Developers short-term lodging industry is the cost to home 577Assuming a 3% discount rate and the high- (providing the hourly wages for web developers); share hosts of re-optimizing prices. This cost is and OEWS Lawyers (providing the hourly wages for evaluated using an estimate of hosts’ hourly value end assumptions, the break-even time saved per lawyers). of time rather than wages, which is not doubled. consumer per year would be 0.68 minutes.
(c) Quantified Benefits and Costs: Live- secondary market. A given ticket to an but commented that such a rule would Event Ticketing Industry event may be sold in the primary only be effective if applied to all ticket This section analyzes the final rule’s market, and then resold multiple times sellers and rigorously enforced.586As quantified benefits and costs in the live- in the secondary market. It is difficult to discussed in section III.B.1.b, the event ticketing industry. Quantified fully quantify how many live-event benefits are limited to the expected ticket purchases are made in the U.S., and conspicuously[] addresses a pressing issue in the nonprofit performing arts sector’’).
reductions in search costs to consumers. how many involve mandatory fees, and 584U.S. Gov’t Accountability Office, Event Ticket Since there is an additional, the typical amount of the fee. Many live- Sales: Market Characteristics and Consumer unquantified benefit of reduced event ticket sellers appear to include Protection Issues, (Apr. 12, 2018), (‘‘GAO Report’’), deadweight loss, which is discussed some kind of fee, although the size and https://www.gao.gov/products/gao-18-347. conceptually in section V.E.2.a.ii, the type of the fees vary across sellers.583In 585See, e.g., White House, President Biden net benefit estimated in the following Recognizes Actions by Private Sector Ticketing and Travel Companies to Eliminate Hidden Junk Fees analysis is conservative. The 581Michal Dalal, Online Event Ticket Sales in the and Provide Millions of Customers with Commission finds that the quantified US, IBIS World (May 2023) (‘‘Ticket Sales Industry Transparent Pricing (Jun. 15, 2023) https:// benefits and costs indicate that the rule Report’’). www.whitehouse.gov/briefing-room/statements- will have a positive net benefit, even 582Id. releases/2023/06/15/president-biden-recognizes- without accounting for the unquantified 583Numerous commenters from the live-event actions-by-private-sector-ticketing-and-travel- ticketing industry recognized the pervasiveness of companies-to-eliminate-hidden-junk-fees-and- benefit of reducing deadweight loss. various ticketing fees. See, e.g., FTC–2023–0064– provide-millions-of-customers-with-transparent- Consumers in the live-event ticketing 3212 (TickPick, LLC observed the ‘‘widespread’’ pricing/. Some ticket sellers, such as TickPick, LLC, industry are often surprised by deceptive practice of bait-and-switch pricing); FTC– have never used hidden fees; S. Comm. on mandatory fees at the end of the 2023–0064–3230 (Future of Music Coalition Commerce, Sci., & Transp., TICKET Act, https:// purchase process.580In 2022, online commented that they have worked to ‘‘deal[] with www.commerce.senate.gov/services/files/ the scourge of junk fees in various parts of the 071401A3-D280-414C-AEDB-A9B57F276067. economy,’’ including live touring); FTC–2023– 586FTC–2022–0069–6089 (ANPR) (National 580E.g., White House, How Junk Fees Distort 0064–3105 (Charleston Symphony affirmed that Association of Ticket Brokers); FTC–2022–0069– Competition, supra note 551. ‘‘requiring sellers to disclose the total price clearly 6079 (ANPR) (StubHub, Inc.).
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<450.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2139 Commission received similar comments listings a consumer views when fees are attributable to the U.S. (0.87 in 2023), in response to the NPRM emphasizing displayed upfront is 0.1525 listings. which results in an estimated 192 that the benefit of the rule requires To calculate the reduction in million tickets sold in the primary and industry-wide coverage so that no single consumer search time resulting from secondary markets by Ticketmaster in seller is allowed to charge surprise fees upfront pricing, the Commission the U.S.591 at the end of the transaction. If any requires information on the length of To find the total number of tickets seller utilizes hidden fees, they may time a consumer spends viewing a sold in the U.S. by all live-event ticket capture a larger market share by single listing. The Commission is not sellers, the Commission’s analysis advertising lower initial prices. Absent aware of any data available on this. extrapolates from Ticketmaster’s ticket a Federal rule applying to all sellers, However, many ticket sellers utilize a sales using its market share. However, competitive forces might drive ticket ‘‘countdown clock’’ where the selected Ticketmaster’s market share is sellers to return to the use of hidden tickets in the consumer’s shopping cart uncertain. In 2010, the Department of fees. Thus, the Commission’s analysis expire and are returned to the Justice found that Ticketmaster had quantifies benefits and costs relative to marketplace. During this countdown maintained a market share of more than the baseline equilibrium where sellers clock, a consumer who was unhappy 80% for the previous fifteen years.592If do not disclose total price upfront. with the revealed total price could the Commission’s analysis assumes that search for another ticket without losing Ticketmaster still has an 80% share of In this final live-event ticketing net the original ticket. The Commission the live-event ticket market (which benefit analysis, the Commission uses this range of countdown clock time includes both primary and secondary updates firm counts, wage rates, any as a proxy for a low-end and high-end ticket markets), it can estimate the total inflation-adjusted values, value of time, estimate of the time spent viewing a number of tickets sold in the U.S. by and 10–K live-event ticket revenue listing. These countdown clocks range dividing Ticketmaster’s ticket sales in information to reflect the most recent from five to ten minutes per ticket the U.S. by 80%. This provides a low- available data. The Commission was transaction.588Multiplying the assumed end estimate of the number of tickets unable to update any numbers from length of a ticket transaction of five or sold in the U.S. of 240 million tickets. IBISWorld Reports.
i. Live-Event Ticketing: Estimated in viewed listings from the Blake Study selling in the secondary market until Benefits of the Final Rule results in a search time savings of after it merged with Live Nation. Based
(a) Consumer Time Savings When transaction.589 Commission is uncertain of Shopping for Live-Event Tickets Next, the Commission’s analysis Ticketmaster’s market share in the The final rule requires disclosure of estimates the number of consumer secondary market for tickets.593If total price inclusive of all fees or purchases of live-event tickets. Live Ticketmaster does not have 80% of the charges that a consumer must pay in Nation (which owns Ticketmaster) ticket market (both primary and order to use the good or service for its reported selling over 329 million fee- secondary), the number of tickets sold intended purpose. Required disclosure bearing tickets in the primary and in the U.S. would exceed the low-end of total price and prohibitions on secondary markets using the estimate of 240 million tickets. To misrepresentations save consumers time Ticketmaster system in its 2023 10–K generate a high-end estimate of the total when shopping for a live-event ticket by SEC filing.590However, this figure number of tickets sold in the U.S., the requiring the provision of salient, combines North American and Commission’s analysis uses the reported material information upfront and international ticket sales. Live Nation revenue for the full online ticket sales eliminating time spent pursuing ticket also reported that slightly more than industry provided by the private offers priced above the amount the two-thirds of concert events were in research firm IBISWorld and calculates consumer is willing to spend, also North America, so the analysis applies Ticketmaster’s revenue share of the known as the consumer’s reservation that proportion to the total combined industry. IBISWorld reports the online price. ticket sales and assumes that ticket sales industry, including both Ticketmaster sold more than 221 primary ticket sellers and ticket The Commission’s analysis assumes million tickets in North America. To that, as a result of the rule, the total time estimate the number of tickets sold 591U.S. GDP in 2023 was estimated to be $27.36 spent by a consumer conducting the trillion and GDP for North America was estimated solely in the U.S., the analysis then also transaction will decrease, because some to be $31.4 trillion. IMF DataMapper United States consumers will reduce the number of adjusts the number of tickets by the Datasets, IMF.org, https://www.imf.org/external/ share of North American GDP datamapper/profile/USA; IMF DataMapper North ticket listings they view prior to making America Datasets, IMF.org, https://www.imf.org/ a ticket purchase. For example, the external/datamapper/profile/NMQ. The Blake Study examined an experiment on 588Ticketmaster states that the amount of time it Commission’s analysis adjusts North American imposes varies by event but references a five- tickets (221 million) by 87% to estimate the number StubHub where fees were presented minute purchasing period. FAQ’s: Why does of tickets sold in the United States, resulting in 192 upfront to some consumers and at the Ticketmaster enforce a time limit when making million. end of the purchase to others.587The purchases online?, Ticketmaster.com.au, https:// 592See Christine A. Varney, Assistant Attorney experiment found that the percentage of www.ticketmaster.com.au/h/faq.html. Based on a General, Antitrust Division, U.S. Dep’t of Justice, small, non-representative sample of ticket purchase Remarks at the South by Southwest Conference: consumers who only view one listing is attempts, StubHub appears to generally offer ten The TicketMaster/Live Nation Merger Review and 74% when fees are presented at the end minutes to complete a ticket purchase. Consent Decree in Perspective (Mar. 18, 2010), of the transaction versus 83% when fees 589See also Consumer Rule II, supra note 570, at https://www.justice.gov/atr/speech/ticket are presented upfront. Using the 39. The Preliminary Regulatory Impact Analysis for masterlive-nation-merger-review-and-consent- Consumer Rule II assumed airfare consumers would decree-perspective. distribution of listings viewed by save five minutes of search and estimation time if 593The Live Nation 10–K, supra note 590, does consumers as reported in the Blake all websites provided full-fare information upfront. not separate out tickets sold by Ticketmaster in the Study, the analysis calculates that the 590Live Nation Entm’t Inc., Annual Report (Form primary versus secondary markets. Ticketmaster reduction in the average number of 10–K) (Feb. 22, 2024) (‘‘Live Nation 10–K’’), https:// now sells tickets on the secondary market, which investors.livenationentertainment.com/sec-filings/ includes several other sellers such as StubHub, Inc., annual-reports/content/0001335258-24-000017/ Vivid Seats, TickPick, LLC, Ace Ticket, Alliance 587Blake, supra note 521. 0001335258-24-000017.pdf. Tickets, Coast to Coast Tickets, and others. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2140 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations resellers, earned $12.5 billion in 24%, which results in an estimate of the number of consumer purchases. The revenue in 2023.594The Live Nation 10– 801 million live-event tickets sold in the analysis estimates the range of live K reported ticketing revenue of $3 U.S. event consumer purchases in the U.S. to billion in 2023, which suggests that Lastly, the reduction in search time of be 80 million on the low end and 534 Ticketmaster has a 24% revenue share 0.7625 to 1.525 minutes is per consumer million on the high end. of the online ticketing industry.595The purchase, not per ticket purchase. The When multiplied by the number of Commission’s analysis extrapolates a Commission’s analysis assumes that the transactions per year, the reduction in high-end estimate of the total number of average consumer purchase is between minutes spent viewing ticket listings tickets sold in the U.S. by dividing 1.5 and 3 tickets.596Thus, the total will generate a total time savings of 1.02 Ticketmaster ticket sales in the U.S. by number of tickets sold is divided by 1.5 million to 13.6 million hours per year.
(b) Additional Unquantified Benefits: tickets that match their desired quantity reduction in deadweight loss, but such Reductions in Deadweight Loss and and quality (seat type or location).599 a reduction is a positive benefit of the Abandoned Transactions rule.
ii. Live-Event Ticketing: Estimated Costs Tickets.com and Vivid Seats, use this Thus, sellers would have relatively low of the Final Rule classification.602Other live-event ticket costs to transition to all-in pricing in the This section describes the potential sellers, such as Ticketmaster and U.S.606 costs of the final rule’s provisions and StubHub, however, are classified as In this low-end cost scenario, because provides quantitative estimates where NAICS code 7113, which is ‘‘Promoters live-event ticket sellers already are possible. For live-event ticketing, the of Performing Arts, Sports, and Similar prepared to advertise total prices to cost of employee time is again Events,’’ and includes 7,998 firms.603As consumers, the one-time, upfront cost of monetized using wages obtained from a high-end estimate of the number of determining optimal prices and the Bureau of Labor Statistics’ May 2023 live-event ticket sellers, the updating the purchase systems in terms National Occupational Employment and Commission’s analysis uses the sum of of the number of required hours is Wage Estimates.600Because live-event the firms within these two NAICS code negligible. The Commission’s analysis ticketing is not associated with a and assumes there are 9,440 firms assumes five hours of lawyer time to specific NAICS code, the Commission potentially impacted by the final determine if the rule applies, forty hours uses wages at the national level rather rule.604 of data scientist time to re-optimize than the industry-specific wages that are The 9,440 figure is potentially over- pricing strategy, and forty hours of web used to calculate costs for the short-term inclusive, as many firms within NAICS developer time to edit and reprogram lodging industry. code 561599 and 7113 do not directly the website to display upfront prices. The costs to sellers from the rule sell tickets or charge mandatory fees, For the low-end cost scenario, the include a review of whether the rule and thus would not be impacted by the analysis also assumes there are no applies, and, if the firm is not currently final rule. The private research firm annual costs after the firm has incurred compliant with the rule, one-time costs IBISWorld estimated that the number of the one-time transition costs. to comply with the rule, as well as firms in the online live-event ticket In the high-end cost scenario, the recurring annual costs to review and selling industry was 3,326.605The Commission’s analysis assumes that ensure ongoing compliance. The Commission’s analysis uses the 3,326 ticket sellers have not laid the Commission’s analysis presents two cost figure as a low-end estimate of the groundwork to comply with the rule. scenarios corresponding to different number of firms. The high-end cost scenario assumes assumptions of how many hours are Next, the Commission’s analysis sellers require twice the number of required to comply with the rule and estimates the number of hours a firm hours to determine optimal prices, re- how many firms would be affected by would spend complying with the rule. program the website to include total the rule. The analysis presents these as As with assumptions regarding the price, and review and confirm low-end and high-end cost scenarios. number of firms, the following compliance. Thus, the one-time costs To estimate costs for the entire live- estimation utilizes low-end and high- include 10 hours of lawyer time, 80 event ticket-selling industry, the end values for the number of hours hours of data scientist time, and eighty Commission’s analysis calculates the necessary for compliance. Because hours of web developer time. For the cost per seller and multiplies that by the many ticket sellers operate in other high-end cost estimate, the analysis number of sellers in the industry. There countries that currently have assumes there are recurring annual costs is some uncertainty about the number of requirements similar to the final rule of ten hours of lawyer time per year to live-event ticket sellers that would be (Canada, Australia, the United review and confirm compliance.607 affected by the rule because, while the Kingdom, and the European Union BILLING CODE 6750–01–P 600OEWS National, supra note 571. Commission and not subject to the provisions of the sellers already have the capability to provide Total 601NAICS code 561599 ‘‘comprises rule, then the total costs to ticket sellers is Price due to existing regulations in other countries. establishments (except travel agencies, tour overestimated. See, e.g., FTC–2023–0064–3212 (TickPick, LLC); operators, and convention and visitors bureaus) 605Ticket Sales Industry Report, supra note 581. FTC–2023–0064–0132 (Individual Commenter who primarily engaged in providing travel arrangement 606FTC–2023–0064–3212 (TickPick, LLC purchased tickets from GameStop and StubHub and reservation services.’’ U.S. Census Bureau, commented: ‘‘For the most part, ticketing noted that ‘‘on all of these sites the fees are not North American Industry Classification System, marketplaces would incur an immaterial cost to explained until the final page unless you go find the 561599 All Other Travel Arrangement and implement all-in pricing. Internationally, major toggle to include fees as you are looking for Reservation Services (2022), https:// ticket marketplaces are already required to comply tickets’’); FTC–2023–0064–3207 (Consumer Reports www.census.gov/naics/?input=561599&year= with true all-in pricing in Canada and the United noted a consumer who commented: ‘‘While I 2022&details=561599. Kingdom. The technology to display tickets appreciate that TM [Ticketmaster] now has the 602U.S. Census Bureau, 2021 SUSB Annual inclusive of fees in the form of a toggle is a widely option to view all your fees up front as part of the Datasets by Establishment Industry (Dec. 2023), available functionality. Put differently, the https://www.census.gov/data/datasets/2021/econ/ technology already exists within ticketing platforms price if you toggle that option, its totally insane that susb/2021-susb.html. to eliminate drip pricing and would simply need to fees can be 25% of the cost at LEAST.’’); FTC– 603Id. be applied to events in the U.S.’’). 2022–0069–6162 (ANPR) (Recording Academy 604Note that some live-event ticket sellers may be 607FTC–2023–0064–3122 (Vivid Seats noted that ‘‘StubHub allows the consumer to toggle organized as non-profit entities and thus could fall commented: ‘‘We believe that the FTC is ‘Show prices with estimated fees’ filter during the outside of the Commission’s jurisdiction. The underestimating the amount of employee time ticket search’’). The Commission did not receive Commission did not find data on the proportion of required by at least a factor of five.’’). The any definitive data on the number of hours this ticket sellers that are non-profits and thus uses the Commission notes that other commenters stated the change would take and thus retains the low-end full number of firms. If a non-trivial number of transition to upfront pricing for ticket sellers would and high-end hours estimates presented in the ticket sellers are outside the jurisdiction of the be as simple as a toggle switch and that most ticket NPRM. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2143 iii. Live-Event Ticketing: Net Benefits calculate the low-end of the range for benefit assumptions. For the high-end of net benefits, the analysis subtracts the the range for net benefits, the analysis In Table 9, the Commission’s analysis presents net benefits using the total quantified costs using the high-end subtracts the low-end estimate of total quantified benefits and costs discussed cost assumptions from the total quantified costs from the high-end in section V.E.3.c.i and V.E.3.c.ii. To quantified benefits using the low-end estimate of total quantified benefits. 608U.S. Census Bureau, 2021 SUSB Annual Statistics. See sources cited supra note 571, Developers (providing the hourly wages for web Datasets by Establishment Industry, supra note 602. including OEWS Data Scientists (providing the developers); and OEWS Lawyers (providing the Hourly wages are from the Bureau of Labor hourly wages for data scientists); OEWS Web hourly wages for lawyers). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<650.52AJ01RE 2144 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations Using various assumptions, the iv. Live-Event Ticketing: Uncertainties data are unclear, the analysis relies on quantified benefits and costs imply that The Commission’s ability to precisely assumptions that generate a range of the rule will have a positive net benefit, estimate benefits and costs is limited low-end and high-end estimates. In even without accounting for the due to uncertainties in key parameters. Table 10, the analysis summarizes those additional benefit of reducing The quantified benefits and costs for the key assumptions and their effect on the deadweight loss. live-event ticketing industry rely on a resulting estimate of quantified benefits set of assumptions, based on the best and costs.
(d) Quantified Benefits and Costs: Short- underestimates how much U.S. makes the conservative and simpler Term Lodging Industry consumers pay in mandatory fees assumption that the time spent viewing because it does not include fees from a listing remains the same, and that Businesses in the short-term lodging finding accommodations on the home consumers reduce the number of listings industry, which include both traditional share market through websites like they view. Table 11 quantifies the hotels609as well as home share options Airbnb and VRBO, or fees incurred from benefits of such time savings and like Airbnb and VRBO, often charge a booking at foreign hotels with U.S.- provides low- and high-end estimates to variety of mandatory add-on fees. These facing websites. Resort fees in the U.S. account for uncertainty in the available fees are typically either disclosed average 3.9% of the per-night cost of a statistics.
upfront but separately from the base room, and can exceed 20% of the per- The Commission’s analysis focuses on price (a practice known as partitioned night cost, especially at lower cost the benefits that accrue to consumers pricing), or revealed just before hotels.613 who book rooms from within the United payment, after the consumer has clicked This section analyzes the final rule’s States on any U.S.-facing website, which through multiple pages of a listing (a quantified benefits and costs in the can include bookings at both domestic practice known as drip pricing).
fees.’’ These fees are mandatory and do Benefits of the Final Rule Although not all short-term lodgings not depend on the consumer’s use of the As a result of the final rule, the charge resort fees, the lack of a unified amenities or services. Commission expects that the time standard of upfront pricing across Consumer behavior studies have consumers spend searching for short- listings makes comparing prices shown that both partitioned pricing and term lodging will decrease because difficult and time consuming for drip pricing cause consumers to prices will be easier to compare within consumers. Even a single short-term underestimate the full price of the and across websites. Some consumers lodging website can vary in whether product, even when all components of will reduce the number of short-term listings have hidden fees. Different hotel the price are disclosed upfront.610As a lodging listings they view prior to brands belonging to the same larger result, disclosing mandatory surcharges booking or spend less time hotel company may impose hidden fees separately from the room rate without understanding and assessing the full for listings in some cities but not in more prominently disclosing total price price.615In its analysis, the Commission others. Some listings may note whether is likely to harm consumers by resort fees are included in the base increasing search costs and reducing Industry Fees and Surcharges Forecast to Increase price, but in very fine print under the consumer surplus.611These fees may to a New Record Level in 2018—$2.93 Billion, and listed price. Some listings may not say reduce consumer surplus if consumers Another Record Anticipated for 2019—the Newest anything, requiring consumers to click Emerging Category is ‘‘Resort Fees’’ for Urban respond by booking a room that is more Luxury and Full Service Hotels (Aug. 27, 2018), through the listing to learn whether expensive than the room they would https://bjornhansonhospitality.com/fees-%26- there are hidden fees at the end of the have chosen under upfront total pricing. surcharges. booking process. Given that a minimum Partitioned pricing and drip pricing may 613Sally French & Sam Kemmis, How to Avoid of 6% of hotels616impose drip or Hotel Resort Fees (and Which Brands Are the also increase search costs if consumers Worst), NerdWallet (updated Aug. 1, 2024, 11:53 partitioned pricing, and the average spend more time looking at additional a.m. PDT), https://www.nerdwallet.com/article/ hotel shopper visits seventeen travel listings in search of a cheaper hotel. travel/hotel-resort-fees. websites before booking,617consumers One industry group states that 6% of 614In this final short-term lodging net benefit U.S. hotels charge mandatory fees, analysis, the Commission updates firm counts, wage rates, any inflation-adjusted values, value of purchasing their preferred hotel room. which amounts to over $2.5 billion paid time, and 10–K hotel revenue information to reflect Alternatively, another group of consumers could in resort fees annually by U.S. the most recent available data. The Commission view fewer listings because upfront prices allow consumers.612This number was unable to update any numbers from IBISWorld consumers to compare rooms more easily and select Reports. their preferred hotel room more quickly. Blake, 615The drip pricing literature suggests that, supra note 521. The total search time for these 609Throughout this section, we use ‘‘hotel’’ as an because time to view one listing is lower under consumers will decrease. The Commission’s umbrella term for hotels, motels, inns, short-term upfront pricing, a subset of consumers may view analysis focuses on the latter group of consumers rentals, vacation rentals, traditional bed and more listings rather than fewer because the cost of because the change in their search time represents breakfasts, hostels, and other places of lodging. viewing an additional listing has decreased. a decrease in ‘‘bad’’ or unnecessary searches caused 610Shelanski, supra note 550. Sullivan, supra note 611. It is unclear how this by drip pricing. 611Mary Sullivan, Fed. Trade Comm’n, Economic affects total search time. If the higher number of 616FTC–2023–0064–3094 (American Hotel & Analysis of Hotel Resort Fees 4 (2017), https:// listings viewed is offset by the lower time it takes Lodging Association). www.ftc.gov/system/files/documents/reports/ to view each listing, the total search time will be 617Chris Anderson & Saram Han, The Billboard economic-analysis-hotel-resort-fees/p115503_hotel_ lower under upfront pricing for this subset of Effect: Still Alive and Well, 17 Cornell Hosp. Rpt. resort_fees_economic_issues_paper.pdf. consumers. If total time increases, it can be 1 (2017), https://hdl.handle.net/1813/70982. The 612FTC–2023–0064–3094 (American Hotel & classified as ‘‘good’’ search time for this subset of Commission calculates the average number of Lodging Association); Bjorn Hanson, U.S. Lodging consumers because it results in consumers websites visited by summing the average number of VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2147 are likely to encounter at least one proportion to the mean listings viewed hotels and home shares. The website that imposes dripped or by Airbnb users in Fradkin (2017) (2.367 Commission’s analysis finds the total partitioned pricing in their search for a listings, proxied by number of contacts) number of nights booked in the U.S. in hotel. Even if consumers complete their and finds a reduction of 0.25 listings. 2022 by dividing the total revenue the whole search and booking process On the high end, the Commission U.S. short-term lodgings industry without visiting any websites that applies this to the mean listings viewed earned from rooms by the average daily impose hidden resort fees, the fact that by hotel searchers in Chen and Yao rate (‘‘ADR’’).623The ADR is the average there could be hidden fees creates (2016), 2.3 listings, and finds a revenue per room-night booked in the uncertainty and may cause consumers reduction of 0.24 listings.621 U.S. The total number of nights booked to click through more listings than they Multiplying these numbers by the in the U.S. in 2022 that would otherwise would have to learn if the minutes to view one listing results in potentially be affected by this rule is initial price is truly the final price. 2.39 to 3.47 minutes saved per about 1.29 billion. Therefore, the Commission quantifies transaction. These are likely Dividing the total number of nights the benefits for all U.S. consumers who conservative estimates, given that they booked by the average number of nights book a room in a given year, regardless assume consumers only view one per booking gives 715 million total of whether they interacted with a website before booking a room. As bookings.624About 91.8%, or 657 website that imposed dripped or previously stated, one study suggested million, of these bookings are made by partitioned pricing. that consumers visit an average of U.S. consumers.625Finally, the seventeen websites before booking.622 Commission calculates the total savings (a) Search Statistics The average reduction in listings viewed for U.S. consumers per year by The Commission uses two different may also underestimate benefits from multiplying the number of bookings studies to calculate low- and high-end eliminating dripped and partitioned made by U.S. consumers by the minutes estimates for the average number of pricing because it is more difficult to saved per transaction and the value of minutes it takes to view one listing. On adapt to the wide variability of fees in time for consumers. This results in total the low end, the analysis uses statistics the short-term lodging industry than it savings ranging from about $674 million on Airbnb user search behavior is in the live-event ticketing industry, to $980.3 million. collected by Fradkin (2017) to calculate where listings have the same percentage that consumers spend 9.48 minutes to (c) Foreign Hotels and Home Shares
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<950.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2149 (e) Additional Unquantified Benefits: platforms.630The Commission also Next, the Commission’s analysis Reductions in Deadweight Loss and quantifies the cost to individual home estimates the number of hours a U.S. Abandoned Transactions share hosts in the form of a one-time hotel would spend complying with the cost to adjust prices on home share final rule. The analysis assumes all As is discussed in section V.E.2.a.ii, the final rule requiring short-term listings. hotels that do not impose dripped or lodgings to display total price of rooms Table 12 outlines the estimated costs partitioned pricing will spend one hour will likely result in a reduction of of the final rule. Panel A shows the of lawyer time determining if the final deadweight loss. When consumers are costs for U.S. hotels and home share rule requires any changes to their not provided total price at the beginning hosts; Panel B shows the costs for advertising. Hotels that are not presently of the booking process, sellers likely are foreign hotels and home share hosts compliant with the rule will incur able to charge higher prices than under who post listings on U.S.-facing additional costs to come into the final rule. The rule’s total price websites;631and Panel C shows the total compliance. In the low-end estimate, requirement may provide consumers combined costs for both groups. the analysis assumes that, because many with more complete pricing information (a) Panel A: U.S. Hotels and Home Share hotels have websites facing other so that they can make informed Hosts countries that already have similar decisions about short-term lodging requirements to the final rule (e.g., There are 49,216 U.S. hotels reservations, thus reducing deadweight Canada, Australia, and the European associated with the ‘‘Traveler loss. The Commission does not quantify Union member states), hotels already Accommodation’’ NAICS code. Of these the reduction in deadweight loss but may have the experience and firms, 6% impose resort fees, bringing acknowledges that it is a positive benefit infrastructure required to incorporate the high-end number of U.S. firms to the final rule. the necessary changes to their operating affected to 2,953. The low-end number In some cases, once total price is practices. In this scenario, hotels have of firms affected is 2,948 after removing provided, consumers may fully abandon relatively low costs to transition to all- Marriott International, Inc., Omni Hotels the transaction (i.e., not book any room). in pricing for their U.S.-facing websites. Management Corporation, Choice Hotels Since lodging cost is only a part of The analysis assumes five hours of International, Inc., Hilton Worldwide overall trip cost, abandoning a lawyer time to determine how the final Inc., and Hyatt Hotels Corporation to transaction may be less likely for short- rule applies to the firm, forty hours of account for the possibility that these term lodging than other industries. In data scientist time to re-optimize the hotels will eliminate dripped and that case, the unquantified benefit is pricing strategy, and forty hours of web partitioned pricing from their websites likely to be small. The Commission developer time to edit the website to regardless of this rule to comply with solicited comment in the NPRM on the display total prices and make other any existing or forthcoming settlements frequency of, and reasons for, requisite disclosures.
ii. Short-Term Lodging: Estimated Costs information obtained directly from short-term VRBO. The Commission’s analysis of the Final Rule lodging firms (see, e.g., FTC–2023–0064–3293, estimates the total number of home Travel Technology Association), and do not need to share hosts in the U.S. by starting with The Commission herein describes the reoptimize prices or drastically change displays the number of Airbnb hosts in the U.S.
final rule’s potential costs to the short- themselves, the Commission believes that term lodging industry and, where intermediary firms will not face additional who post home share listings (not compliance costs from the rule. including larger bed and breakfast or possible, provides quantitative estimates 631The Commission’s analysis includes costs to hostel establishments) and extrapolating of those costs. The costs to hotels from foreign hotels with U.S.-facing websites because to the full U.S. market using Airbnb’s the final rule include a review of complying with the rule may cause them to pass whether the rule applies and, in cases through some costs to U.S. hotel shoppers. The of noncompliance with the final rule, Commission is unable to quantify what percentage Hotels Mgmt. Corp. Resort Fees (Colo. Nov 9, 2023); one-time costs to come into compliance of costs will be passed through; to be conservative, Assurance of Voluntary Compliance, the analysis includes all costs to foreign hotels and Commonwealth v. Omni Hotels Mgmt., GD–23– and recurring annual costs to ensure home share hosts. 013056 (Pa. Commw. Ct. Nov. 9, 2023); Assurance ongoing compliance. The cost of 632In 2021, Marriott agreed to a settlement with of Voluntary Compliance, Commonwealth v. Choice employee time is monetized using the Commonwealth of Pennsylvania, Office of the Hotels Intl., Inc., GD–23–011023 (Pa. Commw. Ct. wages obtained from the Bureau of Attorney General, in which Marriott agreed to Sept. 21, 2023); Order Approving Assurance of include mandatory resort fees in the base rate of its Voluntary Compliance, Nebraska v. Choice Hotels Labor Statistics’ National Industry- hotel rooms on the first page of the booking process. Int’l, Inc., No. CI 23–3269 (Neb. Dist. Ct. Sept. 27, Specific Occupational Employment and Assurance of Voluntary Compliance, 2023); Order Approving Assurance of Voluntary Wage Estimates.629The Commission Commonwealth v. Marriott Int’l, Inc., No. GD–21– Compliance, Nebraska v. Omni Hotels Mgmt. Corp., uses wages specific to the Traveler 014016 (Pa. Ct. C.P. Nov. 16, 2021). In 2023 and No. CI 23–3641 (Neb. Dist. Ct. Oct. 27, 2023). 2024, Marriott entered into similar settlements with Choice Hotels agreed to an additional settlement Accommodation industry (associated the Offices of the Attorney General in both the State with the Oregon Department of Justice. Assurance with NAICS code 721100). This of Nebraska and the State of Texas. Assurance of of Voluntary Compliance, In re Choice Hotels, Int’l, industry includes traditional hotels and Voluntary Compliance, Texas v. Marriott Int’l, Inc., Inc., No. 23–CV–39128 (Or. Cir. Ct. Sept. 21, 2023). motels, casino hotels, bed and breakfast No. 2023–CI09717 (Tex. Dist. Ct. May 16, 2023); In 2024, Hilton Hotels agreed to a settlement with Order Approving Assurance of Voluntary the State of Nebraska, Office of the Attorney inns, hostels, and home share Compliance, Nebraska v. Marriott Int’l, Inc., No. CI General. Final Consent Judgment, Nebraska v. 23–3860 (Neb. Dist. Ct. Jan. 18, 2024). In 2023, Hilton Dopco, Inc., No. CI 19–2366 (Neb. Dist. Ct. 629U.S. Bureau Lab. Stat., Occupational Omni and Choice Hotels both agreed to similar Jan. 29, 2024). Finally, Hyatt Hotels faces an Employment and Wage Statistics, May 2023 multi-state settlements with the Offices of the ongoing lawsuit filed in 2023 by the State of Texas, National Industry-Specific Occupational Attorney General in the State of Colorado, the Office of the Attorney General, which seeks to Employment and Wage Estimates: NAICS 721100— Commonwealth of Pennsylvania, and the State of require Hyatt to display full prices in the initial Traveler Accommodation (May 2023), https:// Nebraska. See, e.g., Assurance of Discontinuance, In advertised price of any hotel room. Plaintiff’s www.bls.gov/oes/current/naics4_721100.htm re Choice Hotels Int’l Inc. Resort Fees (Colo. Sept. Original Pet., Texas v. Hyatt Hotels Corp., No. (‘‘OEWS Traveler Accommodation’’). 21, 2023); Assurance of Discontinuance, In re Omni C2023–0884D (Tex. Dist. Ct. May 15, 2023). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2150 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations U.S. market share.633On the low-end, hotels incur annual costs of between share is about 14.5%,636the one-time the analysis assumes that each host will zero to ten hours of lawyer time per year and annual costs for foreign hotels each take one hour to reprice each listing. to review and confirm compliance with can be calculated by multiplying the Hosts have, on average, 1.18 listings, the final rule.635The total costs, which one-time and annual costs for U.S. resulting in 1.18 hours of time per include both the one-time fixed cost and hotels by (1¥0.145)/0.145. This method host.634The value of time comes from the annual costs for the next ten years captures the cost of all foreign hotels, the same source as in Table 11. in present value, range from $35.9 including ones that will not be subject In the high-end cost scenario, the million to $107.8 million using a 7% to the final rule because they do not Commission’s analysis assumes that discount rate, and from $35.9 million to have U.S.-facing advertising. Therefore, hotels have not laid the groundwork for $112 million using a 3% discount rate. the costs to foreign hotels may be upfront pricing. The analysis assumes The Commission also finds that the per overestimated. under this scenario that hotels require firm annualized cost to U.S. hotels that The Commission’s analysis uses the twice the number of hours to determine are not presently compliant with the percentage of Airbnb’s U.S. revenue optimal prices, re-program the website rule ranges from $527 to $2,011 using a (43%)637as a proxy for the U.S. home to include total price, and review and 7% discount rate, and from $434 to share market’s global market share. confirm compliance. Thus, the one-time $1,825 using a 3% discount rate. Home Using this proxy, the analysis estimates costs for hotels include ten hours of share hosts in the U.S. incur an average the one-time cost for foreign home share lawyer time, eighty hours of data one-time cost between $30.42 to $91.27. hosts to be equal to the total one-time scientist time, and eighty hours of web cost for U.S. home share hosts developer time. The analysis further All ranges of lawyer, data scientist, multiplied by (1¥0.43)/0.43. The total assumes home share hosts spend three web developer, and home share host one-time and annual foreign hotel and hours repricing each listing, resulting in time used in the analysis serve as home-share costs for the next ten years 3.5 hours per host. proxies for any costs associated with in present value range from $117.4 In addition to the one-time costs, the reviewing and ensuring compliance, million to $352.8 million using a 7% Commission’s analysis also assumes adjusting pricing strategies, ensuring discount rate, and from $117.4 million consumers are presented with total to $377.9 million using a 3% discount 633See Clark Shultz, Airbnb increases market price, and re-evaluating home share rate. The Commission is unable to share in latest read from M Science, Seeking Alpha listings, respectively, in response to the (June 6, 2022 1:32 p.m. ET), https://seeking final rule. provide the per firm annualized cost for alpha.com/news/3846023-airbnb-increases-market- foreign hotels and non-U.S. home share share-in-latest-read-from-m-science (providing (b) Panel B: Foreign Hotels and Home hosts because the number of foreign Airbnb’s market share); Thibault Masson, Airbnb Share Hosts hotels and home share hosts is not Host Data: Who are Airbnb hosts? Why are individual hosts more important than professional known. ones?, Rental Scale-Up (updated Dec. 19, 2020), The Commission acknowledges that
iii. Short-Term Lodging: Net Benefits and costs discussed in section V.E.3.d.i total costs using the high-end cost and V.E.3.d.ii. To calculate the low-end assumptions from the total benefits Table 13 presents the net benefits of of the range for net benefits, the using the low-end benefit assumptions. the final rule in the short-term lodging For the high-end of the range for net 641See OEWS National, supra note 571 benefits, the analysis subtracts the total 638U.S. Census Bureau, 2021 SUSB Annual Datasets by Establishment Industry, supra note 602. (providing the mean hourly wage); Hamermesh, costs using the low-end cost 639FTC–2023–0064–3094 (American Hotel & supra note 533 (providing the value of time). assumptions from the total benefits Lodging Association). 642See infra section V.E.3.d.ii.b (describing the using the high-end benefit assumptions. 640OEWS Traveler Accommodation, supra note calculations).
629. 643Airbnb 10–K, supra note 637.
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<160.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2153 The quantified benefits and costs accounting for the unquantified benefit imply that the final rule will have a of reducing deadweight loss. positive net benefit, even without iv. Short-Term Lodging: Uncertainties of assumptions based on the best the resulting estimate of quantified available public information. When the benefits and costs. When possible, the The Commission’s ability to precisely data are unclear, the analysis uses sets analysis underestimates benefits and estimate benefits and costs is limited of assumptions that would generate a overestimates costs in order to due to uncertainties in key parameters. range of low- and high-end estimates. conservatively estimate net benefits. The quantified benefits and costs for the Table 14 summarizes the key BILLING CODE 6750–01–P short-term lodging industry rely on a set assumptions and how they may affect VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<260.52AJ01RE 2154 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4725 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<360.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2155 BILLING CODE 6750–01–C costs for the entire economy.644The The Commission sets forth additional 4. Economic Evaluation of Alternatives economy-wide break-even analysis alternatives to the final rule that it implied there would be positive net considered in section V.B but does not As an alternative to the rule, the benefits to the rule if the benefit per have sufficient data to prepare a Commission considered not pursuing consumer was at least $6.65 per quantitative analysis of those rulemaking and instead relying on its consumer per year over a ten-year alternatives. existing tools of enforcement actions period assuming a 7% discount rate or 5. Summary of Results and consumer education. This approach at least $5.95 assuming a 3% discount is equivalent to a no-action baseline and rate. The Commission estimated that per The Commission’s final regulatory would result in no incremental benefits firm annualized costs for an economy- analysis catalogs and, where possible, or costs. The prevalence of drip pricing wide rule would be between $691 and quantifies the incremental benefits and and hidden mandatory fees would $2,010 assuming a 7% discount rate and costs of the final rule for the live-event persist. between $569 and $1,803 assuming a ticketing and short-term lodging industries. The Commission estimates The Commission also alternatively 3% discount rate.
costs for short-term lodging firms for the given change in the base price and the Academic research provides a model ten-year period to be between $153 corresponding change to the quantity that relates consumers’ partial million and $461 million using a 7% demanded, a larger change in the fee awareness to the resulting shift in discount rate and between $153 million would be needed to effect the same aggregate demand.645Specifically, the and $490 million using a 3% discount change in quantity, reflecting model assumes, based on empirical rate. consumers’ partial awareness of, and evidence, the elasticity of demand with The Commission also provides a decreased sensitivity to, the fee. break-even analysis using quantified 645Chetty, supra note 555. BILLING CODE 6750–01–P VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2157 VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4725 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<200.52AJ01RE 2158 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations BILLING CODE 6750–01–C 3) and point J (equivalent to point B in deceptive shrouding of the price leads Figure 4 illustrates how consumers’ Figure 3). As illustrated in Figure 4, the to a transfer of surplus from consumers partial awareness of fees impacts the more consumers are aware of the fee, to firms equal to the area of trapezoid effect of shrouded pricing on consumer i.e., the larger the q, the smaller the ABMR as well as an additional decrease and producer surplus. The intersection market clearing full price and, hence, in consumer surplus not captured by of D partial with S, illustrated by point R, the base price, must be. As an additional firms, the deadweight loss, equal to the at quantity Q partial and price P total,partial , example, when consumers are fully area of triangle ART. The surplus represents the outcome when aware of the fee (q = 1), the market transfer from consumers to firms and consumers are partially aware of the fee. clearing full price under shrouded the deadweight loss are both smaller in In this figure, D fee,Pbase,partial (not shown) pricing equals the market clearing price this case of partial awareness relative to would go through point U (equivalent to under upfront pricing, P , and the upfront the case where consumers are point A in Figure 3) and point R base price, P (not shown), is base,aware completely unaware of the fee. That is, (equivalent to point B in Figure 3). For lower than P . base,partial the harm caused by the firms’ deception comparison, in the case of complete Consumer surplus is now equal to the is mitigated by the extent to which unawareness (q = 0), D (not area of triangle CMN minus the area of shown) would go vertic fe a e l ,P ly bas e t ,u h na r w o are ugh triangle NRT. Producer surplus is now consumers are aware of and account for point K (equivalent to point A in Figure equal to the area of triangle EMR. The the fee. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD >HPG/<400.52AJ01RE >HPG/<300.52AJ01RE Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2159 7. Appendix B: Short-Term Lodging Airbnb in a large U.S. city. It reports search result page, including listings Industry Minutes per Listing search behavior separately for all users do not click on. ‘‘Average time Calculations searchers and for searchers who spent browsing’’ includes entering (a) Low-End Estimate of Minutes per contacted the host, either to inquire search parameters, scrolling through Listing Calculation about a listing or to book it. The analysis results, and viewing listings after uses those numbers to calculate search clicking on them. ‘‘Average number of The Commission’s analysis uses the behavior for the group of searchers who contacts’’ is the average number of times Airbnb user search statistics reported in did not send a contact. The relevant searchers contacted a host for a listing. Fradkin (2017)646to obtain a low-end statistics for these three groups are Since contacting the host requires users time estimate to view one listing after clicking on it. The paper provides data summarized in Table B.1. to click on the listing, the analysis uses on a random sample of users who ‘‘Average unique listings seen’’ this as a proxy for number of clicked- searched for short-term rentals on includes all listings users see on a on listings. From the third column, we calculate: 23.253/57.61 = .40 minutes per inclusive of the amount of time spent listing. sending contacts, not just viewing Time to view each listing without clicks listings that were not contacted, we use = Average time spent browsing/ Because the average time spent the preceding value calculated from the Average unique listings seen = browsing for the group in column (2) is group in column (3) to estimate the 646Andrey Fradkin, Search, Matching, and the Trade: Evidence from Airbnb, (MIT Initiative on the ide.mit.edu/wp-content/uploads/2017/07/Search Role of Digital Marketplace Design in Enabling Digit. Econ., Working Paper, 2017), https:// MatchingEfficiency.pdf. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 htiw DORP441S7W9KSD >HPG/<560.52AJ01RE >HPG/<500.52AJ01RE 2160 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations following that applies to searchers in = $4.81 per listing. The inflation regular business activities. However, the column 2: adjusted value is $6.10. Commission is aware that in some Time spent viewing listings without The resulting total search cost is then instances the requirements in final clicks = Time to view each listing $6.10 per listing * 2.3 searches on §464.2(a) through (c) may require some without clicks * Average unique average = $14.04. This total cost can be businesses to display readily available listings seen = .40 * 87.812 = 35.44 conceptualized as the number of information more clearly. OMB minutes of viewing listings multiplied minutes guidance is unclear regarding whether, by the consumer’s value of time. Using and and to what extent, requiring displays of $25.81 per hour as the value of time, the information to be clearer amounts to a Average total time viewing listings after time spent viewing listings is ($14.04/ clicking = Average time spent $25.81 per hour) * 60 minutes per hour collection of information. The browsing¥Time spent viewing = 32.62 minutes. Commission is of the view that the listings without clicks = The minutes to view one listing is rule’s requirements regarding disclosure 57.874¥35.44 = 22.43 minutes. then calculated as 32.62 minutes/2.3 of total price, exclusions from total price and the final amount of payment are Finally, we calculate time to view one searches = 14.18 minutes per listing. unlikely to qualify as collections of listing:
(b) High-End Estimate of Minutes per persons. The term ‘‘collection of Final §464.2(a) provides it is an Listing Calculation information,’’ as used in the PRA, unfair and deceptive practice for a The Commission’s analysis uses the includes any requirement or request for business to offer, display, or advertise hotel search cost model developed by persons to obtain, maintain, retain, any price of a covered good or service Chen and Yao (2016)648to calculate a report, or publicly disclose without clearly and conspicuously high-end estimate of minutes to view information.649The PRA analysis disclosing total price, which is defined one listing. The paper uses data from requires an estimate of the burden in final §464.1 to permit the exclusion consumer search behavior when associated with a collection of of government charges, shipping booking hotels in four major information.650 charges, and fees or charges for any international cities on an anonymous Upon publication of the NPRM, the optional ancillary good or service.
major U.S. online travel website. Commission submitted an associated While businesses may exclude these A search is defined as a listing click- clearance request with a Supporting charges from total price in offers, through, and the search cost for a listing Statement to OMB for review under the displays, and advertisements, final is specified as: PRA. In response, OMB filed a comment §464.2(c) provides that, before a C = C (TimeConstraint, Slot) = exp(g on December 11, 2023 (OMB Control ij i i j i0 consumer consents to pay for any + g TimeConstraint + g Slot) = No. 3084–0176), requesting that the i1 i i2 j covered good or service, a business must exp(3.07 ¥ .05 * TimeConstraint + Commission resubmit the clearance i disclose clearly and conspicuously: The request upon the finalization of the .01 * Slot)
1. Number of Respondents 3. Estimated One-Time Labor Costs calculation relies in part on cost The Commission estimates that there The estimated one-time labor cost that assumptions from its final regulatory are 12,393 entities that may incur live-event ticketing and short-term analysis in section V. Applying these additional incremental labor costs to lodging firms may incur to comply with cost assumptions as one-time fixed costs refine their disclosure activities so that final §464.2’s disclosure requirements in this burden analysis likely generates they are fully compliant with final is $32,990,931. This total is calculated an overestimate of incremental labor §464.2. This estimate of 12,393 entities by summing the labor costs for the live- costs for a number of reasons. First, the takes the high-end estimate of the event ticketing and short-term lodging number of respondents that will have to number of firms in the United States in industries. The labor cost for the live- make changes to their price displays the live-event ticketing industry (9,440 event ticketing industry is calculated by and offers is likely to be significantly firms) and the number of firms in the applying the hourly wage for web inflated. Since the Commission United States in the short-term lodging developer time in the live-event announced its NPRM, California’s industry (2,953) that will incur ticketing industry of $45.95 to the Honest Pricing Law, SB 478, which was additional compliance costs related to estimate of 60 hours of web developer amended by SB 1524, went into effect, disclosure activities. time multiplied by the number of U.S. making it illegal for businesses to firms in the live-event ticketing industry 2. Estimated One-Time Hour Burden advertise or list prices that do not that incur additional compliance costs include all mandatory fees or charges In section V.E.3, the Commission ($45.95/hour × 60 hours per firm × 9,440 other than certain government taxes and estimates the cost of adjusting the firms) resulting in $26,026,080.654The shipping costs. As such, many national presentation of advertised prices and labor cost for the short-term lodging firms doing business in California, the purchase process for online sales. industry is calculated by applying the including live-event ticketing and short- The final regulatory analysis in section hourly wage for web developer time in term lodging firms, will already have V assumes live-event ticketing and the short-term lodging industry of short-term lodging firms not presently $39.31 to the estimate of sixty hours of incurred costs to develop the compliant with the final rule will web developer time multiplied by the capabilities to comply with the employ a low end of forty hours and a number of U.S. firms in the short-term Commission’s rule even if they are high end of eighty hours of web lodging industry that incur additional currently only fully deploying such developer time to become compliant compliance costs ($39.31/hour × 60 capabilities in California. Similar with the final rule. For purposes of this hours per firm × 2,953 firms) resulting legislative and regulatory efforts have PRA analysis, the Commission uses the in $6,964,851.655The total for the two been enacted in New York, midpoint of the range of web developer industries is $32,990,931 ($26,026,080 + Massachusetts, North Carolina, hours presented in section V.E.3; that is, $6,964,851). Minnesota, Tennessee, Connecticut, Maryland, and Colorado.656Second, to 652See, e.g., FTC–2023–0064–3238 (Gibson, Dunn 4. Estimated One-Time Non-Labor Costs the extent that live-event ticketing and & Crutcher LLP argued that businesses would need The capital and start-up costs short-term lodging firms opt to present to hire, among other professionals, web designers or associated with the final rule’s all-inclusive total prices that obviate the software engineers ‘‘to rebuild entire websites.’’ In need for the disclosures set forth in final addition, it argued that the Preliminary Regulatory Analysis did not account for costs needed to replace 653Brick-and-mortar firms that do not currently §464.2(b) through (c), such firms will physical ads, subway ads, and billboards and comply with the rule would update the price require less web developer time to speculated that would take ‘‘thousands of hours.’’); presentation and purchase process by printing new FTC–2023–0064–2856 (National Football League price displays, revising advertising campaigns, called on the Commission to reexamine the adding required disclosures, and potentially 656See, e.g., N.Y. Arts & Cult. Aff. Law sec. 25.01– estimated compliance costs because it did not updating websites. The Commission uses web 25.33 (McKinney 2023) (Effective Jun. 30, 2022); An adequately take into account ‘‘the additional legal, developer hours as a proxy for any costs associated Act Ensuring Transparent Ticket Pricing, H. 259, developer, and data personnel time that would be with updating the price presentation and purchase 193rd Gen. Court (Mass. 2023); S. 607 (2023–2024 required from live-event industry participants—and process to become compliant with the final rule. Session) (N.C. 2023) (Enacted July 9, 2024); 2023 especially industry participants dealing in large 654The estimated mean hourly wages for a web Minn. H.B. 3438 (Enacted May 20, 2024) (Minn.); volumes of live-event ticket sales in complying with developer are $45.95. OEWS Web Developers, supra H.B. 1231 (113th G.A.) (Tenn.) (Enacted May 24, a final rule.’’); FTC–2023–0064–3122 (Vivid Seats note 571. 2023); Conn. Gen. Stat. §53–289a (2023); S.B. 329 commented: ‘‘We believe that the FTC is 655The estimated mean hourly wages for a web (2024 Reg. Sess.) (Md.); S.B. 329 (2024 Reg. Sess.) underestimating the amount of employee time developer are $39.31 in the short-term lodging (Md.) (Enacted May, 9, 2024); H.B. 23–1378 (2024 required by at least a factor of five.’’). industry. OEWS Web Developers, supra note 571. Reg. Sess.) (Colo.) (Enacted June 5, 2024). VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2162 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations comply, and the Commission is likely has prepared the following FRFA for this final rule focused on covered goods overestimating total labor hours. this final rule. or services with certain additional In the NPRM, the Commission revisions to reduce compliance burdens B. Prohibited Misrepresentations Under provided an IRFA and solicited on small businesses and other entities. Final §464.3 comments on the burden on any small To begin with, because this final rule is entities that would be covered.660The limited to covered goods or services, Final §464.3, which the Commission Commission received comments in many industries that have significant proposed in similar form as §464.3(a), response to the IRFA.661The small business participants are no sets forth that in any offer, display, or Commission received comments from longer covered. Second, the advertisement for a covered good or two industry groups requesting that the Commission adopts an extended service, it is an unfair and deceptive Commission conduct a Small Business compliance date—120 days—to ensure practice for a business to misrepresent Regulatory Impact Analysis to analyze that small businesses have adequate any fee or charge, including its nature, the impact of small businesses in time to come into compliance with the purpose, amount, or refundability, and particular industries.662The rule’s requirements.663Third, as the identity of the good or service for Commission also received comments discussed in section III, in response to which the fee or charge is imposed.
VII. Regulatory Flexibility Act—Final rule. The Commission modifies the The Commission describes the need Regulatory Flexibility Analysis proposed rule in response, in part, to for, and objectives of, the rule in section such feedback. The Commission will V.A. The legal basis for the rule is The Regulatory Flexibility Act continue to engage with small business section 18 of the FTC Act, 15 U.S.C. 57a, (‘‘RFA’’), as amended by the Small stakeholders to facilitate which authorizes the Commission to Business Regulatory Enforcement implementation of, and compliance promulgate, modify, and repeal trade Fairness Act of 1996, requires an agency with, the final rule and other guidance regulation rules that define with to provide an Initial Regulatory as necessary to assist small entities in specificity acts or practices in or Flexibility Analysis (‘‘IRFA’’) and Final complying with the rule. affecting commerce that are unfair or Regulatory Flexibility Analysis Based on the Commission’s expertise, deceptive within the meaning of section (‘‘FRFA’’) of any final rule subject to and after careful review and 5(a)(1) of the FTC Act, 15 U.S.C. notice-and-comment requirements, consideration of the entire rulemaking 45(a)(1). unless the agency head certifies that the record—including the more than 60,800 B. Significant Issues Raised by regulatory action will not have a comments the Commission received in Comments, the Commission’s significant economic impact on a response to the NPRM, empirical Assessment and Response, and Any substantial number of small entities.659 research on how bait-and-switch pricing Changes Made as a Result In developing the final rule, the tactics, including drip pricing and Commenters, including the Small Commission carefully considered partitioned pricing, harm consumers Business Majority, argued that the IRFA whether the rule would have a and honest competitors, and the failed to appropriately assess the impact significant impact on a substantial Commission’s Final Regulatory Analysis of the proposed rule on small number of small entities. The in section V—the Commission adopts businesses.664The NPRM assumed that Commission continues to believe that of the total estimated firms in the the final rule’s impact will not be 660NPRM, 88 FR 77479–80. United States (6,140,612),665only a substantial for most small entities and, 661See, e.g., FTC–2023–0064–3251 (National RV in many cases, will likely positively Dealers Association); FTC–2023–0064–2367 (Small impact small businesses by enabling Business Majority). The Small Business 663A 120-day compliance date after publication Administration, Office of Advocacy raised similar in the Federal Register complies with the them to compete fairly in the criticisms of the proposed rule. See U.S. Small Bus. requirements of the Congressional Review Act that marketplace with larger players. Admin., Office of Advocacy, Re: Trade Regulation a ‘‘major rule’’ may not take effect fewer than sixty However, the Commission cannot fully Rule on Unfair or Deceptive Fees FTC–2023–0064– days after the rule is published in the Federal quantify the impact the final rule will 0001, https://advocacy.sba.gov/wp-content/ Register. 5 U.S.C. 801(a)(1)(3). uploads/2024/03/Comment-Letter-Trade- 664FTC–2023–0064–3251 (National RV Dealers have on such entities. Therefore, in the Regulation-Rule-on-Unfair-or-Deceptive-Fees.pdf. Association); FTC–2023–0064–2367 (Small interest of thoroughness and an The Commission addresses that comment infra Business Majority). abundance of caution, the Commission section VII.C. 665The number of firms used in the NPRM was 662FTC–2023–0064–3269 (IHRSA—The Health & provided by the United States Census Bureau’s Fitness Association); FTC–2023–0064–3294 Statistics of United States Businesses. U.S. Census 657See 5 CFR 1320.3(c) (definition of the term (International Franchise Association). The Bureau, 2020 SUSB Annual Datasets by ‘‘collection of information’’). Commission notes that the final rule is limited to Establishment Industry (Mar. 2023), https:// 658See NPRM, 88 FR 77478. Covered Good or Services, which does not include www.census.gov/data/datasets/2020/econ/susb/ 6595 U.S.C. 603–605. the health and fitness industry. 2020-susb.html. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2163 small fraction (818,178 or about 13%) and to ensure maximum consumer Some commenters argued that fees would incur additional costs beyond the benefits from increased price help small businesses offset rising costs initial one-hour compliance review to transparency. The NPRM also invited and staff salaries and benefits, comply fully with the proposed rule. comment on questions and concerns especially for small businesses Commenters, including the Small related to small businesses, including operating on thin margins.671One Business Majority, argued that the IRFA the estimated number of small industry group argued that the rule failed to appropriately assess the impact businesses and the impact on those might place small businesses at a of the proposed rule on small businesses, as well as alternatives to the competitive disadvantage compared to businesses.666For the purpose of the rule for small businesses. The larger businesses.672As discussed in IRFA, the Commission concluded that Commission’s FRFA includes further Parts III and V, the Commission narrows the proposed rule would not have a discussion of the alternatives the scope of the rule to address concerns significant economic impact on a considered in section V.B. affecting small businesses by, for substantial number of small entities and The Small Business Majority noted example, modifying the definition of solicited comment on its analysis, that many small businesses lack access government charges and addressing including the submission of supporting to legal staff and ‘‘run the risk of factual scenarios and questions or contradictory empirical data. The occupying a substantial amount of time concerning application of the rule to Commission did not receive any data or to understand how exactly they need to small businesses, including related to other evidence to suggest that the adjust their pricing models to comply credit card surcharges and contingent number of firms incurring additional with the new rule.’’669As a result, the fees. In making these clarifications and costs should be higher. The Commission Small Business Majority encouraged the modifications, the Commission narrows anticipates that modifications made in Commission to provide guidance to the total price requirement for, and the final rule will reduce the number of small businesses, including through thereby reduces the compliance burden businesses that are likely to incur outreach, education, and compliance on businesses, including small additional costs. guidance, as well as working directly businesses, offering covered goods or These commenters further asserted with small businesses, to help small services. As discussed in section VII.C, the rule’s proposed economic analysis businesses comply with the final the Commission is also adopting an underestimated the cost of attorneys’ rule.670The Commission highlights and extended 120-day compliance date to fees and ongoing costs to comply with discusses herein that, in response to the allow more time for businesses, the rule.667The Commission addresses comments, the final rule both narrows including small businesses, to assess comments and concerns related to its the NPRM proposal as well as clarifies and come into compliance with the final economic analysis in section V, it in certain respects, thereby decreasing rule. including estimates for attorneys’ fees the burden on small businesses. The Conversely, other commenters noted and ongoing compliance costs. SBP also discusses various pricing that bait-and-switch practices and The same commenters also noted that scenarios raised by commenters, and the misleading fees harm small businesses, the Commission’s IRFA failed to Commission believes that such and that the rule will help small appropriately consider alternatives to discussion will aid businesses, businesses.673One State representative the proposed rule for small including small businesses, in asserted that the final rule would help businesses.668The Commission complying with the final rule. Finally, small businesses because small disagrees. The NPRM stated that the the Commission routinely provides businesses that advertise the entire price Commission had considered guidance and conducts outreach to of their goods and services are at a alternatives, including: (1) a rule that businesses on complying with the FTC competitive disadvantage compared to would exempt small businesses from Act and regulations that it enforces and, larger businesses that advertise lower the proposed rule; (2) a rule that would as required by law, the Commission will prices and only disclose fees at the end apply to online-only businesses; (3) publish a small entity compliance guide of a transaction.674Consumer advocacy alternatives that would otherwise to assist small businesses in complying groups urged the Commission not to narrow the scope of the proposed rule, with the rule.
switch pricing and misrepresent fees, the remainder of these comments 673FTC–2023–0064–2840 (Indie Sellers Guild);
VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2164 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations the rule, because it would benefit small Flexibility Analysis contained in section Finally, the SBA Office of Advocacy businesses.676 VII.D. ‘‘encourages the FTC to clarify that this The Commission notes that the final The comment further contended that rulemaking will not apply to non- rule does not prohibit any business ‘‘there are other alternatives that the profits.’’683The final rule can be offering live-event ticketing or short- FTC should have considered in its enforced to the full scope of the term lodging from charging consumers IRFA,’’ such as ‘‘exempting certain Commission’s jurisdiction. Congress fees or raising prices to support sectors of small businesses or imposing empowered the Commission to ‘‘prevent necessary operating costs, such as labor a limit on certain fees’’ and ‘‘allowing persons, partnerships, or corporations’’ costs or rising expenses. The final rule businesses more time to comply with from engaging in ‘‘unfair or deceptive instead requires that such charges and the rule.681The Commission did acts or practices in or affecting fees be incorporated in total price and consider such alternatives and narrows commerce.’’684To fall within the that they not be misleading. the scope of the final rule to covered definition of ‘‘corporation’’ under the FTC Act, an entity must be ‘‘organized C. Comment by the Small Business goods or services, thereby limiting the to carry on business for its own profit Administration, Office of Advocacy, the rule’s application to only those or that of its members.’’685These FTC Commission’s Assessment and businesses, including small businesses, Act provisions, taken together, have Response, and Any Changes Made as a that offer, display, or advertise such been interpreted in Commission Result goods or services. The Commission precedent686and judicial decisions687 declines, however, to impose a limit on The SBA Office of Advocacy filed a the amount of fees, so long as they are to mean that the Commission lacks comment requesting that the disclosed and not misleading in jurisdiction to prevent section 5 Commission ‘‘prepare a supplemental accordance with the rule’s violations by a corporation not initial regulatory flexibility analysis that requirements, including as discussed in organized to carry on business for its fully considers the economic impact of section III. own profit or that of its members. The the proposed rulemaking on small Commission stresses, however, that both entities and alternatives that may reduce As to the suggestion to give judicial decisions and Commission that burden,’’ as well as ‘‘clarify that businesses more time to comply with precedent recognize that not all entities this rulemaking will not apply to small the rule, the Commission adopts a claiming tax-exempt status as non- compliance date of 120 days after profits fall outside the Commission’s non-profit organizations.’’677The SBA publication of the final rule in the jurisdiction.688‘‘Congress took pains in Office of Advocacy argues that the Federal Register. The final rule will go drafting §4 [15 U.S.C. 44] to authorize Commission’s IRFA did not comply into effect, and compliance with the the Commission to regulate so-called with the requirements of the Regulatory final rule will be required, on that date. nonprofit corporations, associations and Flexibility Act because it ‘‘fail[ed] to This extended timeline considers all other entities if they are in fact provide an accurate description of the comments received from the SBA Office profit-making enterprises.’’689 small entities to which the proposed of Advocacy and small businesses, rule will apply,’’ and failed to provide D. Description and Estimate of the underscoring the time it might take to ‘‘an accurate description of the costs Number of Small Entities To Which the come into compliance with the final associated with the compliance Rule Will Apply rule. For example, some small requirements.’’678According to the SBA businesses may decide to seek outside The final rule covers businesses that Office of Advocacy, the Commission guidance about whether they need to offer short-term lodging and live-event also ‘‘failed to consider significant make adjustments to come into tickets. Small businesses that currently alternatives that would minimize any compliance, while others will conduct comply with the final rule will have a significant economic impact of the their own compliance review.682The relatively trivial cost of assessing proposed rule on small businesses.’’679 Commission finds 120 days should be whether they are currently in The Commission has considered this enough time even for small businesses comment, which it further summarizes conducting their own compliance 683U.S. Small Bus. Admin., Office of Advocacy, herein, and responds as follows. Re: Trade Regulation Rule on Unfair or Deceptive review, and that a 120-day period The SBA Office of Advocacy Fees FTC–2023–0064–0001, https:// recommended that the Commission between publication in the Federal advocacy.sba.gov/wp-content/uploads/2024/03/ Register and the rule’s compliance date Comment-Letter-Trade-Regulation-Rule-on-Unfair- count small businesses using NAICS- appropriately balances the interests of or-Deceptive-Fees.pdf. code specific thresholds defined by the small businesses with the interests of 68415 U.S.C. 45(a)(2). The Commission herein SBA, rather than using a threshold of focuses on coverage of ‘‘corporations.’’ protecting consumers. Further, in 500 employees.680In response to this 68515 U.S.C. 44.
NAICS-code specific thresholds set by entity compliance guide to assist small 687Cal. Dental Ass’n v. FTC, 526 U.S. 756, 766– the SBA to determine the number of businesses in complying with the rule. 67 (1999); Cmty. Blood Bank of Kansas City Area, small businesses in the Final Regulatory Inc. v. FTC, 405 F.2d 1011, 1019 (8th Cir. 1969); FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214 (11th 681Id. Cir. 1991).
share hosts in the U.S. The Commission coverage of the rule, or any part thereof, assumes that these home share hosts are For small businesses subject to the for small entities.694 all considered small entities. Using the rule that are not currently in compliance In the NPRM, the Commission sought NAICS-code specific thresholds set by with the rule’s requirements, the comment on various potential the SBA, the Commission calculates that Commission has determined that firms alternatives to the proposed rule, there are potentially as many as 2,798 will need to adjust advertised prices, including alternatives that were tailored small firms within NAICS code 7211 marketing campaigns, and the purchase to the needs of small businesses and (‘‘Accommodation’’).692 process to comply with the rule. These that addressed the impact (including firms may also incur recurring annual costs) that would be incurred by 690See U.S. Small Bus. Admin., Table of Small costs of additional lawyer time to assess businesses to comply with the proposed Bus. Size Standards, https://www.sba.gov/ and confirm annual compliance. As rule.695Specifically, the Commission document/support-table-size-standards. discussed in more detail in section V, sought comment on the estimated 691The Commission uses the latest data available the Commission estimates that direct number and the nature of small business from the Census Bureau’s Statistics of U.S.
Businesses database, available based on firm compliance costs in the live-event entities for which the proposed rule revenue and firm size. U.S. Census Bureau, Stat. of ticketing industry, over a ten-year would have a significant economic U.S. Bus. (last revised July 9, 2024), https:// period, would result in annualized costs impact, whether the proposed rule www.census.gov/programs-surveys/susb.html. The of $648–$2,144 per firm assuming a 7% would have a significant economic calculation of 9,034 live-event ticketing firms is likely an overestimate of the number of small discount rate or $534–$1,916 per firm impact on a substantial number of small businesses due to data incompatibility and the use assuming a 3% discount rate. U.S. home entities, and if so, how it could be of the high-end assumption regarding how live- share hosts would incur one-time costs modified to avoid such an impact, as event ticketing firms are categorized using NAICS re-optimizing prices of $30.42–$91.27. well as whether the proposed definition codes. The U.S. SBA sets different revenue thresholds for different NAICS codes. However, the The Commission also estimates direct for ‘‘business’’ should exclude certain Statistics of U.S. Businesses does not necessarily compliance costs for U.S. hotels, over a businesses, including small businesses report the number of firms with earnings under ten-year period, would result in meeting the SBA’s definition of a ‘‘small those particular thresholds. Therefore, the Commission calculates there may be as many as annualized costs of $527–$2,011 per business concern’’ and the SBA’s Table 3,094 firms in NAICS code 711310 with receipts firm assuming a 7% discount rate or of Size Standards, or simply certain under the SBA threshold of $40 million, 4,358 firms $434–$1,825 per firm assuming a 3% limited-service and full-service in NAICS code 711320 with receipts under $25 discount rate. These estimates, however, restaurants meeting such million (an overestimate given the SBA threshold of $22 million for NAICS code 711320), and 1,582 are for firms of all sizes; the requirements.696The Commission also firms in NAICS code 561599 with receipts under Commission has not separately inquired as to whether the ‘‘total price’’ $35 million (an overestimate given the SBA estimated the costs for small businesses definition should exclude mandatory threshold of $32.5 million for NAICS code 561599). specifically. charges by restaurants for service 692Id. The calculation of 2,798 small hotels firms performed for the customer in lieu of is likely an overestimate of the number of small businesses due to data incompatibility. The U.S. 721110 with receipts under the SBA threshold of tips, as defined by the Department of SBA sets a revenue threshold of $9 million for $40 million, 101 firms in NAICS code 721120 with NAICS code 721191 and NAICS code 721199. receipts under the SBA threshold of $40 million, However, the Statistics of U.S. Businesses does not 2,960 firms in NAICS code 7211191 with receipts 6935 U.S.C. 604(a)(6).
report number of firms for those particular under $10 million (an overestimate given the SBA 694See 5 U.S.C. 603(c). thresholds. Therefore, the Commission calculates threshold), and 1,384 firms with receipts under $10 695NPRM, 88 FR 77479–83. there are as many as 42,186 firms in NAICS code million (an overestimate given the SBA threshold). 696Id. VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD 2166 Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations Labor.697The Commission also The Commission notes that it has PART 464—RULE ON UNFAIR OR considered alternatives that would designed the final rule to minimize DECEPTIVE FEES otherwise narrow the scope of the compliance costs for all businesses. As proposed rule, including limiting stated in section V, the Commission Sec.
application of the rule to ‘‘Covered estimates that direct compliance costs in
Businesses’’ as defined in the NPRM, the live-event ticketing industry, over a
ultimately adopting a variation of this ten-year period, would result in 464.4 Relation to State laws. approach in the final rule. annualized costs of $648–$2,144 per 464.5 Severability. The Commission requested this firm assuming a 7% discount rate or Authority: 15 U.S.C. 41 through 58.
information to minimize the final rule’s $534–$1,916 per firm assuming a 3% burden on all businesses, including discount rate. U.S. home share hosts §464.1 Definitions. small entities. As explained through this would incur one-time costs re- Ancillary good or service means any SBP, the Commission has considered optimizing prices of $30.42–$91.27. The additional good(s) or service(s) offered the comments and alternatives proposed Commission also estimates direct to a consumer as part of the same by the commenters, including the SBA compliance costs for U.S. hotels, over a transaction. Office of Advocacy, and finds that the ten-year period, would result in Business means an individual, final rule will not create a significant annualized costs of $527–$2,011 per corporation, partnership, association, or impact on small entities. Indeed, the firm assuming a 7% discount rate or any other entity that offers goods or type of deception that will be unlawful $434–$1,825 per firm assuming a 3% services, including, but not limited to, under the final rule is already unlawful discount rate. Based on the available online, in mobile applications, and in under the FTC Act, but the final rule evidence, the Commission does not physical locations. would allow the Commission to obtain believe that the analysis in section V is Clear(ly) and conspicuous(ly) means a monetary relief more efficiently than it fundamentally different for small required disclosure that is easily could solely under section 19(a)(2) of entities. For this reason, the noticeable (i.e., difficult to miss) and the FTC Act (i.e., without a rule Commission is not creating an exception easily understandable by ordinary violation), thereby deterring current and for small entities or creating different consumers, including in all of the would be violators of the FTC Act. regulatory requirements for small following ways: entities. (1) In any communication that is In its Preliminary Regulatory The Commission also is not delaying solely visual or solely audible, the Analysis, the Commission described an the effective date of the final rule solely disclosure must be made through the alternative to the proposed rule, namely, for small entities. The final rule’s same means through which the to terminate the rulemaking and rely effective date is 120 days after communication is presented. In any instead on the Commission’s previously publication in the Federal Register on communication made through both existing tools, such as consumer May 9, 2025. In the Commission’s view, visual and audible means, such as a education and enforcement actions the rule’s effective date of May 9, 2025 television advertisement, the disclosure brought under sections 5 and 19 of the will afford small entities sufficient time must be presented simultaneously in FTC Act, to combat the specified unfair to comply with the final rule, and both the visual and audible portions of or deceptive pricing practices. The commenters have not provided evidence the communication even if the Commission believes that promulgation that more time is necessary. The representation requiring the disclosure of the rule will result in greater net Commission declines to set different is made in only one means. benefits to the marketplace while effective dates for small businesses and (2) A visual disclosure, by its size, imposing no additional burdens beyond larger businesses because the final rule’s contrast, location, the length of time it what is required by the FTC Act. As the core objectives include promoting appears, and other characteristics, must Commission describes further in section comparison shopping for consumers stand out from any accompanying text V, the rule will not only result in and leveling the playing field for honest or other visual elements so that it is significant benefits to consumers but competitors. For all of the reasons easily noticed, read, and understood. also improve the competitive stated, these objectives would be (3) An audible disclosure, including environment, particularly for small, thwarted in a marketplace where certain by telephone or streaming video, must independent, or new firms. Therefore, businesses must comply with the rule’s be delivered in a volume, speed, and the rule appears to be superior to this requirements for a period of time while cadence sufficient for ordinary alternative for small entities.
narrows the rule by adding a definition practices. (4) In any communication using an for ‘‘covered good or service’’ that is interactive electronic medium, such as limited to Live-event tickets or Short- VIII. Congressional Review Act the internet, a mobile application, or term lodging. The Commission also Pursuant to the Congressional Review software, the disclosure must be modifies the definition of government Act (5 U.S.C. 801 et seq.), the Office of unavoidable. charges to replace the language that Information and Regulatory Affairs has (5) The disclosure must use diction included only those government charges designated this rule as a ‘‘major rule,’’ and syntax understandable to ordinary levied ‘‘on consumers,’’ with language as defined by 5 U.S.C. 804(2). consumers and must appear in each clarifying that any government charge language in which the representation List of Subjects in 16 CFR Part 464 ‘‘imposed on the transaction’’ may be that requires the disclosure appears. excluded from total price. Finally, the Advertising, Consumer protection, (6) The disclosure must comply with Commission addresses in section III Trade practices. these requirements in each medium how the rule would apply to credit card ■ For the reasons set forth above, the through which it is received, including processing fees and contingent fees Federal Trade Commission adds part all electronic devices and face-to-face charged by small businesses. 464 to chapter I of title 16 of the Code communications. of Federal Regulations to read as (7) The disclosure must not be 697Id., 88 FR 77481. follows: contradicted or mitigated by, or VerDate Sep<11>2014 20:07 Jan 08, 2025 Jkt 265001 PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 E:\FR\FM\10JAR2.SGM 10JAR2 DORP441S7W9KSD Federal Register/Vol. 90, No. 6/Friday, January 10, 2025/Rules and Regulations 2167 inconsistent with, anything else in the service without clearly and or deceptive fees or charges, except to communication. conspicuously disclosing the total price. the extent that such statute, regulation,